Forecasts



September 23, 2005 - Changes have been made in most predictice charts below to account for the unusual and unpredictable recent events (7/7 London bombings, Katrina, Rita), and any large future unexpected events will cause a rapid chart update. There is also a small chance that Katrina & Rita financial and inflationary effects could lead to a higher market range than that shown on the current forecast graphs - time will tell.


Predictions
Global business cycle Dates to watch Inflation Dow Jones (DJIA)
U.S. dollar index Real estate Gold Silver
Oil demand      
Notes
All is not black The real economy & GDP Leading Economic Indicators How these predictions were created
Fear / Calm Index Other forecasts


Global Business Cycle, showing economic confidence & activity

It peaked on a relative basis in late December 2004, and is headed down through January 2006. Global economic confidence will turn back up into a major relative peak in early February 2007.

Before you blow this off as just another cycle graph from some analysis cycle nerd, please do look at the relative accuracy. The cycle called a global top in early January 2005, the US stock market bottom in late 2002, the Dow Jones and S&P 500 peak in 2000, the low in gold in mid 1999, the Russia/Brazil/LTCM crises in mid 1998, the Asian crisis bottom in 1997, a very good buy point in US stocks in early 1994 as the hottest part of the move started, and the global peak in late 1989 when Japan and various other financial items peaked. Credit belongs here. Maybe its too simple... but it works for us to help put things into a broad perspective.

Another broad look at where we have been and where we may be going is a Word document from Ian Gordon's site, The Long Wave Analyst. We disagree on his timing since he feels we're in a deflation and headed for much more, but its a valid cyclical outlook.

Another excellent work but short term and limited to energy, the U.S. dollar and industrial metals is here in a PDF file at Dr. Ed Yardeni's site. Notice especially the correlations between his "Foreign Official Dollar Reserves" and metals prices, oil demand, S&P 500 earnings, and the reverse correlation with a version of the U.S. Dollar Index on pages 9-13. It very generally shows oil, metals demand and the dollar value headed down as of early/mid 2005. One last quite good predictive aid is the Baltic Dry Index ( chart link, recent prices), a broad measure of worldwide shipping prices - when its going up, many world economies are improving and vice versa.



Another way to look at the broad general economic cycle:

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Key dates to watch

Date    Event    Predicted outcome
November 1, 2005    Federal Reserve meeting    1/2% up (5%), 1/4% up, and likely removing the word "measured" (70%) or no change (25%). Announcement is at 2:15 EST.
December 13, 2005    Federal Reserve meeting    Either 1/4% up (50%), 1/2% up (15%) or no change (35%). (On an historical average, the Fed starts lowering rates about five months after the last rate increase.)
January 2006    Alan Greenspan retires?    Replaced with Ben Bernanke?
January 27, 2006    8.6 year global confidence cycle low    Stock market starts stabilizing
January 31, 2006    Federal Reserve meeting    Likely no change (80%).(On an historical average, the Fed starts lowering rates about five months after the last rate increase.)
February 12, 2006    78 week stock market cycle low (last low Aug 15, 2004)    Stock market bottoming

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Inflation rate prediction (quite tentative)

Trending up until June/July 2005 and peaking at around a 11-13% actual rate, then down as the US heads into a hopefully short recession and stagflation.

These predictions are not just dreamed up or pulled out of the air. We process tens of thousands of pieces of data with proprietary formulas, mostly from the Federal Reserve but also from places like the Bureau of Labor Statistics or the Bureau of Economic Analysis, in a very large set of Excel sheets. Yes, they're not perfect but the general trends and trend changes have been correct. The chart is quite tentative since much more work is under way on issues like derivatives. Please also note that CPI is on the left hand scale, and our "real" inflation rate prediction are on the right hand scale.


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U.S. Dollar Index price prediction (quite tentative)


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Gold price prediction (quite tentative)


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Silver price prediction (quite tentative)


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Oil demand prediction

See the popup chart here, click here for regular link.

Source is here in a PDF file at Dr. Ed Yardeni's site. His "Foreign Official Dollar Reserves" concept also has a decent forecasting track record with other commodities.

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Real estate peak prediction

We believe that the real estate mania has at least a 66-75% (as of May 2005) (85% as of Oct 2005) chance of peaking in the summer of 2005, probably in July or August. It will possibly not be apparent or recognized as such until sometime in the fall, or perhaps even in the winter. If it doesn't occur then, the next most likely time will be early 2006. Our main concern is that major media have been heavily talking about a housing bubble and their track record is quite poor on predictions.

This does not necessarily mean that an immediate and large drop in prices will occur, but does mean that approximately July 2005 will be the general peak in price and speed of appreciation of U.S. real estate. Historically, non inflation adjusted price drops in 'hot' markets like Florida or California average about 20% per this FDIC report, but they could go lower too. Per Yale economist Gary Shiller , the inflation adjusted loss in Los Angeles area real estate was about 40% in the period 1989-1996. The size and length of the drop is dependent on actions of the Federal Reserve and Congress, since together they control the amount of monetary stimulus that may or may not be applied. Our crystal ball is cloudy on this one. In a speech on May 20th 2005, Alan Greenspan said "Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern."

See the Stages of Real Estate and make your own best guess.
As of early October 2005, the peak appears to have occured. The average length of time that a real estate price drop lasts varies strongly by market area, but averages between 12-30 months in the 'hot' markets.
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Dow Jones Industrial Average prediction

Our prediction is based on the inflation definition of "more money than goods" and therefore when more money is created (or people think its being created) than goods, it goes into things like financial assets or real estate. For the prediction below, we use many different money measures from the Federal Reserve, and then add a varying time lag since it takes time for the money to get fully into the economy after it has been created.

Also Donald Coxe, US Portfolio Strategist within the Research Department of BMO Nesbitt Burns, had this to say in early April 2005: "Virtually all severe stock market setbacks are preceded by underperformance of financial stocks, and the selloff tends to continue until the financials start to outperform. 1987 was a classic example of this phenomenon. The sharp underperformance of the NYSE Financials was the warning of coming horrors. ... Regrettably, the NYSE Financials Index was discontinued some years ago; it had a nearly perfect warning record. Its successor, the Philadelphia Banking Index, seems to have filled its shoes admirably."

The old "Sell in May and go away" as well as "don't try to catch a falling knife" stock investing guidelines sure do appear to apply this year.

July 11, 2005 - Since the prediction model does not include any emotional elements, the recent London bombing events may skew the current topping formation and cause the top to be later than predicted. The same applies to the hurricane Katrina.


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Leading Economic Indicators

Leading Economic Indicators is a fancy term used by the Conference Board (an independent company that gathers economic statistics) to describe their method of forecasting the future of the economy. It has quite high reliability in forecasting recessions and economic slowdowns, and is showing a troubling picture.

From July 21, 2005 = The headline "The U.S. Leading Index Increases Sharply; Revisions Announced" is troubling due to the revisions made in how the index is calculated and composed. We remain, pending the next month or two or data, on the side expecting further slowdowns and stock market weakness. See the graph showing how the recent changes affected the index since 1958 here.
From June 20, 2005 = "The U.S. Leading Index Decreases in May. The Leading Index has declined by 1.9 percent over the last twelve months."
From their April 21, 2005 press release: "The leading index declined in March following a small increase in February. The leading index has been essentially flat since October 2004 following a small decline over the previous five months. In addition, there have been more weaknesses than strengths among the components of the leading index in recent months."

As an example, this is just one of the ten elements used in calculating it (source here). Note that this consumer confidence index ranged between 110 and 120 in 1999 as a comparison (1985=100).
      ...and here's the LEI chart from May 2005  & July 2005  August was down .2% pre Katrina


Additionally, there are other statistics that help predict the direction of the economy. Some of them are:
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The real U.S. economy?

A simple chart, showing GDP (on the right hand scale) as reported and then adjusted by CPI as reported (on the left hand scale). The purpose is to show more clearly the effects of inflation, even though it overstates the inflation impact prior to the late 1990s (see the Boskin Commission data for more understanding). It sure does give a different picture of what has happened in the U.S. since 1980 than is generally believed... the dirty little secret is that rather than the economy having grown a lot since 1980, it is actually even to down when inflation is more fully taken into account.

Using the numbers that were used means that the graph does not include any "fiddle" factors that the government uses in calculating both GDP and CPI, like hedonics or using "homeowners adjusted rent" instead of actual home prices, or using used car prices instead of new car prices in the calculation of the CPI, or even that taxes aren't included in it. Look up the way the CPI and GDP are measured yourself if you don't believe us.

From an investing view, it also clearly shows significant longer term correlations to many trends of various financial instruments like stocks and bonds and precious metals, some of which are as follows: One last statistical point and as a side note, per the U.S. Bureau of Economic Analysis foreign-made goods now make up over 35% of all durable goods, 50% of autos, 55% of computers, office equipment, computer chips and office equipment, 70% of consumer electronics, 75% of clothing, and 95% of all footwear.

As of mid 2005, it also appears to be rolling over into an economic slowdown or recession. Note also that the trend line drawn from the last bottom in 2003 used to match the GDP figures before the July 2005 historical data revision - the last 2-3 years were adjusted significantly lower. One other quite odd data point in the recent figures - new home prices were adjusted downward (a Technical Note under "Sources of Revisions" states: "Investment in residential structures was revised up, mainly on the basis of a downward revision to the Census price index for single-family houses.").



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All is not black

In a recent article in Forbes, Steve Forbes has this to say: "The idea that Americans are overspenders and undersavers and addicted to debt is all myth. Household balance sheets have never been more robust. Last year Americans increased their financial assets--checking accounts, money market funds, mutual funds, IRAs, etc.--by an impressive $590 billion. Credit card debt increased a paltry 4%. Take our financial household assets (not counting houses and other tangible assets such as automobiles and jewelry) and subtract liabilities such as mortgages and credit card debt, and the American consumers' total financial net worth comes to an eye-popping $26.1 trillion. Consumers today have more than $4 trillion in savings accounts, more than $1 trillion in checking accounts and directly hold another $10 trillion in equities and mutual funds. Their life insurance and pension assets are in excess of $10 trillion. To put it in perspective, Americans' total debts, including mortgages, are dwarfed by their liquid assets. Our per capita liquidity exceeds that of Japan, a nation noted for its high savings rate. As Bear Stearns' brilliant economist David Malpass notes, "The U.S. household sector is the world's biggest net creditor." Contrary to the conventional wisdom on rising interest rates, Malpass observes, "[This sector] stands to benefit from higher interest rates due to the generally short maturity of its assets versus the long maturity of its debts." Why the bum rap for America's savings rate? Because of the crazy way our government computes that number. Washington leaves out of the household income number such items as realized capital gains and payments from pension plans and 401(k)s. As for consumption, long-lived assets such as autos and furniture are treated as if they were disposable pens. As Malpass puts it, "Consumption includes education. The absurd result: Spending less on education would raise the ‘personal savings rate,' even though it would reduce future U.S. growth."".
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Fear / Calm Index

A tentative index to help track relative fear in the various markets. The gold price is shown for reference.





Other Forecasts

UCLA Anderson Forecast Predicts Sluggish Growth for National Economy Through 2006
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Global Consciousness Project

Just for fun, the current data from an odd and 'out there' ongoing experiment and project at Princeton University.

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