In the beginning of January last year we made a post about what we predicted will happen in 2009.

2009 is now over. Here is a look back to the predictions and how well we did.

1. The dollar will fall 20% or more against the Chinese yuan.

Verdict: WRONG! The Chinese yuan has staid on the same level in regards to the dollar thanks to the Chinese policy of keeping it fixed to the US dollar (+ some other currencies).

2. The price of gold will be up 10% by the end of the year.

Verdict: WRONG! The price of gold is up 23.4% in 2009. This means that jumped well over the 10% we predicted.

3. The price of oil will stay between 40 and 60 dollars for the most of the year and will rise to as high as 75 dollars/barrel by the end of 2009.

Verdict: CORRECT! The price of oil climbed gradually throughout the year but managed to stay in the 40 to 60 dollars range all the way from January to July. The end of the year saw oil prices rise as high as $79.

4. The Dow Jones Industrial Average will be up about 15%.

Verdict: CORRECT! The Dow Jones Industrial Average was up 19% in 2009. That’s close enough!

5. The world economy will not recover from the financial crisis by the end of 2009.

Verdict: CORRECT! Unemployment rates are the highest in decades. The real estate bubble has not bounced back. The economies of the world are still weak.

6. There will not be any more major bank failures. We will possibly see governments taking proactive steps to save banks and other major companies before they are in actual trouble.

Verdict: CORRECT! Following the failings of 3 major banks in 2008 we have not had any major bank fail in 2009. All the large banks and insurance companies have been saved by the government before they went under. There have however been a large number of smaller banks that have failed and that have not been saved that remain mostly unknown to the public.

7. None of the three big US auto companies will fail in 2009.

Verdict: CORRECT! Despite fears in 2008 and the beginning of 2009 – Ford, General Motors and Chrysler are all here!

8. The housing market does not bounce back.

Verdict: CORRECT! The housing market is down and it doesn’t look like it will bounce back any time soon.

9. Inflation in the US rises.

Verdict: WRONG! According to official figures the inflation plummeted from 3.8% in 2008 to 1.8% in 2009. The USA has however changed how it used to calculate inflation. Using the old method it should be around the 10% figure.

10. Obama’s stimulus package passes in his first months in office.

Verdict: CORRECT! The controversial 800 billion dollar stimulus package was passed in February 2010.

11. More bailout money will be needed by large companies.

Verdict: CORRECT! Bank of America received an additional 20 billion dollar loan  in January 2009 in addition to the 25 billion dollars that bailed them out in October 2008.

12. US economy will not come out of recession.

Verdict: FALSE! The 3rd quarter of 2009 was the first quarter in more than a year that saw economic growth in the US. That means that officially the recession is over. In reality however unemployment rates are highest in decades, consumer fears are still rising and people are saying that it is still a recession.

13. There will be an assassination attempt on Barack Obama. If you won’t hear about it, it is because it will be kept secret.

Verdict: CORRECT! Obviously! Could it have been any other way?

14. Apple will launch a smaller version of the iPhone.

Verdict: FALSE! Although we saw the iPhone 3G S, we are still waiting for a smaller and cooler model. Odds are that we will be waiting for a long time…

15. Financial Jesus will end the year with more than 1000 subscribers.

Verdict: FALSE! 2008 started with a whopping 119 subscribers and ended with 469. We were about 500 users too short.

Total Score

9 out of 15. That is pretty decent if you ask me!

Once a year most of the worlds influential businessmen, politicians, investors and economists meet in Davos, Switzerland to discuss the current state of world economy. This yearly gathering is known as the World Economic Forum.

To give you an idea of how high-level Davos is, you should know that in addition to presidents and prime ministers, it is visited by all of the worlds major banking institutions – starting with the banks bailed out last year and finishing with the leaders of the central banks of USA, Europe and China.
Among this years attendees were more than 70 world leaders and over a hundred of the worlds most influential companies (the likes of ExxonMobil and Coca-Cola).

Main topic in the World Economic Forum

You don’t have to be a genius to figure out what they talked about this year – the economic crisis.

It was revealed by private equity giant Blackstone that the current economic downturn has destroyed over 40% of the world’s wealth during the last 5 quarters and that things are not getting better – they are only getting worse! The world will lose even more of its wealth!

Here are some of the things said during this years summit:

“Worrying about inflation now is like worrying about the measles when you might get the plague.”

Kenneth Rogoff  – Harvard professor and former chief economist of the International Monetary Fund

“The outlook is pretty grim. Things are not good and business surveys are coming out showing they’re getting even worse.”

Sir Howard Davies – London School of Economics

“Confidence grows as slowly as a coconut tree, and falls as fast as a coconut.”

Indian economist, Montek Singh Ahluwalia

“The free enterprise system has not failed; the financial system has failed.”

Tony Blair -Former British Prime Minister

“We cannot underestimate the challenges and the dangers that we face in 2009. We are in a global recession the likes of which we have never seen. But there is no quick fix.“

Stephen S. Roach, Chairman of Morgan Stanley Asia

“The crisis is getting worse. It’s going to take drastic action to turn it around, if it can be turned around, quickly. I believe it will take a long time.”

Rupert Murdoch – Chairman of News Corp

And from a more positive side:

“In times of recession there are massive opportunities and fortunes to be made, so for new up and coming entrepreneurs, this is the time to go and start a business.”

Richard Branson – Founder of The Virgin Group

I agree that things are indeed bad and they will probably get worse before getting better but among all these quotes I especially love the last one from Richard Branson.

The positivity of this serial entrepreneur and billionaire is what keeps the world running – a true businessman always looks to the future and thinks how he can use the mistakes done in the past to build a better business for tomorrow! As long as there are people like Richard Branson – we will be just fine!

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2008 was a mess. Everything changed from great to being a disaster. The markets were down and most of the world’s leading economies slipped into recession.

For most of the world 2009 is not looking any brighter. The United States, Great Britain, France, Germany and Japan are all expecting a standstill of their economies or a recession.

For the first time in decades we are facing a situation where the fastest growing economies will be countries that are virtually unheard of in the western world.

5 fastest growing economies in 2009

Here is a list of top 5 fastest growing countries as predicted by The Economist.

5. China – 8% GDP Growth

China is the only superpower that makes the list of fastest growing countries in 2009. This second largest exporting country (Germany is no 1) has the world’s largest population of 1.3 billion potential consumers. While the rich world is in recession and Chinese exports are taking a hit – China is relying on the growing demand for products from its own people. Thanks to the expanding middle class Chinese economy is as strong as ever.

4. Malawi - 8.3% GDP Growth

This small southeast African country is one of the poorest in the world. For the last few years it has had a democratic government that is rapidly increasing living conditions throughout the country. In addition to having large uranium deposits Malawi is mostly known as an exporter of tobacco, coffee, sugar and tea.

After president Bingu wa Mutharika started a fertilizer program intended to boost crop production Malawi is doing better than ever. The program has radically improved agriculture and allows to export more goods – thus leaving Malawi unaffected from the global recession.

3. Congo (Brazzaville) – 8.5% GDP Growth

This central African country gets most of its income from selling oil, gas and petroleum. Most people live in the capital Brazzaville or in one of the small cities along the countries one and only 332-mile (534 km) railway.

In 1997 a 5 month civil war erupted in Congo – when it ended, president Sassou Nguesso expressed interest in economic reforms with the intent to take the country out of poverty. This reforms are still taking place today.

2. Angola – 9.8% GDP Growth

Just like in the rest of the world – economy in Angola is actually slowing down. In 2005 and 2006 it boasted with economic growth of around 20%. Almost all of the countries economic growth comes from oil and Angola’s ability to sell more of it every following year.

Angola has increased its oil production so much that as of 2007 it is the largest supplier of oil to China.

1. Qatar – 13.4% GDP Growth

It seems that being one of the richest countries in the world is not enough for Qatar. While being a poor country in the past, Qatar discovered huge reserves of oil and gas in the 1940-s,that completely transformed its economy.

Qatar offers most of its services to its citizens for free and has no income tax. The amount of money they get from selling oil is more than enough for their small yet thriving economy.

Never heard about most of these countries?

Don’t worry – neither have your friends. If you leave China out of this list then the combined gross domestic product for Qatar, Angola, Congo and Malawi is about the same as the GDP of Hong Kong (and Hong Kong is just 1 city – although very large).

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“Never make predictions, especially about the future.”
Casey Stengel

One of the worst things you can do is to predict the future. Your predictions will almost always be wrong and you will look like a fool. Looking back – you have no idea how you couldn’t even predict the simplest of things.

Regardless, here are the predictions of Financial Jesus for 2009.

1. The dollar will fall 20% or more against the Chinese yuan.
2. The price of gold will be up 10% by the end of the year, as uncertain investors will be looking to gold for support.
3. The price of oil will stay between 40 and 60 dollars for the most of the year and will rise to as high as 75 dollars per barrel by the end of 2009.
4. The Dow Jones Industrial Average will be up about 15%. If you correlate this with the falling dollar it will actually mean that those investing in the US will actually lose money.
5. The world economy will not recover from the financial crisis by the end of 2009. We will see the making of an economic crisis that has its roots in the credit crunch of 2008.
6. There will not be any more major bank failures. The governments of the world will not let that happen. We will possibly see governments taking proactive steps to save banks and other major companies before they are in actual trouble.
7. None of the three big US auto companies will fail in 2009. They will get enough help to just “hang in there” for a year or possible more – only then will we see a failure among the big three.
8. The housing market does not bounce back. We will see falling prices throughout next year.
9. Inflation in the US rises. Fears of deflation are largely without grounds and are only fueled by the falling real estate prices. Oil and gas will be on the rise and will therefore help to fuel the inflation.
10. Obama’s stimulus package passes in his first months in office but it fails to address the real problems. This is sadly realized only toward the end of 2009.
11. More bailout money will be needed by large companies. The government can’t deny their help because “everyone will already expect them to help”.
12. US economy will not come out of recession.
13. There will be an assassination attempt on Barack Obama. If you won’t hear about it, it is because it will be kept secret. (Yes, I just made sure that at least 1 prediction will become true)
14. Apple will launch a smaller version of the iPhone. Let’s call it the iPhone nano.
15. Financial Jesus will end the year with more than 1000 subscribers.

“My predictions are notably inaccurate.”
Robert Caro

“I figure lots of predictions is best. People will forget the ones I get wrong and marvel over the rest.”
Alan Cox

What are your predictions for the coming year? Let us know in the comments so we can find the best fortune teller when we sum things up in the end of 2009!

According to the dominant economic theory all decisions made by humans are rational. Humans are looked as beings who make rational decisions in order to maximize their wealth. Scientists even have a name for it – Homo economicus.

The problem with Homo economicus is that it is the cornerstone in almost all modern theories that try to explain how markets and economies work. At the same time it is more and more evident that contrary to popular scientific belief humans are not always trying to maximize their wealth and can therefore make decisions that are money wise irrational.

The Endowment Effect

The Endowment Effect says that once someone owns something, he places a higher value on it than he did before acquiring it.

This seems like common sense for an ordinary person but this revelation has made quite a storm in the scientific world because this means that there are situations when the Homo economicus theory is wrong.

According to the endowment effect if you were to buy a bike for 100 dollars you would be unwilling to sell it immediately afterwards for the same $100. After feeling a sense of ownership the bike is not just an ordinary bike it used to be but YOUR BIKE. In a way it feels that your new bike is special just because it belongs to you.

The theory of rational markets says just the opposite – the value someone gives something does not depend on whether he actually owns it. According to the modern economic theory a bike that is worth  100 dollars is always worth a 100 dollars – no matter who owns it!

It seems that the dominant economic theories and the way people actually behave can be totally different.

Examples of The Endowment Effect

One of the fist experiments that showed the endowment effect in action found that students were surprisingly reluctant to trade a coffee mug they had been given for a bar of chocolate, even though they did not prefer coffee mugs to chocolate when given a choice between the two.

Since then, there have been hundreds of experiments and observations made in real life about the endowment effect

Investors

According to professor Pete Lunn working in the Economic and Social Research Institute in Dublin, professional investors are sometimes reluctant to sell investments they already hold even when they could trade these investments for something they would buy if starting from scratch.

I have also felt the same effect in my personal investment portfolio but never knew what it was before hearing of the endowment effect.

Monkeys

Keith Chen from Yale University showed in 2006 that capuchin monkeys could learn to trade and in doing so also developed the endowment effect. This suggests that the nature of this effect could be hidden in our evolution. Some scientists believe that in the past it was too risky to give up anything that you already owned and that is why we give a higher value to the things we own versus the things we don’t.  Giving up something you owned could mean certain death.

In the study done by Keith Chen the monkeys were given the option to choose between peanut butter and frozen juice bars. 60% of monkeys chose peanut butter and 40% juice bars.

However when a monkey was given peanut butter without being able to choose anything else in the beginning and afterwards presented with an option to trade it for a juice bar, 80% of monkeys decided to keep the peanut butter. Since actually only 60% of monkeys preferred peanut butter when presented with a choice, it seemed that the peanut butter had somehow gotten more valuable to them after owning it. This experiment proved that the endowment effect is also present with other primates not only humans.

Explanation of the Endowment Effect

As of now there are two competing explanations to the endowment effec.

1. In modern societies with multiple markets a customers can go elsewhere when he doesn’t like the price of what he is buying but in small ancient communities there were no alternative sellers. In that case, those who were reluctant to sell might have gotten better prices because the buyers knew that if they truly wanted to buy something they had to pay the price they were asked to. The sellers had a lot of negotiating power while the buyer had almost none. We could simply value our things pricier than those not belonging to us because deep down our brains still think that we are the only people in possession of what we have and therefore the buyer will have to pay the price we are asking.
2. As already mentioned in this post – In the past it could have been too risky to give up anything that you already owned. For example giving up food could have meant death even if you traded it for a lot of gold.

Conclusion

Whatever the real reasons behind the endowment effect there is one thing for sure – human beings are way more complex than economic theories assume. It should be possible to take into account the psychological aspects we know about humans and use them to make a small fortune.

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Here is a fun and addicting game to all you money loving FinancialJesus.com readers.

In the Fed Chairman Game you are in charge or the national monetary policy of the US.

Your goal is simple – you must adjust the Federal Funds rate in order to keep the inflation and unemployment rate stable. This game makes you realize just how difficult it is to steer the national monetary policy.

It took me at least 10 tries to keep inflation in the target 2% area, while at the same time keeping the unemployment rate at around 5% and finishing the game successfully. See if you can do better.

You can play the Fed Chairman Game here.

What is The Federal Funds Rate?

The Federal Funds rate is the interest rate that Federal Reserve (the central bank of US) uses to lend money to other banks. By changing this interest rate the FED has the ability to control the supply of money in the U.S economy. Among many things this basically gives them the power to control the amount of business done in the US and also the unemployment rate.

Be the first to find out about new fun and educational financial games. Sign up to my full feed RSS or subscribe via email.

I am a big fan of behavioral economics which tries to explain why people act the way they do.

Here are 3 interesting experiments that scientists have made in order to get a better insight into how people relate to money.

The Ultimatum Game

You are given 100 dollars. You need to decide how to split this money between yourself and another person taking part of the experiment. If the other person accepts the amount that you will give him – you will both get to keep your share of the money. If the other person declines – neither of you get the money.

This experiment is set up in order to reveal whether mankind is rational (as the economic theory suggests) or not.

A rational person would accept any amount offered because he or she knows that when he doesn’t accept the amount that is offered to him – he gets nothing. In other words if the first person(A) taking part of the experiment suggests to the second person(B) that they should split the money $99 to A and $1 to B – the second person should accept. Rationally looking it is better to get 1 dollar than nothing.

What really happens?

Proposals to accept less than 30 dollars are usually rejected. The reason? According to our judgment the proposal is not fair. If you are offered a small amount of money while the other person gets a lot more (that comes from potentially your money) – you’ll have a feeling of injustice and would rather not get money than to get a small amount and feel bad afterwards.

Perceived value of money

The following is a thought experiment. Would you rather earn 100 000 dollars when everyone around you makes $50 000 or would you rather make $200 000 when everyone around you makes $400 000. The only rule you have to keep in mind is that the cost of living and goods stays the same.

Which option will most people choose? A rational person would choose the second option, where he makes more money but less than people around him. That way he will have twice as much to spend. In reality most people choose the first option – being richer than other people. Some scientist think this experiment demonstrates the irrationality of man. I disagree. This experiment clearly shows that social rank is far more important to people than the amount of money they have. If one can choose between more money than your friends vs. less money than your friends – it is a rational decision to choose the first option (even when the total amount of money is less than in the second option). In this experiment people make an irrational money decision but a rational “people decision”. The latter outweighs the first.

The Line Experiment

The first person is standing in a line. When he gets to the counter he is congratulated on being the 1 millionth customer and as a gift gets 100 dollars. A second person is standing in a line at a different place. The man in front of him is congratulated for being the 1 millionth customer and wins 1000 dollars. The second person wins $150 for being the 1 million and first person. Which would you rather be? Surprisingly most people would choose the first option – getting the $100. Money wise this is a bad decision – you lose 50 bucks. The reason most people would rather lose the $50 is because they don’t want to feel the regret of not being the millionth person themselves and winning $1000

What do these experiments show

These experiments show us, that just like in other things people can at times be irrational when it comes to their money. There are situations in life that are more important than money and economists need to understand this. When talking about economy (and the stock market), we should realize that economy consists of ordinary people who at times make financial decisions that are money wise bad for them.

Find the places and areas of life where people make these decisions, play your cards right and you will get to keep their money.

If you liked this post there is a good chance that you will find something of interest on my insights page where I post short reviews of longer articles about the rules of making money:

Insights to money and how getting rich really works

Illustrated Guide to Reading People’s Faces

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Below is a great video of Jim Rogers who is widely know as one of the most successful investors in the world. Among other things he was the guy who helped George Soros start the Quantum Fund which grew 3365% (yes, three thousand) during the first ten years. That’s 42.6% per year for 10 years straight.

This video is spectacular because we have a chance to see what a man who knows more about the economy than most of the people on earth think about what’s going on. Stuff like this rarely gets aired. Enjoy!

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