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Financial Predictions for 2008
Please remember that these
predictions are for fun. If I knew what was going to happen, I certainly
would not share that information with others! You must make your own
decisions regarding your financial future and not hold others, including me,
responsible for your own results. Enjoy!
Most of these predictions were made
in late December 2007, although final editing did not occur until late
January 2008.
- Economy: there is not
much positive to look forward to in the United States. The consumer has
kept the economy afloat longer than I thought possible. The tide is
likely to go out in 2008. How many consecutive years can the stock
market show positive results? The economy might not formally hit a
recession, but growth will continue below long-term averages. There are
many issues to worry about: budget shortfalls, currency imbalances,
credit issues, uncertain political situation, etc. A physical disaster
could put the economy over the edge. I don’t expect a depression, but
every time the Federal government bails out a bubble “victim”, the
inevitable correction comes closer and will be deeper. The shots to the
economy administered by the Fed late in 2007 should start to take effect
in 3rd/4th quarter 2008, just prior to the
election. A new President will likely reduce military spending and work
toward a balanced budget for the first two years of their
administration.
- Volatility will stay
above long-term averages, although I don’t expect it to surge above 30
unless there is an international crisis. VIX is currently at 22.50.
- Oil will stay in the
$80-120 range (initial cost is about $95/barrel)
- Credit risk will
increase with unintended consequences as the sub-prime crisis plays
itself out – watch for commercial mortgages and junk bonds, along with
CDOs and credit default swaps, to struggle in 2008. My worry is what
unintended consequences remain from this bubble. I did not anticipate
the impact on liquidity that required the Fed to bail out the economy
with lower rates, increasing the risk of inflation and lowering the
dollar’s value. I am hopeful that the investment bankers learned more
this time than they did from the manufactured housing debacle that
preceded it.
- Home building sector
will finish bottoming and level or slightly improve depending on
interest rates (up would be worse) – we’ll try this one again this year.
I think I was just a little early in 2007.
- The dollar will bottom
out as oil prices stabilize. Other scenarios focus on countries who are
heavily invested in dollars, such as China, Japan, and the oil
exporters, choosing to dump dollars. US Treasuries would then spike and
the US economy could find itself in a vicious cycle. This may take
several years to play out and will impact the stock market heavily. The
wild card here is the subsidization of ethanol in the United States. If
these subsidies are reduced, the price of oil will temporarily increase,
although that would open a financially feasible market to the oil held
in the Rockies of North America and ultimately create a cap to the
price.
- I have a fear that the
Benazir Bhutto assassination was only the first of numerous events over
the next couple of years. Whether this is a repeat of 1968 remains to be
seen. I worry for the Presidential candidates in the US in 2008. We
should pick our Vice-Presidential candidates carefully.
Emerging Risks - Concerns
- Pandemic influenza –
business continuity, impact on small businesses, combination with
malaria/AIDS in Africa
- Infectious disease -
increased resistance to drugs like antibiotics (e.g., tuberculosis,
staff infections or pneumonia)
- Global warming –
unexpected side effects like new viral/bacterial attacks, along with
coastal flooding and increased hurricane activity
- Terrorism
- Principles-based
capital in the financial services industry will be abused by some and
will not be caught initially by peer review
- Can an internal CRO be
strong enough to stand up and be counted, or will fears for their job
keep them “in line”
- Tort reform needed
- US gridlock/
presidential campaign
- Malthus – too many
people, not enough food – will ethanol subsidies result in starvation
for the poor?
- Economy – risk of
stagflation and the lack of internal hedge for investors holding both
equities and bonds
- Counterparty risk – it
is currently so concentrated that one misstep could have major
repercussions. Watch the credit default swap market. Much of the economy
is now concentrated in a few parties. This leads to more contagion in
the system and more correlation in the tails. Financial experts seem to
either rely on models that aren’t accurate in the tail or focus on top
line rather than bottom line growth.
Top Actuarial Issues
- Defined benefit plan
valuation – needs to reflect marketplace economics. Actuaries from other
disciplines should be welcomed, along with those from outside the
profession. Focus should be on cash flows rather than regulatory issues.
- Demographics –
designing a retirement insurance product that is economically sound
- Obesity – how will the
various drivers of mortality and morbidity interact (some good, some
bad)
- Lack of rudimentary
knowledge of assets and how to value them – need teaching sessions that
are short of stochastically based financial economics
- Peer review – how to
make it extend beyond a regulatory requirement to help manage the
business by identifying and exploiting advantages
National health care – need
actuarial solutions
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