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The Daily Reckoning PRESENTS: In today's essay, Bill follows the theme of the first week of the year, and offers his forecast for 2008…or as he calls them, the 'financial obituaries'. Read on…

PREDICTIONS, GUESSES, AND COMPLETE FANTASIES FOR 2008
by Bill Bonner

Don't tell me when I will die, says Woody Allen. Just tell me where…I'll avoid the place.

In the year of our Lord 2008, there will be many places investors' money will die. Of course, if we really knew where the deaths would take place we wouldn't be writing this column. It is not given to man to know his fate. Nor even the fate of his money. But this is the time of year when a financial columnist lets his well-deserved humility give way to brazen immodesty. He sticks his neck out…and offers dear readers a peek at the upcoming year's financial obituaries.

But let us add an extenuating circumstance: the importance of an event is not merely the likelihood of it…but the likelihood times the consequences. For example, it is not a good idea to drink heavily and then drive down U.S. I-95 to Miami. Most likely, you'll get there in any case…but the consequences of being wrong make it a bad choice. Likewise, we may have another year of rising equity prices, a strong currency, a new boom in house prices…and a healthy, growing economy. But there are times - such as after imbibing too deeply for too long from the cup of liquidity - when betting on rising asset prices and prosperity is a bad wager; the risk of a crack-up is just too great to ignore.

So let us turn to our guesses. The alert reader will see that they follow a pattern. We believe that the financial world stands between two more or less equal and opposite forces. On the one hand is the irresistible force of inflation. On the other is the immoveable object of deflation. Central bankers are busily trying to keep prices rising on one side; on the other, Mr. Market has plans of his own. The party is over, says the market. No, here's some more punch, say the central banks.

Just to complicate things, between the thesis of inflation and the antithesis of recession is the synthesis of stagflation. Not that we know what will happen, but with all this 'flation' around, something is bound to blow up. The predictions that follow are just our way of taking cover.

Getting down to specifics, our guess is that this will be a better time to sell shares than to buy them. The U.S. economy depends on two big industries - and both of them are menaced by 'flation.'

The travails and hardships of the financial industry are well known. No need to say more about them. But asset prices depend on finance. Wall Street takes money from the people who earn it, all over the world, and funnels it into asset prices. When credit contracts, asset prices fall.

Another major contributor to a share-price funk is the housing industry. Houses are not going up; they're going down. And in America, falling house prices squeeze house owners…and reduce consumer spending. When consumers don't spend, businesses don't earn as much money. Falling earnings produce, ceteris paribus, falling share prices and an economic slump.

We have already let the cat out of the bag as far as house prices go. There are two things you can count on: both house prices and business earnings revert to the mean. Housing prices always go back to levels where people can afford them. And outstanding corporate earnings always get worn down by competition.

The dollar, too, is threatened by both inflation and deflation. Not that we have any direct or new information, but if we were writing a life insurance policy on the buck, we'd want a thorough physical. Inflation hurts the value of the greenback directly. Things cost more, in dollar terms. But deflation hurts it too. Lowering asset prices and cutting consumer spending, deflation hits below the belt. The economy crumples over…and the dollar falls.

Why? Because the dollar's handlers want to see it lose this fight anyway. As deflation threatens, they lower interest rates…making the buck even less attractive to foreign (and domestic, for that matter) holders. The Fed, along with the Bank of England and the European Central Bank are all working the pumps - trying to keep the inflationary boom going by reducing the values of their own currencies. We have little faith in the healing power of central banking; but when it comes to killing a patient, even a quack can do the job.

But if the dollar is to go down, what will it go down against? Ah, that is a good question. Against commodities? Maybe. Against housing and stocks…as we have said, probably not. Against the pound or the euro? We can't say; they are all in jeopardy. Against gold?

Back in January 2001, we announced our Trade of the Decade - sell shares/buy gold. At the time, the ratio of share prices to gold was just coming off an all time high of 44 ounces to one Dow index. Gold had scarcely ever been lower and shares had scarcely ever been higher. Twenty years previously, the ratio had been as low as 1 to 1.

Since January 2001, the ratio of shares to gold has fallen in half. Not because shares have come down, but because gold has gone up. The trade has been a good one. Will it be good in the year ahead? Again, we can't say. But since we're guessing, our guess is that there is more juice in this trade. Gold is clearly in a bull market. If the force of inflation prevails, it is impossible that the bull market will come to an end with the price barely higher than the peak set 27 years ago. And, if gold does not go up, it will be because the force of deflation has the upper hand, which will almost certainly mean lower stock prices. One way or another, the Trade of the Decade still looks like a good one. Like a good marriage or a bad movie, we'll stick with it to see how it turns out.

Regards,

Bill Bonner
The Daily Reckoning

Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill's latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics is available now by clicking here: