3rd Quarter Update of 2008 Predictions

 It’s time for my end-of-the-3rd-quarter review of my 2008 Predictions, which I wrote in November of 2007. To put it mildly, financial and economic conditions began unraveling at a frightening pace this quarter. It’s now clear that, as pessimistic as my forecasts for the economy seemed a year ago, nearly every measure of the economy will be far worse by the end of the year. Even I continue to be amazed by the power of the theory I presented in Five Short Blasts. The consequences of running colossal trade deficits and casting our work force into the global labor glut, by trading freely with overpopulated nations, are destroying our nation’s economy at an alarming rate. If you haven’t read the book, I strongly encourage you to do so, not for my sake but yours, so that you too can see our economy for what it really is and perhaps adjust your investing strategy accordingly.

Here’s some high-lights of my predictions vs. current conditions:

Prediction:

The credit crisis will deepen as the trade deficit continues to send hundreds of billions of dollars to foreigners who will demand safer investments with higher returns in the U.S., an ever-shrinking commodity.”

Results:

I guess you could say I nailed that one! Credit has seized up so badly that Congress just passed a gigantic bail-out of the financial industry to restore liquidity and get banks lending again. And each passing day brings news of yet another step by the Fed to nationalize the entire financial industry.

 

Prediction:

Tighter credit will definitely lead to a recession, deeper than economists are forecasting.

 Results:

Things have gotten so bad that economists would now be ecstatic if a recession was all we had. Central banks are pulling out all the stops in a desperate bid to head off a full-blown depression.

 Prediction:

Unemployment in the U.S. will rise to approximately 5.5%.

 Results:

Unemployment rose to 6.1% in August, a rate that inexplicably held steady while the economy lost another 159,000 jobs in September. And weekly first-time jobless claims are soaring. I wouldn’t be at all surprised if unemployment soars to 7.5% by the end of the year. Of course, this is merely the “official” government figure, one that is highly suspect when 17% of the work force is filing for unemployment each year.

Prediction:

Look for the Bush administration to take a “budget deficit be damned” approach and start pouring large amounts of cash into the economy in a futile effort to pull the economy out of recession ahead of the presidential election.

Results:

What probably looked like an alarmist prediction at the time has been blown away by reality. Is it even possible to keep track of the money that the Fed and the Treasury are throwing at the financial crisis?

Prediction:

The federal budget deficit will swell to $400 billion per year.

Results:

Now, shrinking the federal budget deficit to something less than $400 billion per year seems an impossible dream. There’s probably no way to know just how large our budget deficit is now, with all of the Enron-style off-balance-sheet actions by the Treasury and the Fed. It may actually be close to $2 trillion and growing fast!

Long-Shot Prediction:

There will be at least one Enron-style collapse of a major financial institution as off-balance-sheet schemes unravel.

Results:

I think we can all agree that the collapses of Bear-Stearns, Lehman Brothers, Merrill Lynch, AIG, Fannie Mae and Freddie Mac are sufficient evidence that I got this one right. But not in my wildest dreams did I think that that the entire financial system could collapse.

Long-Shot Prediction:

Either Chrysler will be broken up and sold off (and thus cease to exist) to raise capital for Cerberus or Ford will declare bankruptcy.

Results:

Hasn’t happened yet, but now there’s increased talk that all of the “Big Three” are teetering on collapse as the sales volume that they depend on so heavily for cash flow to keep them going has literally dried up in the past month. All of them will need huge infusion of government cash to keep them going.

So my 2008 Predictions made a lot of good calls but I’d be less than honest if I didn’t admit to blowing a few pretty badly, especially the following:

Prediction:

The Fed will not respond with significant interest rate cuts, at least not as much as the stock market would like. The Fed will be constrained by high inflation (lead by oil prices reaching $120/barrel by year-end and by higher food prices) and by the need to keep interest rates up to attract foreign investment. The Fed will end the year with rates not less than 3.75%.

Results:

The Fed just lowered rates from 2% to 1.5%. However, these rates have been rendered almost meaningless by economic conditions that have overwhelmed the ability of interest rates to have any impact. In normal times, a 50-basis-point cut would have triggered a huge rally on Wall Street. Instead, it did almost nothing to halt the free fall. Banks are ignoring the Fed rates, keeping rates high if they are willing to lend at all.

Prediction:

The U.S. stock market will be flat in ‘08 as measured in terms of the S&P 500.

Results:

It seems I couldn’t possibly have blown this call any more badly, although the year isn’t over yet. But it’s very, very difficult to see how the market can recover at all this year, with the possible exception of a wave of optimism accompanying the election of Obama, very similar to what happened in ’92 when Clinton was elected, sparking a big market rally in the middle of a recession.

For a complete review, visit my 2008 Predictions page.

Watch for my 2009 Predictions in November following the election!

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