I know, the blogosphere is a-buzz with predictions for 2006. Well, about the only thing that new year's predictions are usually good for is making fun of them next year. Instead, live by the forecaster's maxim of giving them a date or a number, but never both at the same time.
About a year ago, I made a few posts on the dollar. I wasn't 100% right on. Like nearly everyone, I thought the dollar would slide a bit more this year. The opposite happened. But I did get one aspect of it right. I was skeptical of some of the gloomier scenarios put forth by, for example, The Economist. And in a couple of posts, I made reference to similarities between 2005 and 1995. Well, that was actually a pretty good comparison--much better than I thought it would be--where the dollar was concerned. I will admit, however, that I didn't think it would happen so quickly. Had I been pressed, I probably would have looked for the dollar recovery to begin this fall or about now.
Anyway, here's the picture.
So, prediction #1--If things continue as they did in the last cycle, I'd look for modest gains in the dollar again this year. It goes without saying, of course, that predicting the value of the dollar is one of the most hazardous activities known to economists. Let's just say that if I were a long term speculator with a 10 to 20 year horizon, I'd be bullish. One economic reason for that belief is that the pension concerns and demographic pressures in the rest of the world are going to be even more of a problem than for us. In other words, it's not always going to be an easy road, but on balance, the dollar should weather it ok.
Prediction #2--Canada will once again cobble together a weak coalition led by the Liberals, but the Conservatives will gain a few seats.
Prediction #2a--One of our family vacations this year will be to Canada. (Ok, that's not a prediction so much as a shout out to my Canadian readers that I really enjoy visiting their country. During the Winter Olympics, I expect to be singing "Oh, Canada" a lot.)
That reminds me...Prediction #3--The order of the medal count in the Winter Olympics will be Germany, Norway, U.S., and Canada, but Canada will beat the U.S. in curling-- a sport with less of an adrenaline rush than luge, but just as fun to watch. Anyone know where I can get tickets for 2010 in Vancouver?
And finally, "measured pace" might be gone, but some other phrase will keep us talking. Greenspan will go out on a rate hike, but there WILL be a pause in the rate increases sometime this year!
Yeah, most of these are pretty safe predictions. Nothing on the housing bubble or on just where interest rates will end the year. Nothing even on real GDP or the probability of recession. Those questions are serious. (The dollar prediction is serious, but I'm also careful to put it in context.) Truth is, a lot of people might start thinking and talking recession this year, especially early in the year, especially if the yield curve stays flat. For me, the key right now is business investment. If firms remain confident and invest, we could be in for another good year of 3-4% GDP growth. If investment falters (always a possibility), we could get a lousy quarter that sets everyone on edge. I hope that doesn't happen, and that if it does that it is only one quarter.
One more sort of off the wall prediction based on a hunch. New rules on minimum payments for credit cards will have a noticeable effect on consumer credit data and maybe even savings. The effect on savings might be barely noticeable, but maybe enough to keep it from falling any more.
Happy New Year to the east coast already. 52 minutes to go here. It has been a good one. Thank you to all my readers--especially you regular (and semi-regular) commenters who make it fun.
Do you have any thoughts on the effects of the changing structure of the stock markets? Things like RegNMS and the NYSE Hybrid market? The Listed portion of the market has been stuck in "manual mode" for a couple decades and looks to go the way of automation that the NASDAQ market did several years ago. I see a couple possibilities: The opportunities for hedge funds and speculators could add some liquidity to the capital markets. The volitility of the markets may increase, to what effect I have not given much thought. The volume of trading will increase, perhaps more an increase in the number of trades with not as significant an increase in the actual volume of shares traded. The changing "rules of the game" will provide an opportunity for new players or strategies.
Do you see these changes as having any broader economic impact?
I guess the question I would have is to what extent the current rules of the game act as a binding constraint on the sort of actions you describe. How much would it simply result in a shift from, say, the NASDAQ to the NYSE? If it's just a shift, the impact would be smaller. As to your last question, I would tend to think any broader impact would be very small and certainly hard to identify.
Think of it this way, we already have program trading, which certainly changed the way things work on the exchange. But did it have a large effect on the economy? No. In fact, this article suggests that program trading's effect on volatility might be less than you think.
http://www.econlib.org/library/Enc/ProgramTrading.html
Then there's Barry Ritholtz's post on the death of volatility recently.
http://bigpicture.typepad.com/comments/2005/12/death_of_volati.html
The bottom line is that there might be some short run effect right after the rules change as people try to reoptimize and figure out the best strategy. But in the long run, once people sort it all out, the effect diminishes.
Just my 2 cents.
Was that men's or women's curling (or both)?