1. Lots More Pain for Housing
There is a near consensus that housing is in for more trouble in 2008, but this is not one of those cases where it would be better to go against the crowd - that will happen in another couple years or so when your friends and neighbors tell you that real estate is a horrible investment. Just like back in 1995-1996, when no one wanted to go near an open house five years after that last peak - that's when you'll know we've hit bottom.
Housing prices will fall another 10 percent nationally, based on the year-over-year change to the 20-city S&P Case Shiller Home Price Index for October 2008 (this report gets released at the end of December and showed a 6.7 percent decline as of last week.)
In some areas home prices will reach 2003 levels, which, in California, would still be more than double the price at the 1995-1996 bottom but will be a painful 40 percent below the 2006 peak. Don't let talk of stabilizing sales for new or existing homes confuse the issue of home prices - home prices will continue to fall as long as inventory remains at historically high levels.
2. The Dollar Will Continue to Go Down
The eight percent decline in 2007 on the trade weighted U.S. dollar index (against the Euro, Yen, Pound, etc.) was such a success that there will be another, slightly smaller, decline in 2008. By year-end the index will be at 71 or 72 and economists will marvel at how the trade deficit is narrowing and how gross domestic product is receiving welcomed support due to more exports.
The Japanese yen will gain the most against the greenback and both the euro and the Canadian loonie will strengthen, but not as much as in 2007. The British pound will lose ground to the buck as credit and housing market problems accelerate in the U.K.
3. It Will Be a Bad Year for U.S. Equities
The Dow and the S&P 500 Index will decline by 5 percent and the Nasdaq will gain 1 percent. Foreign stocks will continue to do better than U.S. stocks, but there will be fewer high-flyers than in 2007.
The Chinese stock market will gain more than 50 percent by summer and then lose most of the gains by year-end. The Japanese stock market will be one of the top performers in the world.
4. Short-Term Interest Rates Will Go Much Lower
The Fed will cut interest rates by a quarter-point at every meeting and at one meeting they will cut by a half-point putting the Fed Funds rates at an even two percent by year-end.
They'll continue to talk tough about inflation occasionally but no one will really care - inflation will be the least of the country's problems by summer.
5. Energy Prices Will Continue to Rise
The price of crude oil will rise to over $130 per barrel before ending the year at $115 per barrel. Just like $3 gasoline wasn't a big deal, $4 gasoline won't be a big deal either - unless of course you use your car a lot and/or you don't make a lot of money. Then it will be a big deal.
Natural gas, a laggard over the last two years after a spectacular rise in 2005, will surprise to the upside in 2008.
6. Gold and Silver Will Continue to Rise
Gold will spike to over $1,000 per ounce and finish the year just below that mark. Silver will hit $22 per ounce and end the year at $19. There will be at least two gut-wrenching corrections that will cause many new investors to make an early exit from precious metals markets, but they'll be back.
People will start talking about junior mining stocks at cocktail parties - just like internet stocks in 1997. (I'm going to keep saying this until it's true).
7. Economic Growth will Turn Negative, Consumption will Decline
This is the year that the American consumer finally pulls back in a big way and real economic growth will be negative in two quarters. Home equity, the source for much of consumer spending in recent years, will vanish more quickly due to falling home prices than it did when people were spending their home equity like drunken sailors.
8. Reported Inflation will Remain Contained
More people will realize that the government's inflation numbers are bogus. They won't be happy about it.
9. Job Growth Will Turn Negative by Year-End
State and local governments will cut back on hiring due to shrinking tax revenue and fewer people will eat out - two important props for the job market will be partially removed. Employment in health care will continue to boom and even fewer people will talk about the looming Medicare crisis.
By the end of 2008, year-over-year job growth will turn negative but it will be impossible to really know for sure until sometime in 2010 when the Bureau of Labor Statistics completes all its revisions for 2008.
Help wanted signs at coffee shops and restaurants will slowly disappear which will be unfortunate for those teenagers who finally have to start looking for low-paying jobs to buy their next iPod or cell phone because their parents have spent all their home equity.
10. Hillary or Barack will Win the Election
It's too bad Ron Paul isn't ten or fifteen years younger - in another eight years the country will be ready for him.
© 2008 Tim Iacono