Flying Pink Unicorns

Some predictions for 2009

Since my 2008 election predictions were a monster success, I figured I'd take a stab at some 2009 economic and other predictions. I'll come back at the mid-year mark, and in very early 2010 and see how I did. Be gentle, some of these are sure to be embarrassingly wrong.

1. The economy:

As I explained in my earlier post, I expect the economic recovery to begin in about June, 2009. I do not expect it to be vigorous at first, although the economy may show surprising vigor by the very end of this year. Or it could go yet to hell in a hand basket if the credit markets truly seize up again. I'm guessing that the worst will be over by March and growth will resume by June. By the end of the year it will be real, although whether the job market will be improving I'm not sure.


2. The stock market:

The Dow Jones is currently at 8,776.39. I expect it to move up 25% from here, closing the year at around 11,408, give or take 500. I know that sounds like a huge move, but it all it would really do is undo a portion of the losses of the crash-year of 2008. The Dow Jones closed 2007 at 13,364.16. So I'm only predicting it gets partway back. Historically, the markets move prior to changes in the real economy. Since I'm predicting an economic recovery starting in June and picking up steam towards the end of the year, I therefore predict a solid market move starting circa March. I can't tell what month-- that would just be making stuff up as opposed to an educated guess/prediction.

The conditions for a huge year in the market are practically perfect. Ridiculously low interest rates and an economy that has been in recession for a year, and which recession has greatly increased in severity in recent months. That may sound funny, but the market bottom should precede the economic bottom, and that is coming soon. If the credit markets improve, as I predict, and credit begins flowing, this will light a fire under the markets.

The Dow Jones isn't the whole market obviously, but as a market overview prediction it will do nicely.

3. Interest rates: The Fed Funds Rate:

As of now, the Federal Funds rate is set at a target of between 0 and 1/4th of 1 %. Effectively zero. I predict it will move up to 1% by the end of the year, with all of that move coming after August, and possibly even in November/December.

The fed has lowered interest rates truly to the floor. They will want to begin gently easing as soon as they are confident that the credit markets have largely or entirely returned to normal, and the economy is recovering. That should be by the end of next year. They may, in an abundance of caution, leave rates at zero several months into 2010, which would make this prediction wrong, but then they may not. Obviously a lot will depend on the overall economy, and whether inflation is sharply negative, as it may be early in 2009. If inflation numbers come in negative month after month, the fed will be seriously spooked, and will leave interest rates at zero regardless of what happens in the real economy. The fed simply does not want to risk a bad deflation!

4) Interest Rates: The 10 year bond:

These days, the benchmark interest rate set by the credit markets is the 10-year bond. This is currently at 2.24 % after taking a bath late last week. Still, 2.24% is just about the lowest in 40 years. I predict that at the end of 2009, the 10-year bond will be at 4.5%. This is of course a huge move! There are two main reasons for my prediction:

First, I think the rate is somewhat artificially low (or, put another way, the price of the bond is artificially high) as a result of a flight to quality. Investors are terrified of investing in most anything; stocks, bonds, etc, for fear of mass bankruptcies. Uncle Sam is safe (at least from bankruptcy), so investors have rushed to accept historically low yields so as to park their money safely and at least earn something.

Second, Since I predict a fragile economic recovery, that would imply that the markets would no longer fear a big deflation, and I think that deflation fears have really brought down the rates on the 10-year bond, big time. Think about it-- if inflation is negative 2% (deflation), a 2% return is actually 4% after inflation, which isn't bad at all. However, if inflation is 1%, to maintain that same 4% post-inflation yield, interest rates would have to move up to 5%.

5) Oil:

As I write this early in the morning on January 2nd, oil is at $41.65 a barrel. I predict that oil closes 2009 at $52 a barrel. The futures markets are predicting a bigger move up than that. OPEC has moved fairly aggressively to attempt to cut production. They will surely make further attempts. Whether they succeed, I have no idea. Congress is likely to pass major legislation requiring massive increases in fuel economy in future years, and investing huge amounts of money in alternative energy. Given that the US uses 25% of the world's oil, this will register in the markets. But the big oil-market story of 2009 will be that economic Armageddon is avoided. Once the oil markets realize that this is the case, oil should move up quite a bit. My prediction here is actually fairly conservative.