This time last year, in the spirit of entertainment, I offered a few predictions for 2024.

The predictions were fine. I did a bit better than chance. You can see them below.

The chart is hard to follow. What I'm trying to get across is the market price on January 2023, when I made the prediction; the price I forecast for January 2024; and the actual price on January 2024. I want to get across both how accurate the guess was, and how much of a surprise the change in price was.

The only problem is that the things I'm comparing use wildly different scales. It's one thing to say, when the S&P 500 index of US stocks rose from 3,800 to 4,700, that it rose by 20 per cent. It's another thing to say ECB base rates rose 200 per cent when they rose from two per cent to four per cent.

With those caveats, the chart gives a rough sense of what changed a lot last year, and how well I forecasted the change.

The most important change of 2023 was the drop in inflation. Last January, eurozone inflation was 8.5 per cent. At the most recent reading in November, it was 2.4 per cent.

The drop in inflation was the most important thing to happen last year because inflation is something like a rev counter in a car. When the rev counter is in the red, the car can't go any faster. It limits the speed of the car.

Now that inflation is low and falling, the economy has the capacity to grow a bit faster.

That's why stock markets had a good 2023. Stock market investors could see inflation was working its way out of the system. There would be no more unexpected slams on the brake.

Last year, I forecast inflation would fall from 8.5 per cent to 3.0 per cent. That was a bold forecast but in the event, it wasn't bold enough, and inflation fell even further than that to 2.4 per cent.

My inflation forecast wasn't really my own. I just copied what the professional forecasters were saying. There are four useful indicators of future inflation rates, and they all roughly agreed that inflation would fall to 3.0 per cent. The indicators are the survey of monetary analysts (a survey of financial industry economists), the survey of professional forecasters (a slightly broader survey of financial industry economists and other forecasters), the market's forecast of future inflation, and the ECB's own projections. Score one for the professional economists.

What are those economists forecasting for the coming year? Here's their forecast, in the chart below. The average forecast for 2024 is 2.9 per cent, dropping to 2.1 per cent in 2025 and 2.0 per cent the following year. Why are forecasters expecting this year to be higher than its current level? My hunch is that these forecasts are a few months old, and there was a big unexpected drop in inflation in December of 2023. So my own forecast is for inflation to average 2.4 per cent this year.

Inflation is important because it determines how aggressively the ECB moves interest rates, and interest rates determine (almost) everything else.

This time last year, interest rates had started to rise dramatically. In a little over three months, the ECB base deposit rate had risen from zero to two per cent.

I forecast the worst was over and that the rate of interest rate rises would level off. I did this because that was the market forecast. In the same way that professional economists forecast inflation would fall in 2023, investors forecast interest rates wouldn't need to rise by much.

This year, the market is forecasting ECB deposit rates will drop a little bit, to 3.5 per cent. So that's my forecast too. It should be noted that ECB deposit rates are not the same thing as PTSB or AIB rates. In trying to estimate retail bank interest rates, the main thing to keep in mind is the direction of travel, rather than the specific number.

This time last year was a tough time for the stock market. The S&P500 had fallen 19 per cent in the previous year. There was a sense that 2021 was a crazy time, an irrational time. GameStop and WallStreetBets and Robinhood and Tesla and crypto were still fresh in people's minds. The feeling was that stock market investors needed to chill out for a while. Nobody knew how long that was going to take.

In the event, the timeout only lasted about 10 months. Since the bottom in October 2022, US stocks have returned 34 per cent.

House prices: a different story

House prices are a different story to stocks, and it's a minor chart crime to include them both on the same graph. Stocks are much more volatile than house prices. A 19 per cent drop in stocks over the course of a year is pretty normal. The equivalent drop in house prices would be an unprecedented meltdown.

So my forecast of a five per cent drop in house prices, while it looks modest on the chart, was actually quite severe. It was based on the ESRI's model for house prices, which estimates true value based on four key variables: affordability (disposable income and interest rates), credit conditions (how much credit buyers get for a given income), supply (the housing stock) and demand (the number of likely buyers). The ESRI model is a workhorse model commonly used by housing economists.

In December of 2022, the ESRI model estimated Irish house prices were seven per cent overvalued relative to fundamentals. Into the model, I plugged the market estimate that interest rates were expected to rise. The valuation spat out by the model suggested that, given higher interest rates, Irish housing was overvalued by 13.7 per cent. That number didn't smell right to me because house prices don't tend to drop very fast. So I predicted they'd drop five per cent. In the event I was wrong, and they rose by six per cent. I'll count that as a loss.

As for 2024, I would simply note the ESRI's model estimates Irish house prices are 14-18 per cent overvalued, relative to fundamentals. This year I'll timidly forecast a five per cent drop once again, why not.

The last forecast was bitcoin. This was my wrongest one. This time last year, bitcoin was at $15,600. My guess was that nothing much would happen in 2023. I forecast the price would stay at $15,000. I said: "There is no workhorse model of crypto prices. The most you can say is that they seem to follow whatever trend they're on. And I suppose, over the very long run, the trend has been that they go up."

How wrong I was. As I usually seem to be about crypto. Bitcoin went on a massive run and currently trades at $41,000.

The following chart shows bitcoin in the very long run, on a log scale. Eyeballing it, you can see how it might have one last bull market left in it. It might make $100,000 in the coming years.

This time next year? Once again I'll put my finger in the air and say it'll reach $70,000. Please don't put the house on it.