Since the fad this time of year in the blogging world seems to be making predictions of what will happen in the next year, I think I'll make some of my own.  Given that one of my primary interests is markets and economics I'll make my predictions mainly surrounding those topics.  Yes as many may know, I'm pretty bearish right now and many of these predictions may go against the grain, but I'll lay them out there anyways. 

1. The fear of inflation is misplaced, deflation is coming...

Despite many economic indicators as well as anecdotal evidence showing increasing inflation pressures, we're actually just seeing a lagging effect of 5 years of heavy inflation.  While government statistics showed inflation running 2-3% annually, real price inflation was closer to 10%, think about the increases in food, energy, housing, health insurance.  Monetary inflation was also running high due to the huge amounts of credit created through excess lending (an not just in the US).  As lending at all levels continues to contract we will experience monetary deflation and this will be very apparent by mid next year.  This, in turn will eventually lead to price deflation at the consumer level.

2. The dollar will strengthen against most currencies... 

What you say, everybody thinks the dollar will plunge against most currencies?  Trades in which everyone believes the move will be one way often end up whipsawing people.  But the simple fact is the US economy is likely to fair better than many international economies that are dependent on the US consumer.  This will spark a flight to safety into US currency reversing the trend that has taken place this year. 

3. The housing downturn will continue...

The typical housing downturn historically has lasted 5-7 years and we are somewhere around year two from the peak of this current housing market (depending on your region).  According to the Case Schiller index we saw nationwide price declines of about 6.7% during the last 12 months, and my prediction is will see a similar amount this year. Several of the top ten home builders will be forced into bankruptcy as they violate covenants on their revolving credit lines.

Graph from Calculated Risk blog comparing price declines in LA to previous cycle. 

4. It is not subprime...

The media likes to refer to the credit problems as being "sub-prime" problems, wrong.  The losses in the Alt-A and prime lending space will be even bigger than in the sub-prime, there is just a longer fuse attached to the bomb.  It's also not contained in the residential housing market either, commercial real estate may in fact will have similarly large losses, plus add in everything from credit cards to auto loans to leveraged buy outs. This in turn will lead into a fairly hard recession in the first half of the year, as the debt engine that has driven our economy dries up.

5. Real estate commissions will increase... 

The average real estate commission will increase over the next year.  This has traditionally happened as markets slow and this time will be no exception.  There's already many examples of homebuilders offering commissions to agents up to 10% in an attempt to quickly move inventory. 

6. Several large regional banks will fail...

The last half of this year we saw several bank failures including the largest one since the S&L crisis, Netbank.  This next year several large regional banks will fail and end up being seized/merged by the OTS for violating capital requirements.  There is a very significant possibility of at least one of the top ten banks in the US having a similar fate.  I won't mention any names but several candidates come to mind.

7. More bail-out schemes than you can shake a stick at will be proposed...

Yet, none of them will fundamentally do anything.  See the administrations "Sub-prime bailout" as an example. 

8. The FED substantially lowers the target rate...

The FED will follow deflation downwards, lowering their target rate to well under 3% by the end of the year.  But at the same time other lending rates from mortgages to commercial credit will increase. Despite the media hype the FED really doesn't really have the ability to add much liquidity to the system they operate more like a pawn shop for banks, their main power is jawboning to the markets to try to create an effect.  I'll write a post on this shortly...

9. ActiveRain will launch many cool new features and several new faces will join the ActiveRain team... 

Ok, I know this isn't a market or economic prediction but I had to add something in that will be a "safe bet" ;)

10. Despite all my bearish predictions we will survive and life goes on...

Update: End of the year recap is now out.