It is the time of year when those with a guru bent go public with their predictions for 2007. Perhaps more than in previous years, I am struck by the diversity of those predictions. While, as one might expect, most go with the averages - modest changes in everything, slight slowing of the economy, soft landing, modest rise in the markets - Goldilocks in other words - others go from hyperbullish to hyperbearish. And these people are not idiots or necessarily self-serving, the diversity simply reflects the fact that economics is not a science and provides little or no predictive value. This doesn’t mean that good forecasts aren’t out there, just means that those forecasts depend on the judgment and intuition of the forecaster (or just luck) rather than any “scientific” formula or theory.

The Fed is believed to be building a mega-model of the economy in order to improve their predictions. Perhaps they should ask Gosplan how well that works.

It is an exceptionally difficult time to forecast because of the bubbles. Property prices have risen to unprecedented heights in relation to incomes, the stock market is still highly overvalued in terms of peak earnings and Q-ratio, consumers are spending more than they earn, the country is bleeding money and real blood in endless and apparently pointless military conflict, overseas competition is gutting the domestic manufacturing base, energy and commodity prices are high and look to be going higher… sure doesn’t sound like Goldilocks to me. But then I am not an economist. What seems clear to me is that this is not a stable equilibrium. If anything happens to disturb it - and it will - then we could see chaos. But what will happen and when is not predictable, in my opinion.

Clearly the property market is the latest and greatest bubble. A rapid deterioration in the subprime mortgage asset quality is a leading candidate for a financial disruption. The cost of credit protection on subprime mortgage CDOs (ABX-BBB) closed at new highs last week. But perhaps that’s too obvious.

My prediction is that things will kind of bumble along until something happens to change the crowd psychology. Then the rush for the exits will be scary indeed. When? Who knows. Might not be next year. Might be next month.