Byron Wien: Ten Surprises for 2007 and 2008

Given the fact that I have just finished writing two articles on Wien’s predictions for 2010, I thought it relevant to look back at the last three years of Wien’s surprises to just before the housing crisis.  I posted the 2009 predictions last year. The post is here.  Wien calls these events that he gives even odds where the consensus sees only a one-in-three chance. He’s been doing it since 1986. Below are his lists for 2007 and 2008.

Wien certainly didn’t say anything about the housing crisis in 2007.  Overall, you have to say he has a bullish bias. For example, he predicted the S&P 500 would hit 1600, cruising through the March 2000 highs.  And t did eclipse March 2000 highs – although just barely. He was also bullish on oil, commodities, precious metals, China, Japan and Barack Obama in 2007.  Overall his picks were pretty good.  Here they are.

1. The S&P 500 exceeds 1600 surprising even optimistic strategists and investors. The combination of strong earnings, reasonable valuations and excess liquidity throughout the world drives the U.S. market higher. Market volatility increases substantially with the VIX index rising to 20.
2. Secretary of the Treasury Paulson’s trips together with the forthcoming Olympics move China to a more accommodative attitude toward the United States and the West. China revalues the yuan by 10% and eases terms for Western partnerships with Chinese companies.
3. Despite a world-wide economic slowdown, crude oil remains in short supply because of Asian demand and the price per barrel returns to $80. Development of alternative sources of energy and sales of hybrid cars remain disappointing. There is a movement in Congress to encourage the construction of nuclear powered electric utility plants and local resistance seems to be softening as the “green wave” starts to take hold.
4. As the standard of living rises around the world, agricultural commodity prices continue to soar. Corn goes to $5.00 a bushel, wheat to $7.00, soybeans to $9.00 and cotton to $.80 a pound. The volatility of cattle prices also attracts investor attention.
5. S&P 500 earnings grow by more than 10% for another year, exceeding analysts’ estimates. Profit margins hold their own as productivity continues to improve.
6. The Federal Reserve does not lower rates in the spring. The 10-year U.S. Treasury yield goes to 5.5% as higher wages cause inflationary pressures to increase and the yield curve turns positive. Real growth in the U.S. approaches 3% once again as housing begins to recover. Credit spreads widen as defaults increase in a service oriented, competitive economy that is brutal to manufacturing companies.
7. The price of gold goes to $800 and silver approaches $18. The dollar is stable against the euro because of renewed economic growth in the U.S. and higher interest rates.
8. Economic conditions in Japan continue to improve. After being one of the worst equity markets in a developed country during 2006, the Nikkei 225 rises 15%. In this market large capitalization stocks do outperform their smaller brethren.
9. The emerging markets of Asia take a rest. Attention shifts heavily to Latin America and Brazil stands out. It is a country with vast natural resources and reasonable labor costs. The country moves closer to an investment grade rating and the Bovespa rises to 55,000.
10. Neither of the current frontrunners for the 2008 presidential election in the U.S. proves to have staying power. Rudy Giuliani pulls ahead for the Republicans as fears of terrorism heat up again and Barack Obama gains momentum as he demonstrates that inexperience isn’t a terminal liability.

The market turmoil in 2007 (see the credit crisis timeline) meant caution to anyone watching events, so I see his 2008 calls as much more telling regarding his biases. The interesting bit is his confidence in Obama’s political fortunes, which obviously goes back to at least 2006 since he wrote the 2007 list at the beginning of 2007.  Someone more plugged in can give me the scoop, but it sounds a lot like Obama had his Wall Street connections up and running pretty early.

As for his economic forecasting, he accurately predicted a recession, a drop in the stock market, and commodities-driven inflation. He was right to be bullish on gold and commodities. But he was wrong to be bullish on the Dollar as it got creamed in the first half of the year.  All in all, this is as good as it’s going to get for someone who missed the housing bubble and its fallout.

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.
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.
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.
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.
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.
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.
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.
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.
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.
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 would say he has a good feel for the economy and for politics with a slightly bullish bias. It is this bias which blindsided him when it came to the housing bubble.

Source

Byron Wien Announces Ten Surprises for 2007 – Business Wire