January 6, 2003 6:35 p.m. EST
Seven Unexpected Events
That Await Us in 2003
For prognosticators, the 2003 crystal ball is murkier than ever. One could trot out scenarios unthinkable in recent years, from global trade war to nuclear war. Rather than forecast the predictable, e.g. more tax cuts, I'd like to focus on the unanticipated. Here are seven events to look forward to, or dread.
1. Deflation worries subside as actual inflation emerges. Late in December, Princeton economist and New York Times columnist Paul Krugman raised the specter of deflation, where falling prices send the economy into a downward spiral of reduced spending, shrinking payrolls and deepening recession. It's the so-called Japan scenario. For the past decade, Japan has gone in and out of deflation, and its once-mighty economy and stock market have suffered terribly. As the U.S. economy has stumbled ahead, fears of deflation have risen dramatically.
But the recent spike in commodity prices, the sharp devaluation in the dollar and rock-bottom interest rates in Japan, the U.S. and Western Europe, are together laying the groundwork for a surprising surge in inflation. Moreover, the Bush Administration, desperate to pump the economy ahead of the 2004 election, will do all it can to spend, spend, spend. As few fear the risk of overdoing all this stimulus action, overshooting to the inflation side is becoming a distinct possibility.
The return of inflation will mean higher interest rates, crimping the real-estate market. Treasurys, the place of refuge for so many investors these past three years, will become a deadly locale as prices plummet and yields rise. The consumer price index will hit 5% by year end.
2. The stock market suffers its fourth down year. Most everyone is predicting a rebound in share prices, snapping the three-year losing streak. The most popular argument for an up year is that we haven't had four down years since the Great Depression. Well, we haven't had a bubble like we just went through in some time, either.
The year will start off strong, with stocks moving sharply higher after the swift conclusion of war in Iraq. But investors will have to start holding their breath shortly thereafter as more international crises emerge. The past year has shown how war -- the war on terror and the possible war with Iraq -- can temper investor enthusiasm even in the face of a growing economy. In addition, rising inflation concerns will erode corporate profits, helping to send major averages to narrow losses for the year.
3. Oil prices rise but then end the year sharply lower. Venezuelan President Hugo Chavez will resign his post early this year and call for new elections. Unable to restart the country's oil industry, Mr. Chavez will opt for a return to the polls as part of a deal to get oil flowing once again. This move will come on the eve of conflict with Iraq and will give the oil market some reprieve after prices approach $40. (They're just above $30 now.) OPEC will agree to pump more oil and non-OPEC nations will go along with them. Despite the growth in the U.S. economy, oil prices will end the year at $18.
4. The American Stock Exchange closes. The once-lively exchange, known for years as The Curb, will fail to attract a buyer. Instead, its current owner, the Nasdaq, will sell off its businesses at auction to various exchanges. This closure will deal one more blow to the ailing New York City economy, as the city's financial picture continues to worsen.
5. A new Medicare plan, with a new prescription drug benefit, gets passed. Insurance companies like Aetna and United Healthcare, as well as drug makers like Merck, stand to gain the most from the new federal program, though health insurers have already had a good run in 2002. The cost of the drug program, which will subsidize prescription-drug purchases for senior citizens, will increase the deficit dramatically, adding to the pressure on long-term interest rates.
6. The consumer gets downright frugal. Burdened with debt and concerned about the future, consumers will step back dramatically from big-ticket spending. Despite the steadily improving economy, job growth remains anemic. Paying down credit-card debt and saving for a rainy day will become important themes as the productivity-driven, jobless recovery leaves the unemployment rate above 6%. Even another round of zero-percent financing will fail to attract car buyers.
Daimler-Chrysler will sells its U.S. operations to General Motors. Ford Motor will continue to struggle and be at the brink of bankruptcy by year end. Japanese auto makers like Toyota and Honda will take advantage of lower production costs to eke out profits and gain market share.
7. Alan Greenspan resigns as Fed Chief. Declaring victory over the recession and getting out before the inflationary debate can heat up, Sir Alan will decide to concentrate on his tennis game. Financial markets will barely react to the news, having already lost faith in Mr. Greenspan during the last three hard years.
Coverage of his departure will focus not on his 15-year tenure of economic growth, but instead on the Greenspan Put -- the theory that the Fed will do all it can to help prop up the stock market, leading investors to take on more risk than they should. President Bush will shock his supporters by naming ex-Clinton man Robert Rubin, now at Citigroup, as the new Fed chief. Bonds rally.
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If you like any of these, or don't, look for more from Byron Wien at Morgan Stanley, who just came out with his famous annual list of 10 surprises for investors. (See related article1.) How about surprises you expect for 2003? Let me know and I'll publish a sampling of reader surprises in a future column.
Send surprises and any comments to Dave Kansas at dave.kansas@wsj.com2. |
