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Byron Wien’s Predictions for 2008

Bryon Wien was one of my favorite investment bank in-house economists/strategists for some time.  In 2005 he left Roach and Co. as a managing director of Morgan Stanley to head over to Art Samberg’s Pequot Capital Management.  Wien has over 40 years of experience in the global financial markets. Prior to joining Morgan Stanley in 1985, he was a portfolio manager for 20 years at Weiss, Peck and Greer where he was a partner.

Recently Byron Wien has once again published his annual list of surprises to expect in the New Year.  His predications on commodities prices, oil, and gold all proved correct. He has published his list since 1986 and got a majority of his 2007 picks right.  Wien believes these surprises have at least a 50% probability of occurring at some point during the year. In past years Wien has batted above .500 with his lists.

 

 

 

 

The Prince’s comments are in bold and Wien’s predictions are in italics.

1) In spite of Federal Reserve easing, and other policy measures, the United States economy suffers its first recession since 2001 as housing starts stay soft and banks are reluctant to lend to anyone where a whiff of risk is apparent. Federal funds drop below 3%. The unemployment rate moves definitively above 5% and consumer spending is lackluster.

This one seems pretty likely.  I think the Federal funds will drop to 3.5% but no lower.  Totally agree with his calls on unemployment and consumer spending.  We are already in or heading towards a recession because of the wealth effect on the consumer of housing weakness and credit tightness.

2) Standard and Poor’s 500 earnings decline year-over-year and the index drops another 10%. Energy and materials stocks hold up relatively well in what is viewed as a correction rather than a bear market. Market conditions start to improve during the summer.

This one is more difficult to handicap.  I do agree that earnings will decline year-over-year but I don’t see the index falling by 10%.  All that global liquidity being created from oil wealth in the Middle East and surging growth in Asia will get put into U.S. equities.  The Prince thinks housing prices will stop their freefall in the summer and this will improve equities.  Don’t expect housing prices to start rising before summer of 2009.

3) The dollar strengthens in the first half reaching US$1.35 against the euro and weakens in the second exceeding US$1.50. The European Central Bank begins an accommodative monetary policy. Foreign investors flock in to buy cheap assets in the US early in the year but the dollar declines later as several countries holding large reserves diversify into other assets.

The Prince completely agrees that many central banks (especially China and the ECB) are going to diversify their large reserves into assets other than dollars or dollar denominate assets.

4) Inflation rises above 5% on the Consumer Price Index as higher commodity prices and oil finally begin to have an impact in spite of modest wage increases. The 10-year US Treasury yield rises to 5%. Stagflation becomes a frequent presidential campaign and Op-Ed discussion topic.

The Prince is going to bet against Byron on this one.  Inflation is not headed above 5% and we are not going to see stagflation.

5) The price of oil goes down early in the year and up later, sinking to US$80 a barrel in the first half as western economies slow and inventories are drawn down, and rising to US$115 in the second. Established wells continue to decline in production while China, India and the Middle East increase their consumption.

The Prince doesn’t see oil at US$115 in the 2nd half but he does see it hovering around $100 for most of the year.  Chinese and Indian consumption increases will impact prices and the productivity of wells will decline since that trend has already begun but the price of oil is already so far out of touch with supply and demand that the Prince cannot see it going to $115.  The only way oil goes briefly to $115 is if there is a significant destabilizing event in a top 5-10 producer of oil (i.e. major uprising in Iran, government collapse in Russia, etc.).  If you look at the futures curves neither the traders or the forecasters see oil that high.

6) Agricultural commodities remain strong. Corn rises to US$6 a bushel and cotton to US$0.85 a pound. Gold reaches US$1 000 an ounce as disillusionment with paper currencies spreads across Asia.

The corn prediction seems like a no-brainer given the large number of ethanol plants under construction and the growth in the developing world.  I don’t see Gold going any higher than current prices and I think Asian investors will continue to believe in paper currencies value.

7) The recession in the United States slows the Chinese economy modestly but its stock market declines sharply. Investors recognize that paying biotechnology stock multiples for highly cyclical companies doesn’t make sense. The Chinese revalue the renminbi by another 10% to control inflation and as a gesture to foreign governments participating in the Olympic Games who complain that Chinese terms of trade are unfair. Several long distance runners refuse to compete in certain Olympic events because of continuing air pollution problems.

The Prince has no view on the olympic boycotts but admits that it might happen.  I completely agree that the stock market bubble in China is going to pop.  The Prince thinks all the energy and telecom companies in China are dramatically overvalued.  This will not be a soft correction.  The Prince sees the value of Chinese stocks declining by 20% to 35%.  The Chinese economy will slow because of the U.S. but not as much as most forecasters believe as the consumer economy in China takes hold.

8 ) The new Russian President Dmitry Medvedev, under the tutelage of Vladimir Putin, becomes more assertive in world affairs. He insists that Russian oil and gas be paid for in rubles and demands a Russian seat at major world conferences. Russia and Brazil stock markets lead the BRICs. The Gulf Cooperation Council markets begin to attract interest among emerging market investors.

I think Brazil and India lead the BRICs and Russia’s economy achieves mixed results.  The Prince has no view on Medvedev’s possible actions.

9) Infrastructure improvement becomes an important election theme for both parties and construction and engineering stocks rally in anticipation of huge programs beginning after the new President’s inauguration. Water becomes a critical problem world-wide and desalination stocks soar.

Completely agree with Wien’s water prediction.  The Prince is already invested in desalination.  I don’t think infrastructure improvement will be on the public’s mind, instead I see healthcare reform as the main worry of voters.  I see defense services and contractors taking a hit after and before the election as the Iraq War is brought to an end (i.e. sell Halliburton).

10) Barack Obama becomes the 44th President in a landslide victory over Mitt Romney. With conditions in Iraq improving, the weak economy becomes the determining issue in voters’ minds. They want to make sure that gridlock ends and Congress gets something done for a change. The Democrats end up with 60 Senate seats and a clear majority in the House of Representatives.

I agree that Obama will rule the day but I think Mayor Michael Bloomberg running as an independent will be the runner-up.  The weak economy will be the determining issue and change in the health care system will be second on the agenda.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Byron Wien

© 2008 Prince of Wall Street.