On New Years Eve last year I wrote a post, Market and economic predictions for the new year where I set out 10 predictions mainly about markets and the economy for the new year.  I tried to choose topics where my predictions were differed from the majority of mainstream economists and market pundits.  Since the year is now coming to an end, it's time to revisit this list and see how I did.  I should have a new predictions list for 2009 coming within the next couple days.

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

Correct -  There has been massive monetary deflation as credit throughout the world has significantly contracted.  While price inflation in commodities surged for the first half of the year due to hot money speculators trying to find the next asset bubble, this bubble collapsed rather spectacularly mid-year.  Between massive demand destruction from slowing economies around the world, and the continuing deleveraging in our financial systems this will almost certainly continue.  It wasn't until October that I heard the first mention of deflation not inflation in the main stream media.

People are screaming that we are going to experience near term hyper-inflation do to the central banks pumping liquidity.  The central banks ability to pump money pales in comparison to the size and speed of the credit contraction.  Consider over $30 Trillion in wealth evaporated this year across the various asset classes, compared to a couple trillion pumped by the central banks.  Plus most of this money particularly pumped into banks in simply being hoarded in US treasuries, so it really has no inflationary effect at all.

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

Correct - The dollar index started the year at about 76 and appears that it will end around 81 with most of the US dollars strength coming against the Euro.  My prediction was based on the fact that world economies were in just as bad of shape if not worse than the US economy and there would be massive rate cuts not in the US but internationally.  There were also massive bets being made against the dollar that would b unwound during global deleveraging and the market realization economic problems are not limited to the US.  The global decoupling theory spouted by many economists and market analysts is proving to have more holes than Swiss cheese, the world economy really is dependent on the US consumer.

3. The housing downturn will continue...

Correct - Yup, last I checked it's still going on and I think we've got several years left until "bottom" is hit.  We have many substantial regional housing down turns in the past to look at for a model, and they usually lasted 5-7 years from peak to trough.  It should be noted the steepest price declines happened in the first two years and then it was a slow grind down for several years.  The main driver behind the housing market this time is almost totally availability of cheap credit, so until you see a turn in the credit markets there won't be in housing.

4. It is not subprime...

Correct - Look no further than default statistics on mortgages in general and it's obvious in it's not just subprime, Fannie and Freddie should be proof of that.  Secondary markets for everything from credit card debt to students loans are now pretty much dead, and we even saw it spread all the way into the municipal bond markets this spring as they locked down (I wasn't expecting that to happen so soon).  The worst effects are yet to be felt, as some of the secondary credit market troubles have yet to have spread down to the consumer.  I do not believe the credit crisis is over, in fact I believe we are experiencing another lull in the storm just like we did last fall, then again in the winter, and then again after Bear Stearns.

5. Real estate commissions will increase... 

Maybe Correct - Most people were claiming average real estate commissions on a percentage basis were going to contract due to new business models such as Redfin.  My prediction was made on the basis that commissions typically increase in down turns as it becomes harder to sell properties and that many "innovative" models will die off because they can't survive in an environment of lower transaction volumes.  I haven't seen any hard numbers on this, but I have lots of anecdotal evidence that my prediction was correct.

6. Several large regional banks will fail...

Correct - My prediction was "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."

Out of the large regionals we saw IndyMac, Washington Mutual, Wachovia, Downey Financial go down.  Both WAMU and Wachovia laid claim to being in the top 10 largest banks in the country.  Additionally, the only reason Citigroup (the largest) made it through the year was several hundred billion in bailout money being thrown at them.  Back in April 2007 when I started really investigating the banking system I put together a list of banks that I thought were dead men walking based on their exposure to bad debt and low capitalization.  All of these failed banks were near the top of the list.  There are MANY banks on that list, that I still believe are walking dead even with the government intervention and I actually expect the rate of bank failures to increase significantly in the next year.

The accounting fraud in are banking system, which the regulatory agencies like the FDIC and OTC are assisting to cover up is massive.  There is no other way to describe it other than criminal, the agencies put in place to protect us have instead been assisting in the crimes for years.  See: The TRUTH Behind The Credit Market Lockup

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

Correct - Does this one need any further explanation?  I think I'd need about 10 pages just to list the bailouts set in motion in the last two months alone.  Keep in mind one line from the 2008 prediction though, "Yet, none of them will fundamentally do anything."  I'm sticking with that, mathematically they can't solve the problem, it's all a smokescreen, all they do it drag out the economic pain longer, and act to distribute the losses wider in the system.  History has shown you can not have a true economic recovery until you take the losses and get them out of the system.

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

Correct - What are we at, .25% now from over 4% at the start of the year?  Welcome to ZIRP (Zero Interest Rate Policy), it's gonna last for a while, and no that isn't a good thing.

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

Correct - ActiveRain launched the redesign Localism, Outside Blogs, and is preparing to launch channels which may be the biggest overhaul to the main ActiveRain.com site in years.  Many new faces too, though I've moved onto to start a new venture.

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

Correct - I'm still here writing this...

Now I have some work to do to come up with a whole new set of predictions...