by Michael Nystrom
December 21, 2006
It's that time of year again, when economists, market strategists and pundits all come out with their market predictions, outlooks and forecasts for the New Year. These should more accurately be called guesses, since the future is inherently unknowable, and most of the forecasts are notoriously and invariably wrong. But they are fun to read nonetheless, and hearing a variety of opinions helps you make up your own mind. I especially enjoy reading what others think (since I already know what I think - how boring). So considering that you were just named Time Magazine's person of the year (yes, you!), you'll have your chance to post your opinion at the end of this article, and me and a bunch of other people are going to have fun reading it.
After a day of research I came up with a short list of things that everybody already knows about the year ahead. They know these things because they're printed in black and white in the pages of the popular business press: Barron's, BusinessWeek, Fortune, Forbes the Wall Street Journal - all the usual suspects. Everybody knows this stuff because everybody reads these popular magazines (even if you dismiss a lot of what they say, like I do).
What Everybody Already Knows about 2007
1) The dollar is toast
Everybody knows this -- the opinion on this one is near unanimous. Among many other places, this information can be found in the December 25, 2006 issue of the BusinessWeek "Where to Invest 2007" issue (p.102):
The euro and other currencies have trounced the U.S. dollar since 2002, and the trend is likely to persist into 2007, perhaps longer. The reason: Massive U.S. trade deficits -- $586 billion in the first nine months of 2006 alone -- mean we're flooding the globe with more dollars than foreigners want to hold. With no end in sight to the trade deficit or the U.S. budget deficit, the greenback should be under pressure for years.
Americans -- consumers and the government alike -- are spending money as fast as the Fed can print it. There is no end in sight to this liquidity trend, and everybody knows it. Because Ben is manning the printing presses at the Fed, deflation is an impossibility. He'll just print more money. Everybody knows this.
2) Liquidity is good for commodities
The world is awash in the devalued dollars that the Fed is printing, and these dollars need to find a home, preferably one that will hedge against the very inflation that the Fed is creating. Because of this (and other reasons that everybody knows about) gold and other commodities will be going through the roof in 2007 and beyond. Everybody knows we're in the first innings of a long, commodity bull market. Since a picture is worth 1000 words, let me quote this picture:
In case you can't make it out, that's a stack of one kilo gold bars on the cover of Fortune's 2007 Investor Guide. Enough said about what everybody knows about gold!
3) The housing downturn isn't over, but thankfully that won't affect the rest of the economy
Everybody knows that housing bubble has popped, and we haven't yet seen the bottom. BusinessWeek tells us (p. 114) that "there is still room for prices to fall, and it may take 15 years for home prices to reach new inflation-adjusted highs." As a result of the housing slowdown, the construction sector is in a slump, and that slump is also spreading to the manufacturing sector. Combined, these two sectors - which have some of the higher paying jobs in the US economy -- have lost 174,000 jobs since June (BW, p. 29). But everybody knows the slowdown will be "contained to the housing sector" and won't affect the rest of the economy. If it did, how could #4 be true?
4) The continuation of the Goldilocks economy
For Corporate America, times could not be better. From BusinessWeek, (p. 54)
The fourth quarter could mark the 19th consecutive quarter of double-digit profit gains among companies in the S&P 500. As a percentage of GDP, those profits are at a 40-year high. What's more, cash flow at S&P 500 companies is the largest in two decades. Bullish investors, expecting more of the same in 2007, have bid up stocks: The S&P 500 gained 12.9% in 2006 (through December 8), and the Nasdaq has added 10.5%, while the Dow has tacked on 14.8%. Meanwhile, stock market volatility has plunged to a 12-year low, indicating that investor sanguinity has reached historic proportions.
Everybody knows that this will continue right on through 2007. Just take a look at the cover of Barron's. Its 2007 Investment issue depicts a subservient bear, dutifully brushing the suit jacket of a dapper bull while delivering his watch and cufflinks on a golden platter. The teaser quote on the front says it all: "Nine top Wall Street strategists see more gains ahead for stocks, no recession, cooling inflation and tame interest rates."
But Byron Wien is less concerned with what everybody knows and more concerned with what nobody knows:
There is too much complacency and that makes me apprehensive. The problem is that nobody is concerned about terrorism, our failure in Iraq, that housing will turn out worse, or that the trade deficit is inexorable and that therefore the dollar is doomed in the long run. (BW, p.62)
These are good points that I didn't see mentioned elsewhere in my survey of what everyone knows. It is almost as if such subjects were taboo. So with this concern for what nobody knows and what nobody is concerned about, what is Mr. Wien's forecast for the stock market in 2007?
Up five to ten percent.
Such is the mood on Wall Street these days. Everybody on Wall Street knows 2007 is going to be a banner year, and everyone who is reading about Wall Street in the mainstream media knows the same thing. So don't worry - be happy!
As for my prediction about 2007, let me quote Mark Twain, via Al Gore's movie and book movie An Inconvenient Truth, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."
The thing about complete unanimity is that if anything bad happens, everyone can say, "Wow! Nobody saw that coming!" In a recent interview, James Galbraith noted that Keyens said a banker's job is not to avoid risk, but to make sure that if he's making a mistake he's making the same mistake as everyone else, so that he's positioned to go down with everyone else and not stand out.