My Ten Predictions for 2008

At the beginning of every year, Byron Wien, a former long-time Chief Strategist for Morgan Stanley (MS) who now works for Pequot, a hedge fund, makes his 10 predictions for that year. His record has been up and down, with approximately 5-6 correct picks in a good year, and only 1-2 during a bad year. Initially, it seems that he doesn't set a very high bar for us to beat since most of them are wrong anyway, but it actually indicates just how hard it is to make correct predictions.

2007 was probably not one of Byron's best. The only one he nailed right on was gold going over $800, and the uptrend for some other commodities including oil.

I don't want to be influenced by him or his thinking, as we should be hearing from him shortly after the New Year. I don't want to compare myself to him, but just for the fun of it, I also decided to make 10 of my own predictions for 2008. I will only stick to predictions in the financial markets, and will not delve into other areas, such as elections, foreign relations, or politicians, like Bryon. I may or may not trade these trends, and any of my opinions are subject to change over time.

The following are my 10 predictions for 2008:

The price of gold will reach quadruple-digits in U.S. dollars ($1000) for the 1st time in human history. Gold has entered the 2nd phase of its uptrend, and will have more explosive up movements, and become more volatile. We should see $50+/- intraday movement in 2008. But this gold bull market has a long way to go beyond 2008.

With gold rising, silver and mining stocks represented by the Amex Gold BUGS Index (HUI) will eventually catch up. I expect to see the HUI over $600, and sliver over $20 in 2008. Don't give up on them. A turnaround always happens at the time when everyone feels desperate, and gives up.

After a temporary rebound, the U.S.dollar will continue its downtrend, as an inverse mirror image of gold. The U.S. dollar will lose another 10% of its value, and the U.S. dollar index will hit 70 sometime during 2008.

In 2007, we saw the mortgage bubble burst, which was then followed by the bursting of real estate bubble. In 2008, the credit card bubble will burst (another blow to the credit market), as some consumers have financed their credit card purchases to the hilt. The effects of this will be felt for many years. The bursting of this long-standing consumer bubble will dampen any recovery hope of the retail sector and the economy. At the end of the day, the credit card industry is similar to subprime, with new cards of initial tease rate of 0% to people who should not even have a card, then jacking the rates to as high as 36%, making subprime rates look paltry.

Citigroup (C) will drop into the teens (below $20), and there is more bad news to come in the banking industry. Less than half of the subprime write-downs were announced in 2007, with the other half still to come. The OTC derivative market is full of land miners, and like steroids in professional baseball, we still don't know all of the ramifications, or situation of each player (bank). We know many of them are having problems and will hear more explosive news in 2008.

Banks will be faced with scores of lawsuits, from self-promoting fund returns with the whole purpose of collecting fees and bonuses, to those unable to show ownership documents to foreclosed homes. Many of these institutions will face countersuits from disgruntled homeowners. Moving SIVs to balance sheets will invite more shareholder lawsuits, with the argument that SIV instruments should never have been off their balance sheets in the first place. As a result, shareholders were mislead, and the banks are now being forced to put back them back at par, further destroying shareholder's equity. The fact that banks are busy bringing in sovereign funds tells us that there are more skeletons in the closet.

If this now is the end, banks are able to absorb all the write-downs and would not have asked for sovereign fund injections. The mindset behind sovereign funds investing in U.S. is no different than previously holding all U.S. treasuries in their funds, only this time they "diversify" into more risky U.S. equities. Not only this is too early for bottom picking, likely to suffer 25% loss like their Blackstone (BX) investment, but also any future return (if any) will be more than offset by the further falling U.S. dollar.

Inflation will grow high, and agricultural commodities such as soybean, corn and especially wheat will continue to hit new highs. Wheat is a commonly used ingredient for many daily products which actually provides a better gauge of food inflation than any other indicator. The public will start questioning government published CPI numbers when food, and energy bills become intolerably expensive. There will be pressure on the government to return to the pre-adjustment CPI methodology that was used in the 70s and 80s which is 3-4% higher than current published data. This way, their TIPs investment could receive a more equitable income. There will be talks and fears about real double-digit inflation down the road.

Energy prices will continue to rise. We should finally see oil hit triple-digits ($100 and more), and a decent recovery of the natural gas market with inventory level declining. Against popular opinion, higher oil prices will neither reduce global demand, nor increase global supply. Alternative energy is more a dream than reality. Oil from tar sands is not only costly, but also faces environmental challenges. Biofuel not only drives corn prices sky high, but also reinforces the public's perception that biofuel takes poor people's basic need for food (corn) away to pay for rich people's gas-guzzling SUVs.

The S&P will be at trading range and volatile. As I discussed earlier, both the banking and retail sectors will continue to be under pressure. The S&P 500 reached 1576 in October 2007 which is likely the highest level for this ending bull market, and we should see a more severe correction in 2008. Corporate earnings and profit margins will shrink along with stock prices to make P/E at about the same level as now, which is a typical valuation trap at the start of a bear market.

The Fed will try to rescue market from time to time after big crashes by further lowering fed fund rates, likely 3.5% by yearend. As inflation fear grows, long bonds will drop and yield will go higher. 30-year yield will be back above 5%, with short end (Fed rate) at 3.5%, yield curve will become much steeper than now.

The national real estate market will decline faster in 2008 than 2007, recording double-digit losses and we won't see the bottom until at least 2009.

Comments

[turbo471]

Subjective gloom and doom. Very boring.

[ElliotMiller]

I found this an insightful, although somewhat depressing analysis. The discussion about credit card debt is probably very accurate and the politicians have to be careful in bailing out the participants in the present subprime and credit fiascoes because of the precedent that will set for the credit card companies/banks when the credit card debt starts to go into default..

[ElliotMiller]

There is one factual error in this analysis. In today's dollars gold hit $2,500 an ounce in 1980, so this will not be the first time its price exceeds triple digits, unless one is speaking of the nominal price and not the real, inflation adjusted price, a point which should have been articulated.

[EL-GRECO]

Thomas, you're a grizzly old bear!..<g> this is indeed a possible scenario, only a little too negative. You assume the Fed and consumers will sit back and let all this happen without doing anything except drop rates (the fed) and sue banks (the consumers). c'mon Thomas, there's more to human ingenuity than that, surely?

[JM]

Great article.

If the dollar drops 10% as mentioned, then this would help to fulfill the predictions of higher gold and oil?

Inflation historically has brought increasing home prices, though with the consumer's dollars going to servicing debt and higher costs along with tighter lending, perhaps this won't happen this time, or at least not as much? Opinions?

[User 134085]

short the dollar!

[blah-blah]

Way to go out on a limb! You can find these exact same predictions on every bear blog site out there.

US $ will never recover, the Fed will drastically lower rates causing massive inflation, everyone will lose their house, the consumer is dead, China will take over the US as the new capitalist superpower within 2 years - oh and all US banks will go under, blah, blah

Did I miss one?

Why don't you post under Dr Enzio's name? or Trader Mark last week?

Garbage like this just continues to bring the quality of this site down....

[yi yi]

what is the opnion on solar energy?

[Hugh]

One feature of free markets is the tendency of commodity prices to average over entire markets. In free markets, gold will not be $900 in one area and $700 in another, freedom of movement will dictate a price of $800.

On thing Tan doesn't mention is that labor is a commodity, and American's labor will further merge with the world's price for labor. A low-skilled American can no longer count on selling his labor-commodity at $25,000 per year when those in India demand $5,000, and billions of people in other countries demand even less.

Expect prices for many goods to inflate, except for real estate and American labor. It doesn't look good for millions of Americans.

[ussmls7]

bad news all over, gold will soar/silver will shine bright.

[Tom B]

"Oil from tar sands is not only costly, but also faces environmental challenges. Biofuel not only drives corn prices sky high, but also reinforces the public's perception that biofuel takes poor people's basic need for food (corn) away to pay for rich people's gas-guzzling SUVs."

Dead on: exactly right. Both carbon sources are stupid, stupid, stupid. Corn ethanol will disappear after the Iowa caucus or the 2008 election; oil sands will never take off.

[nofactor]

financial "corralito" in USA for 2008?

[WAKEUP]

Very perceptive article. In this market, the "darker the glass" looked through, the clearer what lies ahead is seen. But the denial factor is still thick, out there. Times have been good for so long that even very intelligent people are having a terrible time realizing that we're in for a ten-year correction. But what did they THINK was going to happen? Maybe that things would keep rolling along, until the median price of a house was $5,000,000? Or that inflation was gone, never to return? Or that credit card companies would keep issuing cards to them, with higher and higher limits? Whatever they THOUGHT, the reality is now at the doorstep, as this article points out.

[Bingo 2]

What Tan seems to forget the greatest threat to the US economy is sitting in the White House with all his cronies. The 15 billion a month wasted in Iraq - draining the US treasury- well folks I just hope we make it until we can get a change in 2009. The myopic morons in charge have only to look in the mirror to find the real source of our financial troubles.

[Solution]

The good thing is that when US is weak enough, we have to withdraw from Traq.

[Darrell]

One forgets that our government debt is largely financed by foreign holders of the dollar. The question is how long foreign investors, foreign institution and central bankers will continue to accept the dollar in exchange for their goods and services. Our federal reserve will continue to issue currency as long as central bankers continue to recognize it as legal tender.

I think a 10% reduction of the value of the dollar is far too conservative. We will be blessed if it is still accepted as legal tender at the end of 2008.

[omooc]

With C the only stock mentioned by name, the rationale for the prediction that it will be in the teens in 2008 is not convincing. Writing-down of subprimes is one thing; beefing up capital is another thing altogether, in my view. omooc

[ishamon]

Tan. Yours is a very US centric analysis for 2008. We are just 20-25% of the world economy. And we are not alone but deeply connected with the ROW (rest of the world). So here are some trends deliberately optimistic to counter balance the doom and gloom.

1. As the BRIC countries 'internetize' there is more demand for better quality of life products. The US multinationals such as PG, MCD, KO, PEP, DIS are well capitalized and out there building market share. Profits follow.

2. The ongoing battle between SIVs and SOVs (Sovereign funds) will be resolved in favor of SOVs in spite of populist sentiments. Banks and the financial sector rise from the dead like the phoenix reborn. C bottoms and races for its place in the sun. Very very BRIC baked!

3. China's much anticipated coming out Olympics party is a grand success. Its reverberations make steel stocks take off as ROW infrastructure expands.

4. Smart phones wow ROW! AAPL, RIMM, NOK, VIP... continue the market share battle.

5. As soy, corn, milk and wheat prices rise, US agriculture linked multinational cos (DE, POT, MON) and agricultural land and water resource prices continue to rise.(Have options on 'em). Wait till banks dump SIVs for SAGGIES! These are structured agri bonds. We may see a Saggie rush supported by SOVs. Better than the deserts. Good tax shelters too.

6. Arab SQUAK (Saudi Arabia, Quatar, UAE, Kuwait) funds are globalized and increasingly managed by Wall Street and Jewish expertise. Here comes world peace. GS makes a play for DOW Jones membership.

7. By the end of 2008 we are looking at Africa's commodity and oil wealth and investing in Africa plays. It is coming at us faster than we know.

8. Yeah solar fun and games continue. This is the tulips in the sun mania. Chinese, US and Canadian solar stocks may parallel the dotcom boom bust. Beware.

9. Geezer plays in pharmaceuticals, biotech, nutratech and nanotech creep into our portfolios. DNDN, ISRG are some crown jewels.

10. The drowning home builders become 'demolition builders'. Old polluted rundown homes are torn down and demolition becomes a new source of PROFIT.

Ah well that was a nice hour spent. I'll take 10% upside next year as the dollar falls another 10%. Thats where the opportunities are for me.

[SmartPlanner]

Those of us who really believe these doomsday scenarios must act accordingly: sell all your stocks (and bonds!), buy gold, bring it home and hide it all in the backyard underground bunker with the all the dried rations and the guns and munitions. This is the only logical conclusion to your nightmarish views, so be a coherent man and JUST DO IT! What? You are not ready yet? Well, then at least you should short the market long-term. That will teach these bulls a lesson!....

[wn]

So I wonder what Mr. Tan's predictions were for 2007? Solar stocks to take off, tech stocks to be good?, sub-prime crisis? I doubt it.

As for the 2008 predictions, I will save this article in a PDF and then by 4Q08 I will repost. And I will bet that the majority of these predictions will not have occurred and there will be at least one big economic/financial item that was not foreseen which will grab the headlines.

Mr. Tan sounds many other perma-Bears that have predicted the fall/collapse/demise of the USA every year since the 60's. Then when the calamity does not occur, are they relieved or turn optimistic? Of course not, they become reinvigorated by a new set of unfortunate circumstances which they believe will definitely befall the USA this time, and this pattern is repeated year after year until the perma-bears wither away from old age always believing they are right and the rest of the world is not.

[eric hart]

This is the best list of predictions Ive seen in a long time. My prediction is that more than 50% of these predictions comes true in 2008. Thanks!

[Gold Bear!]

In a fractional reserve system a credit crunch results in a massive contraction of money supply. Gold will fall just like property! Cash is king!

[thomast2]

Thank you all very much for providing comments to my article.
The response has been overwhelming. I put this article together originally for my blog website more for fun and didn't expect so much feedback. I won't answer all of you one by one, but overall here.

For those criticizing my views as subjective, I fully respect your opinions. But here I only point out one fact, many of my predictions are merely continuation and extension of trends from 2007 (gold, oil, banking sector, real estate, US dollar, etc.), so unless you have your eyes closed or your head in the sand, you are as subjective as mine, but at least my views are based on real data and real trends in 2007. For those don't believe any of these things will repeat 2 years in a row in 2008, just look back in 1970s, it is just a super normal cycle of business and financial market. BTW, I never heard of Dr. Enzio and Trader Mark.

For those who agree with me, please also exercise caution. If at the end of next year, 6-7 of them (2/3) become true, it is already record breaking against any wall st. masters. I personally will be very happy even if 3-4 (1/3) are true.

Elliot Miller, I am talking about nominal USD, but $2,500 gold who knows might eventually happen but probably many years down the road. For general equity market, I am actually more careful by saying range bound since I factor in what Fed can do by lowering fed fund rates very aggressively, down to 3% if they want to. Also the rate lowering this year will help and see impact next year. I also only point out banking and retail will be under pressure, it is possible some other sectors mentioned by nomadine will offset to provide a trading range for overall equity market. Yi Yi, I am neutral on solar and wind, but feel too much hype in solar already. I feel they are not that different than water hydroelectric power utilities with stable income, don't see anything so "high-tech" or super growth like ipod there. Hugh, I agree with your comment on labor and real estate, especially with labor cost. Darrell, I only said 10% for 2008, then I see a rebound, then I agree with you, I see more falling much worse than 10% but will take a few years to play out. But anything is possible in the market, USD could drop much >10% next year too.
Thanks again to you all. It will be an exciting year next year.

[twinnkie]

I believe solar will be the most profitiable energy sector from 2008 -zzzzzzzzzzzzzzzzzzzzz... like oil in 1908.

[Hysteria]

Great post and will be very accurate. May I draw your attention to:

macromarkets.com/image...

Keep in mind, ALL THE PAIN WE'VE SEEN SO FAR is from this 7% drop in home values. To reach historic norms (level 100 on this graph) they have a lot further to drop.

New topic: If the markets verge on recession from a 7% drop in home values, what will happen in the coming 40-50% correction needed to return to historic valuations!

Bear? More like a gang of super-bears who've just tasted blood after a long hibernation.

[User 158281]

Do you think HSBC Bank can go bankrupcy or do you think the bank is strong enough to survive??

[thomast2]

I don't know much about HSBC, never read its FS reports. My impression is they don't have a lot of subprime or CDS, and they have a strong presence in Asia. So I hope that they will survive.

[LockstepInvesting]

Good job with the 2007 predictions. Most of them have come true already.

[User 231754]

vowww.. I thought predictions are always meant to be wrong. Well, yours is an exception !! and thanks to your other brilliant article on CDS.