Fearless Forecasts for 2008
 Bankrate.com recently consulted with a handful of people from a variety of different fields who regularly ponder the future, and asked them to look ahead and see what they expect for 2008.
Our experts included Arch Crawford, publisher of Crawford Perspectives, Harry S. Dent., economist, money manager and publisher of HS Dent Forecast Newsletter and the Philadelphia Federal Reserve's quarterly Survey of Professional Forecasters - a compilation of the economic predictions of more than 50 professional forecasters.
Commodities Will
Do Well In 2008
Arch Crawford is editor and publisher of Crawford Perspectives, 6890 E. Sunrise Dr., #120-70, Tucson, AZ 85750, 1 year, 12 issues, $250, www.crawfordperspectives.com. He is a member of the Market Technicians Association, the International Society of Astrological Research and the National Council for Geocosmic Research. He's been named the No. 1 stock market timer by several publications.
Listed below are some of Arch Crawford's projections for the year ahead.
"The dollar will continue to unravel, with sharp rallies from time to time. It's in a steep downward trend. I think it will go down 15 percent to 25 percent by December 2008."
What investments will do well? "Gold, oil, metals - commodities in general."
"A similar situation to 1987, (the Fed) may have to jack up the (interest) rates to protect the dollar at some point." Rates will rise more than 2 percent in 2008.
Housing prices will be dropping "20 percent to 30 percent." The housing market "will crash" in 2008, "drift lower in 2009," then start to recover.
"The (stock) market will have a significant decline, one of the 10 worst in history, sometime between Aug. 1, 2008, and March 31, 2009."
"Social programs will be an (election) issue because of a recession, and that would lean toward the Democrats. With recessionary forces in the economy, the public will probably lean toward greater social programs, which are usually championed by Democrats."
"We'll get out of (Iraq) when they run out of oil. I think necessarily because of the election, we will bring more people home. But we are not leaving there."
In 2008, unemployment "will be much higher."
"Saturn is going to be in Virgo, which will be a major emphasis on health and health care issues." Government, corporations and the president will be "fighting over re-engineering the health care system."
Financial Trends
From Harry S. Dent
Harry S. Dent Jr., economist, money manager and author of The New York Times best-sellers "The Roaring 2000s" and "The Next Great Bubble Boom," has tried to transform economic forecasting from an art to a science.
Founder (2000) and president, H.S. Dent Foundation, the umbrella organization over HS Dent Investment Management and HS Dent Publishing, which publishes the HS Dent Forecast Newsletter, 15310 Amberly Dr., Ste. 165, Tampa, FL 33647, 1 year 12 issues, $239, online version, www.hsdent.com.
Using past demographic, economic, geopolitical and commodities trends, Dent and his team have nailed a number of events with startling accuracy, including the top of the bull market in 2000 and the subsequent housing bubble that burst in 2007.
He's also missed on a few, most famously when he predicted the Dow would hit 40,000 before the end of 2008. He's since backed off that view, lowering his forecast to a range of 12,000 to 15,000 based on newly emerging geopolitical and commodities trends. Dent believes his forecasting errors are more a matter of magnitude and lack of context than flat-out errors.
In an interview, Dent discussed his views and forecasts with Bankrate.com on a number of topics, ranging from the real estate market to inflation to the job and investing markets.
Q. Do you expect the housing market to recover in 2008, or will the subprime mortgage crisis continue to drag that aspect of the economy down?
A. Most people in the industry expect it to continue to be weak well into next year. We believe the housing market won't come back - people aren't moving and those who do move are buying similar houses. Therefore, the housing market won't have the same ability to bounce back that it used to. Normally in a housing cycle, the housing market would start to come back in about 2009 if interest rates were falling, but we see interest rates increasing at that point, which will exert downward pressure on housing prices.
The major pressure on housing is that the baby boomers are at the point where they aren't going to want such big houses. Instead they will want to downsize to a smaller house, maybe on a golf course, with no yard. The problem is, who will buy all those McMansions that the baby boomers have built? Not the younger generations; they will be purchasing cheaper starter homes. That is one area of the housing market that will do well, along with all types of senior housing, especially assisted living and apartment-style homes.
We see the fall in housing prices following a similar pattern to the Nasdaq off its heights. Even now, with the decline in housing prices, prices are still higher than they were five years ago. It's going to take some time for this excess to work itself out, and by the time it's finished, we'll see prices down by 40 percent to 50 percent, especially in places where prices were extremely overvalued, such as Atlanta and Dallas.
Too many baby boomers are banking on the equity in their house to get them through retirement and they are in for a shock when prices don't bounce back. We advise our clients to exclude the value of their house from their retirement calculations.
Q. Will the economy slip into a recession in 2008? Why or why not?
A. We see the economy slowing down early next year then rebounding again in a similar way that it did this year in the middle of the year.
Q. What about gasoline and home heating oil prices? That's always a concern in the winter months.
A. Commodity prices, including gas, will continue to go up. We see oil prices backing off slightly at the end of this year and next year and then going over $100 a barrel. We might see gas prices at $4 a gallon, but it won't last.
We just started to really study commodities recently because they really didn't matter for a long time. It is rare in history to see an extended boom in commodities, but it is something that happens about every 29 years. This makes perfect sense, because that puts us back to 1980, when oil prices were extremely high.
Q. Will oil prices remain high for the foreseeable future?
A. We see the high prices lasting through 2009 to 2010, when the economies in the U.S. and Europe start to slow. That slowdown will take the pressure off oil just as alternative energy supply and demand goes up.
A major factor driving high oil prices is demand in the red-hot economies of India and China, and those economies will bust along with the U.S. and Europe. That's because more than 35 percent of their economy is exports, and if we slow down on importing their goods, they can't grow as fast as they did in the past. It will also be a tough time for the Middle East and South America because their economies are so dependent on oil prices staying high.
Q. How about interest rates and inflation? Will the weakness in the housing market prompt the Federal Reserve to cut rates or will worrying about inflation spurred by higher commodity prices rekindle the Fed's fears about inflation?
A. With the economy rebounding in the middle of next year, we expect to see inflation pressures raised again. Inflation will be a factor through 2010.
Then, with commodity prices falling and economies slowing down, deflation will be the issue in the United States. People don't talk about deflation very much, but it is a much bigger problem than inflation. Japan had a severe bout with deflation in the 1990s and it was very difficult to get out of because when interest rates are cut to near zero, there isn't much more the government can do to stimulate the economy.
Q. What is so scary about deflation?
A. Deflation is devastating to people who have assets. The value of real estate, the stock market and businesses fall in a deflationary environment. Your house could end up being worth half of what you paid for it. People have seen stock market cycles, but we haven't seen a prolonged downturn since the 1930s, and that's what we are forecasting for the decade between 2010 and 2020.
When you see stocks go down for 12 to 14 years in a row and you need to keep working because you can't retire, but businesses aren't hiring, it will be a shock. Bonds and fixed income assets will be the best place to be then, because they will actually appreciate, especially high quality, long-term bonds.
Japan went through the deflationary cycle first because they had no baby boom. The only demographic group that deflation is good for will be the echo boomers because they will be able to get long-term mortgages at 4 percent.
Q. In terms of investing, what types of assets are worth considering in 2008 and why?
A. It's a good time to invest in the stock market right now. People are slowing their investments in housing so there is plenty of money available for investment, especially because the baby boomers are still in the consuming phase. They are continuing to spend on their kids' education, eating out, vacations and things like that rather than on housing and related items like furniture because they've already done that. We don't like bonds right now, but we do like certain areas in equities.
Q. What, specifically?
A. We expect tech stocks to do well and like the Nasdaq 100 ETFs, the QQQs. Emerging markets in Asia are another good bet, ETFs that cover that territory are good, including iShares Pacific Ex-Japan (EPP). We also like health care stocks, but are bearish on financials because of the prospect of rising inflation and the slump in the housing market.
In terms of capitalization, large caps have more capital appreciation potential than small caps, as large caps are just catching up. They were left behind in the prolonged small-cap stock rally.
These sectors of the market should be strong through the summer of next year but then we'll see the market approach a top and inflation come in to wreck the party. Emerging markets should peak at that time. This is an area where the bubble is the most concentrated. Emerging markets have done very well and it can't last forever.
Q. With increased globalization, more Americans either must retrain for new jobs or are deciding to retrain in different fields. What career fields do you recommend that will continue to provide jobs going forward?
A. One of the best sectors is health care. Currently we spend 14 percent to 16 percent of our gross national product on health care, and it is one area where people continue to spend on as they age. Within this sector, spending that is discretionary is a strong area, such as cosmetic surgery and cosmetic procedures.
So if you want a career in health care, look at an area that isn't tied to insurance or government reimbursement. That being said, consumers, especially seniors, will spend whatever they have to for major procedures that will extend their lives. Someone isn't likely to balk at mortgaging his or her house to pay for surgery for a major heart problem.
I tell young people to learn a foreign language. Latin America has a good demographic so Spanish is a good choice, although it is an area that will be hit beginning in 2010 when commodity prices start to fall. Southeast Asia should hold up well, so that is a good area to focus on, as by 2020 many companies will be earning a high percentage of their sales from Southeast Asia. If you are in business school, focus on international business rather than a more U.S.-focused business degree. It's a good idea to work for a company overseas because more jobs will be going there in the future.
For those interested in selling or developing real estate, focus on the ends of the market, rather than the middle. Starter homes for younger people out of school will be a fruitful area as will housing for older people such as assisted living and retirement communities. There isn't enough capacity currently for the newly retired and retired, so this will be a great area going forward.
Q. You've been criticized for getting some forecasts wrong. How do you explain those errors?
A. We've been right about the direction of trends, but in some cases wrong on the magnitude of the trends. We were right in forecasting the economic collapse in Japan in the early 1990s and we were right in saying that the U.S. budget deficit would disappear in the 1990s. We were off on the magnitude of the correction in the Dow in 2001.
One area that we've added into our forecasting that is improving our accuracy is the geopolitical cycle. In studying past trends, we've found that the geopolitical cycle tends to be favorable for 17 years, then turn unfavorable for that same period of time. We began an unfavorable cycle in 2001 that will stay unfavorable for a while.
We have added more data on geopolitical cycles and commodities cycles to our demographic and technology data, and that will help us be more accurate going forward. Looking at history and past trends, so much of where trends are going is easy to forecast. I've studied economics, and when you put the science of studying trends together with economics you can see that the economy has peaked every 40 years - there was a peak in 1929, 1969 and we expect one in 2008 to 2009. In commodities, there is a peak every 29 to 30 years.
Projections By
Economic Forecasters
For The Year Ahead
Listed below are some of the projections for the year ahead from The Survey of Professional Forecasters, a quarterly survey of macroeconomic forecasts. Conducted by the American Statistical Association and the National Bureau of Economic Research, it began in 1968 and was taken over by the Federal Reserve Bank of Philadelphia in 1990. The quarterly forecasts are a compilation of the economic predictions of more than 50 professional forecasters.
Projections: Less growth (in the housing market) and flat housing starts. Growth is going to be minus 2.7 percent in 2008, according to third-quarter forecasts. Housing starts will be roughly the same as 2007, with 1.44 million new homes projected for 2007 and 2008.
Interest rates will stay relatively flat, according to forecasters. By the third quarter of 2007, they were predicting 4.85 percent for three-month U.S. Treasury bills for 2007, going to 4.84 percent for 2008.
The inflation rate will be slightly better next year. Forecasters predict the consumer price index (including food and energy) up 2.2 percent, compared to a projected increase of 3.6 percent in 2007.
The rate of growth on household spending on goods and services is expected to slow. The forecasters predict growth of 2.5 percent for 2008, compared with a projected 2.8 percent for 2007.
Businesses will invest more in long-term equipment and facilities. Spending on plants and equipment is expected to grow by 4.9 percent, according to forecasters. (By comparison, the growth rate was estimated to be 3.4 percent for 2007.)
The U.S. will continue a trend of buying more goods from overseas. The country will still be in the black, but not by as much. The import/export balance will leave the country with a net of $19.3 billion in 2008. (By comparison, the U.S. was heading for a projected $40.6 billion by the end of 2007, according to third-quarter estimates.)
The gross domestic product will be a success story: Forecasters are calling for it to hit 2.8 percent in 2008, up from a predicted 1.9 percent in 2007. The bottom line: slower growth in 2007, and stronger growth in 2008.
Unemployment is creeping up slowly. Forecasters project it will increase from 4.6 percent in 2007 to 4.7 percent in 2008.
Next year, forecasters predict growth of 118,000 jobs per month, as opposed to the 156,000 per month they projected for 2007.
For more information on the study or the latest quarterly forecasts is available from the Federal Reserve Bank of Philadelphia's Web site, http://www.philadelphiafed.org/econ/spf/index.cfm
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