# Happy New Year

It seems the thing to do with blogs at this time of year is to make some predictions about the coming year. I’ve been reading up on and studying the prediction business for a while now, so let’s see if I can put some of it to work. My interest in the prediction business is mostly for amusement. Go back and read old predictions and they are not only wrong, but hilariously wrong. My bet is people in the futurism racket are mostly interested in attention, so they tend to be willing to make bold claims about the future.

Of course, most predictions about the future are wrong because people tend to predict things they wish come true. Since most of what we wish for never happens, it follows that such predictions will tend not to happen. Then there is the fact no one ever remembers the failed predictions. The finance guys love promoting people who got some even right in the past, but they never mention that the same guy got fifty other things wrong. No one in the prediction business reminds us of how many things they got wrong.

The bigger issue is the the appearance of randomness. A problem with several constants and one variable is easy to solve. Human affairs have many more variables and few constants. Human affairs have millions of variables. The example of the double pendulum is a good one. We can predict the movement of a pendulum easily using basic math. Put a hinge in the middle and the movement appears to become unpredictable. There are videos on YouTube you can look up if you are unfamiliar with this example.

Then there is the issue of time. I know, as a matter of mathematical certainty, that the Fed policy of dumping a trillion new dollars into the system will have to end. The bears think hyper-inflation is right around the corner and the program will crash. They may eventually be right, but it could be next year or five years from now. Right now, the world economy is soaking up these new dollars and stuffing them into assets like stocks. Eventually, that ends, but knowing when is the mystery. A good prediction is mostly about timing.

That said, years ago I got interested in betting sports games. American football betting is really just a game of  figuring out how the crowd is going. If you can find example where the conventional wisdom is out of phase with reality, you can make some money. I came up with a model that allowed me to beat the spread 59% of the time. That sounds good, but 57% is the break even point. Bookmakers charge vigorish. The book maker strives to set the line so that he gets equal money on each team. The losers pay the winners and the bookie takes his cut. If he does his job, he makes 5% of the total money bet on the game.

With that in mind, here are some predictions for 2014 about things I care about a little:

1) Florida State will beat Auburn and it will not be that close.

2) Denver will not make the Super Bowl. Peyton Manning will not join Earl Morrall and Jeff Rutledge as quarterbacks to make it to the Super Bowl on two different teams. The NFL playoffs comes down to defense. Great QB’s running great offense can win a game or two, but eventually, it comes down to defense. If the Patriots had a decent defense, Tom Brady has two more rings and an undefeated season. The Denver defense is one of the worst in the playoffs this year.

3) The US economy will remain in neutral, growing at about 2.5% after all the adjustments and revisions. The great slow down from health care will not appear as predicted. There’s some evidence that the economy was picking up in the last half of 2013, but certainly not booming. Unemployment, however, remains the primary drag and there nothing in the latest numbers to suggest things are changing on that front. ObamaCare will put downward pressure on the labor market. Continued exploitation of existing technology will offset much of this as companies get better at doing more with less, but you still need people with money buying stuff to make an economy grow. We remain at the edge of personal debt limits. That all adds up to more of the same in 2014.

4) Obama will fall below 40% in Gallup and remain there until the summer, but bubble back up into the low to mid 40’s in the summer. Americans want to like him, even if they hate his policies right now. There’s not a huge difference between 44% and 38% but it will be encouraging to the administration and his party. As noted above, people see what they want to see. The liberal media will break into an early version of Obama nostalgia this summer as a last gasp to salvage his second term, but the limits of reality mean he remains in the 40’s for the rest of the year.

5) The stock market will finish ahead of where it is today. Specifically, the DOW will be above 17,000 by year end, but not by much. There’s no question that the market has had a great run, but it has no basis in reality. Facebook, for example, has a P/E of 140. Twitter is worth \$40 Billion, despite having no profits and no chance to make a profit in 2014. The P/E of the Russell 2000 is 87. The major indexes are better, the DOW is 19 and the NASDAQ is 21, but those remain high historically. The average P/E is 15 going back 100 years. Still, a trillion in Fed money will counter any pull back in 2014.

6) There will be no legislative changes to the health care law in 2014. Nothing will be passed out of the Senate. Right now, this thing is a gift to both parties. The Democrats scare the Left about how the Right wants to repeal it. The Republicans promise the Right they will repeal it. At some point, repeal becomes the stuff of the fringe and both parties take turns promising to repair it. For 2014, we have the repeal/defend dynamic so nothing changes.

7) The Red Sox will not make the playoffs. They caught lightning in a bottle and will fall back to being an 85-win team. The lost a key player in Ellsbury and the rest of the division got better. Repeating is always hard and the margin for error is small. Losing ten more games knocks them out of the playoffs and that’s certainly seems reasonable.

8) The Republicans will pick a net of nine Senate seats in 2014 and have a working majority. The House will see the GOP gained a dozen seats. The GOP establishment is revved up to prove a point to the right. That point is safe candidates can beat democrats in toss-up states. Put another way, they want to show the Right that wackos are not welcome in their club. I think the result will be a strong effort to field competent alternatives to at-risk Democrats and a solid election for the GOP. The Democrats have a dozen highly vulnerable incumbents and the GOP has none this time.

9) The sale of eBooks will continue to stagnate and people will begin to ask if they will displace hard books after all. Sales have been flat for a year. The novelty of tablet computers is cresting and that will put more pressure on sales. The fact is the reading universe is static. People consume a predictable number of books. Weird innovations in the free money era caused a spike (Mega book stores, Amazon, tablets), but there are no more novelties coming to boost sales. The mega book stores are closing. Amazon is flat. Tablets have been driving novelty interest in eBooks, but that’s coming to an end as the tablet market matures. The eBook may be a solution looking for a problem.

10) Tablet prices will fall significantly. They are on the cusp of becoming a commodity. As penetration peaks, the race to the bottom of the price curve will begin. Korean and Chinese makers will begin to flood the market with cheap Android based tablets. The fact is, these things should be cheap media consumption devises. The first HD TV’s cost \$3K and now are a tenth of that in some sizes. Tablet prices will drop as the market for what they do best solidifies. Microsoft’s attempt to make them mini-desktops will fail. There’s no need for an \$800 mini-laptop when you can get a real one for the same price.

11) Cheap tablets will begin to erode the smart phone market. The reason the smart phone exists is it give you a portable media consumption devise. A 7″ tablet is just as portable as most phones. Wi-fi is nearly ubiquitous now. A lot of people, particularly business people will begin to opt for a cheap mobile phone on a cheap plan and a cheap tablet for surfing the ‘Net.

12) 2014 will see the beginning of the end to the old mobile phone model. The market is maxed out now. The way for the carriers to compete will be with the plans, instead of the devices. The fact is, most people rarely leave their local area. That means small carriers can begin to chip away at the lower end of the market. That will lead to more lower end choices from the major carriers. It will also mean less bundling.

13) The first glimpses of a la carte pricing in cable and satellite will appear this year. The cost of cable is way out of hand and the alternatives are getting better. I can subscribe to Hulu for \$8 a month and get more content than I could ever watch. I can get shows from Netflix and Amazon. Apple is ramping up their video content and Microsoft is unleashing hell with XBox One. Cable will begin to experiment with offer customers the ability to opt out of some channels to save a few bucks.