Ushering In a New Economic Era
Though very few people actually realize it yet, 2008 will almost certainly be marked by major change, as the new economic paradigm shift transforms our landscape and entire way of life.
Just like 2003-2006 where in retrospect we can categorize the time as booming years of economic thrill/euphoria, brought about by easy money and cheap credit, I believe 2008 will eventually be regarded as the year of desperation and panic brought about by falling home values, falling stock market, falling dollar, declining state revenues/budget cuts, rising inflation, increasing unemployment and dying credit markets.
The major inflection-point leading into 2008's "Desperation and Panic" was crossed in 2007 with the the seizure in global credit markets. As US mortgages began defaulting in large numbers, hedge funds eventually collapsed, Commercial Paper couldn't be offloaded, banks began to distrust one another, lending standards tightened and the contagion spread to a myriad of other areas (many still unknown or unacknowledged).
Even with the anxiety/fear brought about by the 2007 global credit seizure, the masses were appeased by the constant "denial" of mainstream experts who assured everyone that all was well (the US economy is robust--never stronger); by our Federal Reserve who "had control of the situation"; and by the fact the US stock markets were "in the green" and a great bargain at these P/E ratios...
Note: I expect 2007, in hindsight, to eventually be viewed as "The year of denial".
As the ongoing Credit Crisis intensifies into 2008, the spillover effect, when combined with the massive wave of new mortgage resets, will crush the already faltering US housing market, and one or more of the large financials (Citigroup, Goldman, Merrill, etc) will most likely have to publicly declare insolvency (which we already know they are). Their recent, yet surprising losses on toxic-waste, marked-to-model, tier-III assets will only be exacerbated by new bond insurer markdowns and eventually, with increasing defaults and rising US foreclosures in 2008, their massive losses will no longer be containable. This candid information, when released, will prove to be staggering and will finally provide the equities markets with the irrefutable justification needed for the massive haircut that will ensue shortly thereafter.
Simultaneous with the above issues and related in nature, we will also soon see unemployment numbers rise as credit continues to dry up (spilling over into commercial loans, auto/boat/motorcycle credit, credit cards, etc) and consumer spending and confidence falls -- compounding the equities problems mentioned above.
Furthermore, the dollar will continue to fall as the Fed floods the banking systems with liquidity in their attempt to bail out the financial systems and reinvigorate credit markets. This devaluing of the US dollar will stoke consumer inflation and bring about increased oil prices -- causing gas prices to cross the $4 gallon mark in 2008. Public outrage will ensue and politicians will be forced to action (I'm from the government and I'm here to help) -- ultimately making the problems worse.
These factors mentioned above, along with many others left unmentioned, will eventually overwhelm the ability of our statistical government manipulators, and skewing economic data to appease/console the masses/markets will become next to impossible -- else they risk public backlash and full acknowledgement of their manipulation. This new forthright information will provide the hard evidence for Recession and it will be officially announced in 2008. (I say "official" because we are already in a recession, but falsely reported Inflation, GDP, unemployment figures and numerous other manipulated statistics currently state otherwise--see my link on Inflation or Hyperinflation for a couple of examples).
Bottom Line: The economic euphoria of 2003-2006 is gone, 2007's denial is nearly over and it will be replaced in 2008 with a new economic era--where fear, panic and ultimately recession will prevail.