10 Predictions for 2003:
The First Whiffs of Inflation


SEATTLE - 31 December 2002 by Richard Lancaster
I believe 2003 will be another tough year for the economy, similar to this year in many respects. The general market capitulation I anticipated in 2002 just didn't materialize; I suspect it will creep closer in '03. I am surprised by the resiliency of the markets and consumers. It amazes me the markets are still above October lows and consumers are still spending, albeit a lot less then earlier in the year.

Program trading is at record levels and rising. Between 30-40% of trading volume is now enacted by the worlds 15 largest financial institutions - program trading has doubled in the last 2 years, meaning the market is more and more controlled by the major players. If this trend continues we may see more than 50% of all trades being program trades by the end of 2003!

My predictions for 2002, which I didn't publish, were generally accurate, but the one thing I got badly wrong was timing. I predicted the DOW at 6,000 by year-end. Today I believe the DOW should be at 6,000 based on any rational valuation - maybe a lot lower. But the bottom line is the DOW is hovering inexplicably around 8,250 right now. Economic fundamentals have been falling apart in the last quarter of 2002 and yet the markets rallied. The more bad news that was poured out the firmer the markets have looked! So, having learned the lesson that some things will remain inexplicable forever, I am now taking a more cautious approach to predicting events in 2003!

In no particular order of importance here are my top ten predictions for the next 12 months:

1. POG (Price of Gold): Currently $345 - and rising. On the long slow road to record POG levels I think we will see gold rise ultimately as high as $450, with a few radical swings up and down in the interim. The lesson I've learned in the last year is that the economy can move at glacial speed. I fully anticipate the POG to beat the pants off the former all time high of $840+ in the years ahead - but not in 2003. This bear market we are in has long legs and many years to run. 2003 is a very important year in this secular bear environment, but there will be other years where we'll see just as much positive action on the POG. I'm long gold, it will make its return to our monetary system - but the world is not ready for that yet. Patience is what gold investors need. There will be big swings in the POG going forward, I will stay the course.

2. POS (Price of Silver): Currently $4.75 - but somewhat stagnant. Silver has better fundamentals than Gold at this point, and therefore the opportunity for a relatively higher high is apparent. However, silver appears to somewhat follow gold up and down - whether it breaks-out from the grasp of gold is a big question - if it does, then expect a massive growth spurt. I have a feeling it will breakout towards the middle of the year as more focus is brought by the investing community to the precious metals marketplace. Up until now we have received very little caring and feeding from the talking heads on the boob tube, which is a very bullish sign for us! Given that silver is in short supply and is far more useful to industry than gold I think it will nearly double in price in 2003. Therefore I'm predicting silver to end 2003 at $9.25.

3. Major Markets: (DJIA, Nasdaq, S&P 500): Well what can you say about the performance of the major markets in 2002? I guess I was half right, but got a good chunk of egg on face for being half wrong too! I cannot explain what happened in October, it is simply inexplicable. I know it was a major bear market rally, that's the simple explanation, but why the markets then held their ground amidst a barrage of negative news from the economy is beyond me. Therefore I won't waste time debating or pouring over the details and speculating the whys and wherefores, I will simply predict how I think they will end the next year!

DJIA: Currently 8,275 - hugely over-valued but likely to inexplicably maintain a good percentage of that value for several more years to come. Ending 2003 at 5,900 - I think it could go lower, but I have to be more conservative.

Nasdaq: Currently 1,367 - Tech's are likely to get pummeled more than most still. The PE's of the biggest players are still outrageous and they represent by far the largest part of the valuation of the index. The 2002-year high for the index was 2,098, and the low 1,108 (a 47% delta!!) I can't see it taking off another 47% from whatever the next years high is, but it will be a big loser again in '03, ending the year at 975. But with further to go thereafter. The one savings grace for the big Nasdaq players is their cash position, but this does not justify their PE's.

S&P 500: Currently 889 - Pension funds are going to be a real problem for these guys this next 12 months, but somehow you know the really big boys will scrape by and not get totally slammed (how does that happen?). Big losses to come over time, for '03 the market should end at 20% lower than it is today at 712.

4. Interest Rates: Currently 1.25%. At some point in the next 12 months the Fed will realize the futility of artificially low rates, that consumers are tapped out, that no one can afford another new car at 0 down, 0 payments until the year 3000 and 0% interest! No one will be able to take out a third mortgage on their house, and no one will be able to make the credit card payments they already have wracked up! At that point every ounce of value will have been squeezed out of low rates, and the march to much higher rates will begin. I think rates, once they start to rise, will rise for several years and begin ultimately to reach double figures. But for 2003 we'll see them up around 3.25% from the low of 1.25% we are currently experiencing. Of course just this relatively small rise will be devastating to most of the low-income borrowers who are least able to afford rate hikes. But rate hikes there must be!

5. US$: Currently 102 (DXYO). Gold moves in the inverse to the US$. So if gold is to rise to my predicted level of $450 (a 29% rise in 2003) then the US$ must move in the other direction by a somewhat commensurate amount. Therefore I am expecting to see the over-valued US$ come off the "strong dollar policy" and move to 80 by the end of the year. Maintaining a strong dollar is going to be increasingly more difficult going forward, as the Euro rises as an alternative, as US foreign policy comes under increasing attack and as consumer spending continues to drop off.

6. Sir Alan Greenspan will return to his Libertarian roots and publicly announce a long-term plan to re-establish a true Gold Standard for a new Global Dollar that would be backed by a combination of the United States Governments and the Central Banks of the other G8 members!

Just joking!!

I think this may happen ultimately - but not in 2003! There will be a lot of printing action at the Fed throughout the year and I suspect a record amount of monetary inflation in order to stem deflation and push us in to general price inflation - which I believe will occur by year-end. We are in a deflationary spiral currently, which is globally devastating for the economy. Everything that can be done will be done by the Central Banks to reverse this situation in the next year. I think they will succeed and prices will genuinely start to rise by the end of the year, at the cost of higher interest rates, mass bankruptcies, higher oil prices and war!

7. POO (Price of Oil): Currently US Crude Futures $33. After the war starts for real with Iraq there will be a drop in the POO - but this will be temporary. Trouble in Venezuela will increase - and the US will move on the instability to try to gain more control of their oil supply. After Iraq there may be "trouble" with Iran, Syria and elsewhere. So while there may be some downward pressure on the POO based on an assumed stability emerging due to American "leadership" - I think there will still be overall upward pressure by the end of the year. There is much speculation that oil reserves are not enough to sustain our growing consumption globally for too far in to the future. I think 2003 will be a year of enlightenment regarding the nature of the current conflicts we are facing, the ramifications for the entire world and the central position that oil plays in all of this. The situation will be very hard to contain and the POO will not play ball with Bush for the 2004 US Presidential Election in November '04! I see oil at $35 a barrel at the end of '03. But I do believe every effort will be made to keep the POO as low as possible in anticipation of the '04 election, I just think that it will not be containable.

8. Real Estate: The real estate bubbles in the US and the UK will visibly burst in 2003. I don't think real estate is as inflated as many pundits believe - but it has had a strong run and air will come out of it. Already in some area's of the US real estate has at best stagnated, houses over $500,000 are already losing 10-15%. As consumers reign in further then this stagnation and lowering of prices will affect houses in the sub-$500K range. I expect to see an overall drop of an average of 10% in the US housing market - followed closely by a slightly bigger drop in the UK market.

9. Mutual Funds: There has been almost no commentary during the year from the talking heads on the best performing mutual funds, which are of course gold funds and "short" funds. There has been talk of the outflows from funds, and how that activity has accelerated as the year has progressed. I think we will see as many as 2,000 funds collapse in 2003. Currently there are some 9,000 funds in existence, and over 98% of them have lost money in 2002. Mutual funds have a habit of being absorbed quietly in to larger funds when they start to falter - this activity will increase dramatically. The top performing funds of 2002 achieved in excess of 70% growth for the year, and yet I have not seen a single article in the mainstream media about this amazing success story. I predict the top funds of 2003 will return in excess of 70% and that they will be precious metal or short funds (short funds such as USPIX, RYVNX and RYTPX will return more than 45% in '03).

10. My final prediction is that the TV and major media, corporate-funded pundits will fail miserably to accurately depict true economic conditions in 2003, and that the public will begin to pierce the shroud of manipulation, corruption, arrogance and secrecy that the pundits hide behind. Hopefully this process will signal the beginning of the end for the current crop of talking heads, and the start of a return to true value-based investing and a sound monetary system - although this will take many years to come around. Just how this prediction can be quantified is hard to fathom, although I can imagine a very public humiliation for many of our current financial "leaders" and their cohorts. I do not like to see any person brought low, it is not something that people should enjoy - but in this instance I would not lament such a sight!

So that's it. 2002 ends today for me! I am looking forward to the New Year. I would like to see a more honest world in 2003, a world where the truth is not so hard to establish. 2002 has been bewildering, so many false hopes, so much manipulation and lying at the institutional level. I hope and pray for Peace on Earth for everyone, I hope we can find spiritual solutions to the political problems and global differences we face together. Ultimately I pray for justice in our world.

Cheers!

Richard Lancaster

Email me:richard.lancaster@attbi.com
Other links of interest:
Lancaster's 2003 Predictions
Predictions 2002
Predictions 2002 Recap

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