My 2006 Economic Predictionsâ¦! (posted 12-2-2005) I was recently asked about my market predictions for 2006. The requestor is probably sorry now that he asked. In any event, this year (2005) should wind up about where we are today (12-2-2005). i.e. The equity market is short-term overbought, so a few minor corrections and rallies should bring the Dow into approx. 11,000 @ the end of this month. An exciting statistic based upon consistent history and sound logic is the fact that during the last century the markets have averaged a 50% improvement from the low of the 2nd year to the high of the 3rd year in the 4-year Presidential election cycle. If this year ends at about 11,000 (DJIA), then I expect it to drop to around 7,000 to 8,000 during the unfavorable season (May through October), then rally up to about 11,500 at its peak in 2007.... What are the reasons for expecting a 30% drop next year before the traditional 2006 year-end rally?â¦. Here they are: 1. Inflation is increasing, and the FED is "behind the eight ball". I.e. Inflation has been rising faster than the telegraphed, timid 1/4 point Federal Fund Rate increases @ each of the past 12 FED meetings. Therefore, the attempt by the Central Bank to âcoolâ the aggregate real estate, bond, and equity bubbles has only succeeded in enabling the condition to worsen during 2005. 2. The FED is on a rate-raising cycle. Virtually all rate-raising cycles (the current one should end in 2006) end up in a market semi-bust. 3. Year #2 of the presidential election cycle (the worst of all 4 years). 4. Un UNSUSTAINABLE trade deficit. Foreign purchases of our bonds enable this most abhorrent condition. At some point they will slow or stop, then long-term interest rates will rise significantly with severe consequences. 5. A deteriorating federal budget deficit. As the economy runs out of gas next year it will have a very negative effect on corporate profits and government tax receipts. 6. A negative U.S. saving rate. Correction of this means less consumer spending, which negatively impacts profits. 7. An administration that is doing almost anything to antagonize our trading partners (Middle East countries, China, Japan, India, etc.). This also lays the groundwork for war in the future. 8. An oil and natural gas price shock.... The impact was mitigated by yet another Central Bank flood of liquidity, which only makes the eventual correction worse. 9. A vulnerable presidency. Loss of confidence in leadership can exacerbate rather than mitigate a crisis. 10. A new FED chief; most are historically "tested" very early in their terms. The broadly held opinion of Dr. Ben Bernankeâs monetary prescription to a crisis is to promote rapid monetary expansion, which will frighten the bond markets at the first opportunity. 11. Our housing bubble has enabled the "housing ATM" machine. Equity extraction will total a record $600+ billion this year. As home prices flatten and decline (I expect this in 2006) the "ATM" machine will vaporize and, again, will negatively impact consumer spending and corporate profits. 12. The greatest aggregate bubble (real estate, bonds, and stocks) in the history of the Republic, which creates a fundamentally strong bias to revert to the mean. 13. The carry trade "gravy train" must come to an end soon. Since the yield curve has been flattening, the reaction of the players has been to simply double up the ante (speak LEVERAGE) to maintain or grow profits. The FED has enabled this game, and it will end with massive derivative crashes soon. 14. Asian central banks buying our Treasury bonds due to our "twin deficits" have nearly stopped this year. Per the U.S. Treasury, yrs. 2003 & 4 totaled approx. $500 billion. YTD through August (2005) is only approx. $30 billion. Largely, the "mysterious hedge funds" in the Caribbean's and London have been buying them this year. I cannot imagine yet another year of mysterious bond purchases. I believe for now they are playing the spread between our U.S. bonds vs. the Euro and Asian bonds w/ lower rates... This game must end too... When foreign interest in the purchase of our Treasuries ebbs, interest rates and inflation will increase. Soon, the global race to competitive currency devaluation will kick into full speed... 15. The war; its cost, leadership, and political tolls... 16. The hurricane clean up and rebuilding costs.... 17. The yield curve will likely reverse early next year. In the past 30 years each time that has happened a recession followed.... 18. Our illustrious bubble-blower champion, Dr. Alan Greenspan, delivered a terse speech yesterday (December 2, 2005) in Philadelphia that was filled with caution. How fitting, since he was one of the key architects in creating the economic imbalances we suffer today⦠Alan stated in a closing paragraph: âCrafting a budget strategy that meets the nation's longer-run needs will become more difficult the more we delay. The one certainty is that the resolution of the nation's unprecedented demographic challenge will require hard choices that will determine the future performance of the economy. No changes will be easy, as they all will involve setting priorities and, in the main, lowering claims on resourcesâ¦â More than 80% of Dr. Greenspanâs speech warned of fundamental imbalances and dire consequences..! 19. The âHomeland Investment Actâ was intended to generate new jobs and businesses here in the U.S. by giving favorable tax treatment to multinational corporations that earned profit overseas, but were discouraged to bring them home for investment. Unfortunately, the Act ends Dec. 31, 2005, and more unfortunate, most of the $200+ billion âbrought homeâ this year went into stock buybacks and acquisitions, thus further inflating asset prices. The Positives for an "up" market throughout the unfavorable season in 2006: The Central Bank with its new leader, Dr. Ben Bernanke, and the U.S. Government will continue pulling all the stops as they traditionally have to keep the bubbles inflated because they are very popular to form and increase in size. They have established a 10+ year precedent of utilizing the liquidity-flooding technique to address any economic softening or international monetary crisis. It would be foolish to bet they would utilize any other approach. The perception is that the FED has some âbreathing roomâ to reduce the Federal Funds Target rates (currently @ 4%; anticipating a topping early next year @ 4.5 or 4.75%), if they encounter economic headwinds. Unfortunately, real interest rates are still very âaccommodativeâ (negative on short term and near â0â on long term). Reducing rates now would clearly force the âthe inflation genie out of the bottleâ and further exacerbate imbalances. One of our nationâs best financial minds, Bill Gross, PIMCOâs renowned bond fund mgr., is forecasting a continuation of low long-term bond interest rates. Inherent within his logic is the continuation of the âmercantilist modelâ employed by the Asian countries, which artificially suppresses their currency valuations to maintain a viable expanding export market to the consumption-happy Americans. Bill is perfectly correct in assuming this is what the Asian GOVERNMENTS will want to pursue. As we all know, governments of any persuasion will do anything to stay in power. What he is missing is the behavior of the Asian citizens and investors. Soon, there will be millions of Asians retiring as their Boomers mature. At that point they will âknock on the doorâ of their governments asking why they are sitting on hundreds of billions in U.S. dollar and Treasury reserves. The fundamental question will be how do they collect on these ârichesâ??? They wonâtâ¦! Soon afterwards, the citizens and investors will pressure governments to dump the extremely overvalued dollars and dollar assets regardless of the consequences. If weâve been successful at blowing ever larger bubbles (approx. $3 trillion per year average since 1995), then why can we not continue for yet another year?? Just keep cashing the direct marketing checks we receive in the mail, refinancing to pull cash out of our homes, and buying furniture, Plasma TVâs, etc. for â0â down, â0â interest, and â0â payments through the next year or twoâ¦.! We still have a year or two before the creditors betting on us will ask for something backâ¦! Ten of the nineteen risk issues noted above existed in 2005. Thus, nine are new, which will further increases risk in 2006. The irrepressible American pride and competitive resolve..! The entrepreneurial and productivity improvement efforts (when not suffocated by government) can yield a significant 1.0 to 2.5% real improvement annually in an industrialized country. In todayâs dollars that represents approx. $200 billion in real improvements. Unfortunately, this pales in comparison to the asset bubbles discussed above. i.e. the discovery of the $28 trillion âgorillaâ stock, bond, and real estate overvaluation illusion will swamp the $200 billion-improvement spirit until weâre back into a reasonable economic balance. Other than that, we should have a good year....! My Suggestions: From the late April until mid-Novermer next year (the âunfavorableâ market season of the year) get out of ânon-defensiveâ equities and go safely to cash. Visit the web sites on the âMy Favorite Linksâ page. They are aware of the risks and all have suggestions for investment and protection. By Russell Randall 12-2-2005 http://www.austrianenginomics.com/id9.html
. KC: 7. An administration that is doing almost anything to antagonize our trading partners (Middle East countries, China, Japan, India, etc.). This also lays the groundwork for war in the future. ******* December 8, 2005 SouthAmerica: Reply to K.C. I just finished reading your predictions for 2006, and I agree with a lot of the information on your analysis. I am not sure about the range of oil prices during the year 2006 and what kind of petrodollars windfall will continue to be generated and parked in US government securities â but I know that the perfect storm is forming and eventually the US dollar will collapse. Regarding the antagonization of US trading partners from around the world â You can add one more item to the list: the South American trade block â Mercosur â is in the process of approving a new partner to that group â Venezuela. You also can add to your list: 1) The negative impact that the new US Bankruptcy Law of 2005 will have on the future of consumer spending and US business activity here in the USA - in the coming years. 2) The negative impact that the change on credit card payments starting in January 2006 â The change in the new required minimum payments on credit cards will have a negative effect on peopleâs cash flow and in keeping many people afloat, mainly the people with multiple credit cards. The extra money needed by these people to make these higher monthly payments will reduce the money available for consumer demand of goods and services. 3) Many more major Hurricanes are in the way in 2006 and in future years â When are we going to reach the limit of American goodwill? How many more Hurricanes the American people are willing to pick up the tab? 4) All these analysis and conclusions are based on the regular business activity and cycles and it doesnât take in consideration the potential for another major terrorist attack on US soil. .
You guys think the sun will come out next year? I've been comtemplating posting mine up but in quatrains so the simpletons can't figure it out and for a laugh.
Well, I am generally an optimist on the US Economy but for the next 4 quarters my most optimistic prediction is flat. Generally I feel that a number of no so great factors have appeared at the same time that make it unlikely that we will see even the status quo held next year. The most important factors in my mind are the spike in oil prices, weakening of the housing markets, and a possible stagflation scenario - albeit greatly reduced in magnitude from the previous episode - triggered by the oil spike. I am less concerned about the stagflation/inflation aspects of the economy and more inclined to see a downturn primarily triggered by a reduction in consumer spending. I generally see markets trending down to staying in a trading range. Lets all hope I am wrong. A side note: another offsetting factor might be that if people see real estate as a not so great place for their capital then they might be looking at the stock market.
I generally dont listen to Bill .... He is a great trader and fund marketer and I think you need to always frame his comments within that context.
2006 Possibilities Exchange consolidation... NYX will purchase other exchanges....and not just in the US...Perhaps the London Stock Exchange...and instant NYSE fills are coming...The consolidation of the exchanges will also facilitate faster globalization... Impeachment will begin...50/50 chance There is a chance that Bush/Cheney will be impeached... Iraq Oil Approximately 70% of Iraq´s oil reserves will be contracted/controlled by the major US/British Internationals Housing Prices Housing prices will have declined over 15% on average Oil Prices Oil prices will move between 35 and 55 for the majority of the year... Terrorists and the Iraq War It becomes more likely that a major hit will happen in the US... The US will both lose/win the supposed war...The US will call it a win....but it will be a loss...The US will change how it fights against terrorists... Brokerages There will be fewer names by the end of 2006...Those firms not offering .005 all in...are out....
I really don't see Bush getting impeached since the Repubs control Congress. And I happen to think they will keep control despite all the crap going on lately.
Thanks for all the predictions of what will happen in the markets. But, what do you advise an investor to do? What are you personally invested in/planning to invest in to make a profit in the environment(s) you predict?