Last year...

I think one thing we can all agree on is that 2008 was not a good year for forecasters.

At the end of 2007 / early 2008 I thought we were in for a contraction which would be mitigated by interest rate reductions and lower commodity prices: I believed the year would be one of gradual decline. What in fact happened was just that for the first three quarters followed by a massive contraction in the last.

Four month periods
Oil 100 112 (150) 110 40

FTSE 6500 6000 5500 4300

I thought the FTSE would decline gradually and then rally. It fell out of bed.

The oil price peaked in June at almost double my year end estimate of $75 or less. Many thought it would go to $200 but I stuck to my estimate. The reason was oil futures had clearly been a proxy for shorting the dollar, and as positions unwound, and the recession caused a flight to quality, the growth in the oil price would be reversed. Oil ended at around $40, and whilst most people wouldn’t celebrate a forecast that was double the actual outcome, I am reasonably pleased with that.

I predicted that a major American bank and a car firm would go bust but be rescued. Again, I seriously underestimated the problem.

Perhaps the pivotal factor was the demise of Lehmann Brothers. There was a case for allowing it to go under, on the grounds that it was not a retail bank and that it was not the State’s job to bail out companies with a bad business plan. However the underlying weakness in the banking sector meant it was simply a warning to banks that it could happen to anyone, prompting a further loss in confidence.

To all you gold bugs out there, an investment in gold on 1st Jan 2008 would now be showing a gain of 4%, about the same as a cash deposit.

It has been a bad year for forecasters everywhere. It turned out the banks didn’t know what they had invested in, and, not knowing what the others had invested in, wouldn’t lend to each other. The credit markets almost collapsed. It has not been pretty.

Politically, I predicted that Giuliani would beat Hillary in the presidential race: it may however turn out to be a good one in which to have come second.