2008 Forecast — Sectors to Focus On…

by BWK ~ February 4, 2008

Byron’s Forecasts…

Much of the economy in 2008 will be bipolar. There will be sectors in recession, if not depression. And some sectors will boom.

There will be much bad news in banking and real estate. I foresee at least three large, “brand-name” financial institutions either being taken over by the federal banking regulators, if not filing for protection under the bankruptcy law. “Too big to fail” will now morph into “too big to bail.”

And with those takeovers or bankruptcy filings will come fire-sales of bank assets, from commercial paper to credit card and other debt-servicing businesses, to downtown office buildings. You might find out that the credit card in your wallet will no longer work because its issuing institution has shut down the transaction window. And the FDIC will have to dip into the kitty to pay off many depositors who hold accounts at these institutions.

But at the FDIC limit of $100,000 per person, some people will not get back 100-cents on the dollar. So it behooves everyone to diversify their accounts among institutions and regions. I also predict that our friends at Everbank will not experience the troubles that many other less-well-run banks will encounter, so feel free to load up on precious-metals-backed certificates of deposit (CDs).

As for real estate……… Mortgage lending has dried up, certainly so for jumbo amounts defined as loans in excess of $417,000. Thus the larger, more expensive homes of the nation are finding fewer buyers. So expect the froth to continue to blow off that mug of stale beer. But what affects the top of the market ripples, if not cascades to the bottom. Thus expect to see a continued, general tightening of home-buying in the lower regions of the price range as well. Expect any lender to demand more documentation of income and credit history. Expect to pay a higher down-payment on any home purchase.

Expect the appraising community to be utterly Prussian and inflexible in its collective correctness. Expect the closing process to be highly detailed, with more paperwork and more costs to close. Do not expect to make money by flipping real estate. Enjoy your new home, by the way. You will own it for quite a while.

In the arena of commercial real estate, a banker buddy of mine — who works for a large, Midwest institution — put it nicely. “All my clients who were going to build last year are now thinking of buying an existing structure. Everybody who was going to buy is now talking about just renting. The people who were going to move to larger spaces are now planning to stay put, if not to downsize. Everybody is nervous about the future.” Thus do ripples lap upon distant shores.

But another banker from the same Midwest institution also added, “My business clients are booming. Manufacturing is going great guns. Aerospace, mining and oil services are hitting on all cylinders. Those sectors are just fine. The main problem is bottlenecks in the supply chain. Exports are up.”

Predictions for the world’s oil patch in 2008…

Mexican production trending downwards at 8% or more. Pemex has not invested enough in the past 20 years. No amount of near-term investment will prevent a Mexican oil crash. 2008 might be the year in which Mexico announces that it cannot meet export obligations to the US.

Iraqi oil production trending upwards in 2008. The oil producing regions are stabilizing militarily. Enough of the “right” people are making money off the oil that disruptive attacks will be few and fatal to the attackers and their clans. Central governance in Iraq is weak, and will remain weak. So look for both the Northern region and Southern region to cut their own deals. The Kurds in the north will go with Western companies. The Shiites in the South will go with oil companies from Islamic nations, as well as with Chinese companies.

The next great oil frontier region of the world will be offshore Namibia. The geology is a southerly trend of what one sees offshore Angola, and in some respects a mirror image of the offshore region of Brazil. Offshore development in Namibia will greatly benefit the manufacturing and shipbuilding economy of South Africa.

Russian oil production will remain stable. The Russians will talk a good game about how they can meet their contractual commitments. But beneath the bluster the Russians will be sweating for every barrel of crude oil. Russian oil output is in delicate balance between depletion and reserve growth. Look for immense, new investment streams to flow into Russian oil services. The only way for the Russians to maintain output is to keep servicing older, Soviet-era wells and fields. One company in particular (Baker Hughes — that’s in OSTI) has a rapidly growing business in Russia that should benefit greatly.

Other miscellaneous ideas…

In 2008 China will experience increasing levels of pollution of every sort. We will read reports of increasing damage to human health — in China and abroad — due to Chinese industrial development. The dirty enviromnent of China, and its potential impact on Olympic athletes at the Beijing Olympics, will become a cause similar to the “Chinese Toy Scandal” of 2007.

China will get a lot of bad press on a worldwide basis. Hence China pull out all stops to clean up the air and water near Beijing, leading up to the Olympics, up to and including shutting down vast swaths of heavy industry. This will include shutting down coal-fired power plants in Northern China, and diverting electricity from other regions to Beijing. There will be a ripple effect throughout the Chinese economy, as thousands of plants close and millions of workers are displaced from jobs. This will affect overall Chinese economic output, as well as disrupt Chinese demand for commodities. This turbulence in the Chinese economy may also be the prelude to a major slowdown in Chinese economic activity after the Olympics. Chinese leaders are already looking for ways to get the breakneck pace of economic growth and price-inflation under control, and post-Olympics will be a logical time for the Chinese economy to take a breather.

The recent grounding of over 400 US Air Force F-15s due to structural fatigue has almost crippled the US homeland air defense system. Look for the USAF and Congress to talk seriously about procuring more F-22s from Lockheed (at $100-million+ per copy). The F-22 is sometimes disparaged as a “relic of the Cold War.” Actually, that sort of myopic defamation of the world’s most advanced aerial combat system is the true relic of the Cold War — dismissing the need to invent the future of combat forces.

The F-22 is, quite simply, the most important strategic development in aerial combat systems since the advent of long range bombing in the late 1930s. The F-22 combimes long range, low-observability and unparalleled performance with an electronic suite that is utterly Star Trek in its capabilities. Just taking off from its current bases in Alaska and Hawaii, the F-22 alters the combat equation for a 3,000 mile radius when its wheels leave the runway.

To lower the unit costs of the F-22, expect the beginnings of a public debate over exporting the aircraft to select foreign nations. Japan already has expressed an interest in procuring the F-22, which will drive the Chinese nuts if it occurs. There is some interest in the F-22 coming from Australian defense circles as well. And even Canada may discover that its new-found energy wealth and more valuable loonie makes the F-22 a possibility to replace its current, 25-year old fleet of F/A-18s (which will be 35 years old by the time the F-22 would enter Canadian service).

Imagine the happiness of US strategic planners if they can draw great circles of air and electronic coverage from the polar regions north of Canada and Alaska, down southwards through Japan and northeast Asia, and further south to the outer reaches of the Australian air defense zone (which extends far into the Indian Ocean). In essence, the entire Pacific Ocean and much of the Indian Ocean will become home to air coverage via the F-22. Ordinarily, a major technology export decision such as this would not get made in the last year of any presidency. Such a decision would hold over to the next administration, so as not to tie the hands of the new occupant of the Oval Office. But the F-15 grounding adds a sense of urgency to a prompt procurement decision. Also, considering the rage that selling F-22s to Japan will foster in Beijing, it may benefit the next administration if the Bush administratin makes the decision to sell. That way, the next administration inherits a “done deal” and can pursue its own path with the Chinese.

That’s all for now.

Best, BWK