Clear Sailing Ahead for 2007

by: Tim Iacono

After my shameless victory dance regarding 2006 predictions, an effort will be made today to be a bit more humble when prognosticating on 2007.

We'll see how that works out. There will be no qualifiers this year about predictions not being taken seriously or being "devoid of worth." Now that there's an investment website associated with this blog, silliness would be entirely inappropriate when looking ahead into the new year, at least when it comes to investments.

In other areas, some fun will be had, but it is striking to read the predictions and other writing from a year ago, when things were much more light-hearted around here . Since the website was launched in May, things have gotten soooo serious. That will be New Year's resolution number one for 2007 - to have a little more fun at this blog.

For resolution number two, you'll have to check back in tomorrow. That will be the start of having some fun, but it will also deal with investments. We'll see how that works out. Anyway, on to 2007:

1. The Housing Bubble Will Pop

When the word "pop" is used here it refers to a 10 percent decline in the year-over-year national OFHEO (Office of Federal Housing Enterprise Oversight) resale price data; not refinancings, just resales. Others may define the word "pop" differently, but that's how it will be defined here. All the other measures are so squishy that you really don't know what you're getting. Misleading medians, incentives for new and existing home purchases, and many other factors make it difficult to really assess what has happened using NAR (National Association of Realtors) or Commerce Department data.

The popping will not result from a lack of dumb buyers, but rather a dearth of willing lenders. At some point in time, making sub-prime, option-ARM, interest only, 50-year loans no longer makes business sense, and that time will be 2007. There are far too many headwinds going into the mother of all ARM (Adjustable Rate Mortgage)-resets in the months ahead. will not be able to save everyone.

In some areas there will be hell to pay in 2007. After rising 200 percent or more since the late 1990's, you wouldn't think that a price decline of 20 or 30 percent would hurt, but it will.

2. The Dollar Will Not Tank
foreign currency
The trade weighted U.S. dollar index (against the Euro, Yen, Pound, etc.) will continue its decline and be positioned firmly in the mid seventies by the end of the year. The Euro will gain prestige as never before, old-Europe will look pretty smart, and Asian currencies will finally unhinge from the greenback a little more, but not too much.

A dollar rout is in no one's interest, and if there's one thing that central bankers know how to do, it is to manipulate exchange rates. But, the dollar will go down.

3. Stocks Will Soar

Amid plunging home prices in the U.S., equity markets will continue higher and people will ask each other, Is it Getting Weimar in Here? Where else are you going to put money? In the bank?

The Dow will make new all-time highs on about 75 trading days and the S&P500 will follow with new all-time highs on about 40 days. The Nasdaq will do OK and Google will finish the year where it started. There will be a couple of nasty sell-offs, and short sellers will be confounded for yet another year.

4. Interest Rates Will Remain Unchanged

Absent any big external events, the Fed will leave short-term rates at 5.25 percent and long-term rates will hover around 4.5 to 4.7 percent. Nothing will change. The Fed will talk tough on inflation when it's appropriate and threaten to raise rates, while at the same time gobs and gobs of money and credit will be created in an attempt to keep asset prices elevated.

This gambit will be successful for equities and commodities, but not for housing. The Fed would much prefer that equities and housing continue to rise in price rather than equities and commodities, but you don't always get what you want.

5. Energy Prices will Continue to Climb

Oil will average $70 per barrel in 2006 and will finish the year at about $75, after spiking to $90 sometime during the spring or summer. Russia will become increasingly important in global energy production and they will become increasingly difficult to work with. It's payback time for the 1980's.

6. Gold and Silver Will Soar
Gold will spike to around $800 an ounce and will finish the year in the high $700 range. Silver will almost hit $20 an ounce and will finish the year close to $18.

Junior mining companies will start to be talked about at cocktail parties, like internet stocks circa 1996 or 1997. It's still early. There will be at least two gut-wrenching corrections that will cause many new investors to make an early exit from this sector, but they'll be back. The ones who were shaken out for the first or second time during the May 2006 sell off will be the first ones back in when gold approaches $700 again.

7. Economic Growth will Slow, Consumption will Continue

There are still trillions of dollars of home equity that haven't been spent yet and much of it will be spent in 2007. Unfortunately, much of this will be in the form of reverse mortgages for senior citizens, in order to make ends meet.

As for the younger crowd and their home equity, eventually it will be like millions of alcoholics at closing time, "Sir, the bar is closed. We can not serve you any more drinks. Please go home." Homeowners will spend their home equity until they can't anymore, which won't happen in 2007.

Economic growth will continue to slow, coming in just below 2 percent for the year with a recession starting in the fourth quarter.

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 Slow, But Not By Much
help wanted sign
Some teenagers will be forced to get jobs as their parents' housing ATM shuts down, but not too many. Help wanted signs at coffee shops and restaurants will continue to be ubiquitous and employment at amusement parks will soar. The current crop of teenagers and twenty-somethings is getting set-up for a three generation wake-up call sometime in the next decade. They won't be happy about it.

10. Nothing Will Blow Up (except the Middle East)

A few hedge funds will go belly up and sub-prime lenders will continue to drop, but nothing really bad will happen. There is a cure for every possible ill now that Hank Paulson is in charge at the Treasury Department. It's clear sailing for at least another year.