Future Forecast: Debt, Housing and the Stock Market
In my columns of forecasts for 2008 I made clear and distinct predictions about debt, the housing market and the stock market.
On January 1 I wrote:
“The key economic word for 2007 and even more so for 2008 will be “debt”. It is debt that is the true economic issue for the individual, the company, the state, the country, the world. How all of these economic entities deal with debt will be one of the two key economic issues we will face in the coming years. Energy of course is the other.”
On in a subsequent detailed column on debt, I followed this up with:
“The four debts referred to here are personal, corporate, city and state and federal. All of them feel as though they are beginning to come home to roost and the outlook, if not faced and dealt with, will come together with dire consequences.”
Well, this wasn’t too difficult to predict given the sub-prime mess that started to surface a year ago. It is clear that the mortgage debt problem in the U.S. is unprecedented and is tied to the collapse of the housing industry discussed later in this column. It now seems to millions of Americans that a disproportionate amount of household spending is going toward either debt or energy. This is the pain that individuals are feeling. It is what is being covered with wall to wall media coverage. This mortgage problem will test the perception of soundness of the financial system. The system will survive, though the path to recovery will be painful on the personal, corporate and government levels.
Unfortunately the debt issue lurking behind the mortgage debt problem is the massive amounts of debt accumulated by government at all levels. Cities, for example, that are having to deal with unexpectedly large energy bills and are cutting services as a result will soon be faced with the reality that the decline in housing values is lowering tax revenues so that the two line items of energy and debt servicing will crowd out basic services.
This debt crisis will create an aversion to debt and the taking on of new debt, which of course will trigger economic slow down and disruption well into 2009.
In the “Forecast for 2008” column I wrote:
“Housing will continue to be in a terrible slump for 2008. It will drift lower during the first six months. There will begin to be pockets of recovery by the fourth quarter, but the national market will not turn around until 2009”
This was an easy prediction to make and one that has proven to be accurate to date. I still forecast that in the fourth quarter of 2008 there will be signs that both certain areas of the country and certain segments of the housing industry will begin to show the leveling of price declines, which will represent the passage of the â€˜bottom’ of the market. The national decline in prices will start to slow in the fourth quarter and, by spring will provide factual indications that the â€˜bottom’ has been passed. This does not mean that all markets will move to recovery at that time. Las Vegas, Miami and numerous markets in California that experienced incredible speculative growth in both prices and housing stock will not return to normal until 2010.
In the same column in January I forecast:
“While I was correct last year, I have a bit less certainty this year. That being said, there will be even more volatility than last year, particularly in the first half of the year. In the second half of the year, the U.S. stock indexes will rise dramatically and will finish up for the year.”
Well, this proved to be true for the first half of the year. I still believe that the stock indexes will rise in the last few months of the year, but, due to the steep declines of the first half of the year, I am no longer sure that the major indices will all finish up for the year. That is still possible. Clearly the stock indices these days move more on emotion than underlying fundamentals. In addition to the fear and anxiety generated by the constant drum beat of negativity in the media there is a great degree of uncertainty. When the new president is elected some of the uncertainty will go away.
I do forecast that the stock market indices will all move upward in the nine month period of the 4th quarter 2008 through the 2nd quarter of 2009. There will, however, continue to be extreme volatility. When housing starts to show signs that the bottom has been experienced as mentioned above in the fourth quarter, the new president is determined in November and the country has spent months changing energy consumption habits, there will be strong upward pressure that will start to offset the current dominant bear mentality.