In December 2007 I made my 10 potential surprises for 2008 and Predictions post.  I put the odds of each surprise at less than 50/50 at the time and was hoping to get 5 or more right to be able to pat myself on the back as a "soothsayer". 

What I’ve gotten right so far:

4.  The Chinese stock market will crash by more than 30% from its peak.

5.  At some point in 2008, the Fed Funds rate will be at or below 3%.

10.  John McCain will be the Republican presidential nominee.

What I’ve gotten wrong:

1.  The West (namely the US) and Russia will have a major standoff over the fate of Kosovo.  The magnitude of the crisis will surprise the Western media.  Georgia will be sucked into the crisis somehow. [Russia backed down.]

9.  John Edwards will be the Democratic presidential nominee. [no explanation needed]

Jury still out:

2.  The US and North Korea will sign a treaty officially ending the Korean War. [Things are moving in the right direction, not sure if it’ll get this far before the end of the year, though.]

3.  The US and Iran will have a high-profile detente. [I actually think this will happen, but we’re not there yet.]

6.  The US current account deficit will end the year at less than 3% of GDP. [This might happen, but I should have specified Real GDP, which is the most watched measure.]

7.  The US dollar will rally by more than 10% against the Euro and the Pound.  [Not looking good, but in the realm of possibility.]

8.  Russia will effectively merge with Belarus. [What a random prediction…why did I make this?  why would I care about Belarus?]

Moving on to my actual predictions for 2008:

Despite the subprime-driven credit market crisis, 2008 will be a good year for the world economy.  The US will avoid a recession, with economic growth driven by exports and business investment.  The technology and capital goods industrials sectors will do well.  Commodity prices will stay strong, so the mining and oil sectors will also remain strong.  Expect continued M&A in all of these sectors, with the ultimate end game being the formation of global oligopolies.  For these and other reasons, 2008 could actually end up being a good year for the equity markets, but I expect credit risk spreads to remain elevated.

[The world economy is doing ok, but it’s not going to be remembered as a "good" year, I don’t think.  I now doubt we’ll avoid a technical recession, but I continue to believe that the headline number will hold up ok based on the factors I mention above…exports, business investment, matierals, agriculture.  I do not now think it will be a good year for the equity markets…ahem.]

Interest-rate sensitive, consumer-driven sectors will continue to suffer, with autos hit especially hard.  Some time before the end of 2009, it will become obvious that Cerberus’ investment in Chrysler is in serious trouble.  The housing market will continue to weaken, too.  No surprise there.   Housing is in for a long slump.  The huge run up in prices and supply/demand imbalance are bad enough.  Add in declining demographics with the baby boom generation past their home-buying years, and we’re looking at a long, Japan-style real estate deflation.  The demographics are bad for commercial real estate, too.

[I’m liking this paragraph.]

The US current account and budget deficits will continue to narrow.  Because economic growth driven by a narrowing current account deficit doesn’t feel as good as growth driven by a widening deficit, consumer sentiment on the economy will stay low.  High CPI increases will continue, but will likely start slowing markedly near the end of the year.  The US dollar has likely put in an intermediate term bottom in late 2007 and should rise modestly in 2008.

[This is on track, too.  I continue not to be a dollar bear, but my patience is being tested.]

The cracks in the foundation of global growth will really start to show in 2008, particularly in the form of runaway inflation in China and the Petro-states.  China will be forced to clamp down, probably just after or around the time of the Olympics, starting a chain of events that will lead to a real estate and stock market crash.  The problems in the Chinese economy will likely be overshadowed by Olympics hype, however.  In 2009, deflation will start to spread from China to the rest of the world.

[I still believe this to be true.]

All in all I expect the current trends to continue into 2008, but for it to ultimately be a transition year.  I expect 2008 to represent the peak year of the global expansion.

[I’ll stick with this too.]