Monday, December 21, 2009

Reviewing last year's predictions

Here's a quick recap of the predictions I made last year. I'll never have a better year of forecasting.

All measures of inflation will head higher. Correct. Headline inflation was negative in the final months of last year, and core inflation barely avoided a negative print. The CPI rose throughout the year and was up at a 4.2% annualized pace in the six months ending in November, while the core CPI was up at a 1.5% rate over the same period.

The economy is going to recover sooner than the market expects, with the bottom in activity coming before mid-2009. Almost spot-on. The official pronouncement of the recession's end won't come until later next year, but for now it looks like the recession ended in late June or early July. The economy greatly exceeded almost everyone's expectations.


Residential construction was bottoming, and housing prices would begin rising well before mid-year. Correct. Housing starts hit bottom in April and as of November were up 20% from their lows. According to the Case-Shiller index of housing prices in 20 major markets, housing prices hit bottom sometime around March, and were up 5% from their lows as of the September release.

Treasury yields will be significantly higher by the end of next year. TIPS yields will hold steady or fall as nominal yields rise. Correct. 10-year Treasury yields have risen from 2.1% at the end of last year to 3.6%. 10-yr TIPS real yields have fallen from 2.1% to 1.3%.

Credit spreads have seen their highs and will continue to narrow. Correct. Spreads actually plunged over the course of the year, leading to the biggest rally in corporate debt on record.

Equity prices will lag other risk asset prices, but they will be significantly higher by the end of next year. Correct. To date, the S&P 500 has generated a total return of about 25%, after plunging to a frightening low in early March. Gold is also up about 25%, after earlier posting a gain of almost 38%.

Commodity prices may take awhile to move higher, but they will be higher within 2 years. Oil prices are unlikely to drop below $35. Correct. Commodities rose throughout the year and are now up over 30%. Crude oil has almost doubled this year, after briefly dipping to a low of $36.50 in mid-January.

The dollar is unlikely to make further gains against most major currencies, given the Fed's hyper-easy stance, and is likely to fall against emerging market currencies as commodity prices rise. Almost spot-on. The dollar rallied through April, but so far is down about 5% against major currencies for the year. The dollar fell significantly against the currencies of most emerging market currencies.

I'll have my fearless 2010 forecast out by next week.

9 comments:

nodice said...

nice calls! I think you are the only other longer term bullish blogger out there besides myself!

Ryan Grannis said...

This is MY father!!

Thomas B said...

Scott ... I cannot wait!

Rick said...

Scott, excellent calls for 2009. I think that the equity markets began to realize in February-March, that expectations had been lowered far too much. Right now, the equity markets are trying to calculate next year's recovery rate and the forward discount that should be applied to stock prices. Thus, there has been a long sideways movement in index readings this quarter. Also, the Russell 2000 and NYSE Composite are suggesting that, for most stock prices, there has been an overshoot. But, I await your version of "Carnac the Economist". you have an excellent blog.

Public Library said...

Well done, well done!

Benjamin said...

Given your forecast accuracy of last year, I fear to tread with any contrary observations.

But inflation is dead. We were lucky not to have deflation.

As it is, rents for all commercial and residential property will be weak, labor has no pricing power, unions are dead in the USA (except in the public sector).

There are gluts in all manufactured goods and they get cheaper every year (except for military hardware).

I have to concede commodity prices are up--yet I feel there is more than a little "investing" in commodities, as opposed to true demand-pull.

After all, there are huge gluts of oil and gas right now. Tankers that cannot offload oil. OPEC had to cut production to put a floor on prices, and who knows what happens on the NYMEX. Any system can be gamed, and that may be happening on the NYMEX. The long history of commodities is that price spikes lead to gluts--and price busts. I suspect a moderated version of the spike-bust will play out this go 'round. Oil demand is actually falling in all developed countries.

So, to sum up, who is going to raise their prices next year? Not labor, not manufacturers, not land owners and renters. Not retailers. Who is left? Maybe medical. Maybe higher education. The military costs more every year too.

Commodities may go up, but they may go down also.

Very low core inflation again in 2010. I hope for good economic growth.

Given the chronic global capital gluts, I suspect boom-bust will become more common in various investmenbt sectors in the future, as capital aggressively hunts returns. In the longer run, capital is going to "get tough." But that I mean that after every bust, the vultures will swoop in quickly--busts are only buying opps. This process will happen more and more quickly, limiting downsides on busts. Also, more investors will not "scare" at declines, but will "tough it out."

I like it when I can describe people in armchairs as "tough."

The big story of the next 20 years is gobs of capital everywhere. "Too much money hunting too few deals." For the economy of start-ups etc, this is good news.

For investors? Get ready for lots of competition on every inv4estment. At the risk of sounding cynical, the best research may be to figure out where the herd is going next. Pre-herd investing.

Daniel said...

very nice Scott! glad i followed your advice. Going 'all-in' back in March has really paid off.

Family Man said...

le style, c’est l’homme

Thank you very much.

BTW, there are rapidly growing signs of an inflation rise in China, and a necessity of a yuan appreciation. How does this fits to your 2010 scenarios?

Scott Grannis said...

Family Man: the rising inflationary pressures in China are a very predictable result of the yuan's link to the depreciating dollar. If China wants to avoid inflation, it will need to continue to revalue the yuan. This leaves them in between a rock and a hard place, since a weaker dollar cuts the value of their savings (i.e., their reserves) on the one hand, but reduces inflation on the other. Which way should they go? If I were their adviser, I would recommend a gold standard or something equivalent. In the end, a strong and stable currency is one of the most important things a government can do for its country.