Predictions Game

[Paddyboy1]

Make some finance predictions for 2003. Be as specific as possible. Entries judged on accuracy and degree of difficulty.

1. The Real Estate Bubble Pops - We enter a bear market in real estate with prices dropping for the next 5 years. 5 REITS go bankrupt in 2003

2. Wall Street discovers the revolution in nursing home/assisted living. THis is already a $100B a year business and set for huge growth. The two biggest players in this market share about $5B in sales but have a combined market cap of just $600M due to concerns about tort liability.
KIND and BEV trade above 35, and 6, respectively at some point.

3. Ebay wakes up from their dream. Last vestige of the tech bubble disintegrates and Ebay shares trade below $20 before year end.

4. Govt stimulates the economy by creating an incentive for paying stock dividends. Also restricts the rights of companies to "horde" cash. Microsoft announces a $5 dividend

5. Ford Motor Credit and GMAC are downgraded to junk and rental car leasing in America ends for all intents and purposes. Plans are put in place for a derivatives market based on the price of used cars and car leasing resumes.

[Fiveagain]

A robust, booming war really helps capitalism. I predict unemployment at 4.8% at the end of the year, which is virtually full employment. I'll predict the end of the year will see inflation at the 3.5% level.

[Ms. Re]

here's a few:

1) the yield on the 10 year note drops to 3.25% as growing signs of deflation appear
2) the major stock indices are flat on the year although there is a lot of volatility -- the DJIA will experience a 750 pt swing in one day
3) Microsoft will acquire the AOL division from AOL Time Warner
4) The Jap banking industry writes off $1 trillion in loans. The World Bank bails out Japan in the largest financing package in history.
5) GE will again lower profit guidance

[Spectrum]

Stocks, S&P500 will end the year down 5% for an amazing four down years in a row. There will be a surge up in January as asset allocaters rebalance by selling bonds and buying stocks.

Treasuries will decline slightly with the 10 year bond finishing the year at 3.5%, bond defaults will still be higher than historical averages but credit spreads will narrow by the end of the year.

Real estate prices will hold steady as demand decreases but mortgage rates become cheaper still.

The price of oil will increase 10-20% finishing the year over $30 per barrel

CPI Inflation will be subdued at 1%

The pain of deflation will be discussed extensively in mainstream media with much discussion of Japan.

[Take 2]

S&P down 5% first half, then up 2% for year.

Interest rates flat, inflation 3%.

Banks, healthcare industry push federal insurance solutions through.

[Paddyboy1]

My doomsday predictions are way off so far, but give them time. Microsoft dividend looks promising.

[Westley]

Paddy-

You have claimed there is a real estate bubble before, but I have never seen you explain it. I don't see it. Help?
(I think we will see prices go sideways for a while, prices will go up a little, but not even close to historical. Not sure why you think the value ascribed to living in the most vibrant economy in th world will go down).

[Paddyboy1]

1. Everything I know about economics and finance I learned in the Economist. A few months ago they had a special section on the real estate bubble but they have been talking about it for some time. This is really the only source that informs my thoughts, everything else is me just going on the internet to confirm it. If you need my password for the online version, it is a fun read, and send me a PM.

2. The bubble allegedly does not reside only in the US property market. According to the Economist, it is larger (in order) in Australia, Ireland, and the UK. So its not only or even principally about America. I have a hunch that it exists elsewhere but that Economist was best able to investigate it in english speaking countries. They theorize that the design of the prop markets in these countries has something to do with it, for example, the British market has many people who "rent to own", and Australian house sales are all done by open-house and auction interestingly. Germans generally all rent (or own, I forget which)

3. Your question is premised on the idea that the price of property fluctuates with the value of living in america. not so. Population growth is not that key of a driver, although it is a big one in lets say ireland. Pop growth is steady in america for a decade. These are americans moving to different homes in america.

4. to answer your question specifically why is there a bubble, you can measure things like P/E ratios (house price / rental income), housing costs/income ratios (this especially addresses your question), credit availability (people have gone way into debt to drive up the prices this high), if they go back to long-run levels of borrowing and saving prices should drop, not stabilize.

5. Bubbles are much more socially acceptable for me to predict in property than in equities. I think the equity markets are also currently way overvalued but nobody listens to me, because if I'm so smart then so are a few other people and they can short-sell the market down to size. In real estate, we're not talking about a random walk. Just like in the P/C insurance cycle we're not talking about a random walk. Because there is no (until recently) arbitrage opportunity for the prescient. This point #5 is not really a winning hand in my proof of a bubble, but it gets me a seat at the table.

[Westley]

1. Thanks, Paddy. Here's what I think of your arguments. If you think I am wrong and care to share, feel free; either way, I would appreciate the use of your password, so I can educate myself (or can I just get my own? Is it pay or subscriber-only?)

2. If the design of the property market causes the bubble, why would you think the bubble would pop (unless the market is changed). For example, it seems obvious that the housing market in the US is inflated due to the tax system, but if you don't change the tax system, then why would the bubble ever burst? (Germans all rent)

3. Why wouldn't people moving here have an impact? This seems like a simple supply/demand irrefutable argument. Or, are you saying that the population growth is and has been constant, therefore it doesn't drive prices? Either way, if the price of living here goes down (either the cost of buying, or the cost of renting, which should be tied to buying, although you seem to be saying that it renting and buying costs are not tied so closely together), I would expect more people to move here, driving the cost back up.

4. As incomes overall rise (in real terms), the percent of incom spent on home ownership is likely to rise, as there are only so many things you can buy, but you can always buy a bigger house (people eventually spend less on a better stereo or a new car, as a percent of income). I expected the increase in home value/income ratio to be part of your argument and I find that to be weak. The rental/price ratio seems like it should be a better indicator, but I wonder if it's distorted by the tax benefits of owning (the bigger your mortgage, the better the tax benefit). Americans' love affair with credit seems problematic at least, and could be a good indicator. The amount I am in debt on my house is scary, and I have lots of friends in worse shape. This seems like a strong argument.

5. "Bubbles are much more socially acceptable for me to predict in property than in equities." I know you are always very concerned about being socially acceptable on this board, you hate to say something that is bothersome to Harry or Shekky :wink: Seriously, I think this is a strong argument in a way - I definitely agree with you that a bubble COULD EXIST over a long period of time in the real estate market. As opposed to the equities market, where it would be exceptionally hard (impossible) for that to happen, at least over the long term.

[Wigmeister General]

1. Bill Gates Foundation is investigated for ties to Al-Qaeda, and cleared.

2. Ernst & Young and Deloitte & Touche are denied SEC approval to merge.

3. Oil prices drop to $15 / barrel on November 1.

4. Unemployment in Germany rises to 17%.

5. Detroit, Houston and Philadelphia default on muni bonds.