I am always reluctant to offer predictions for the year ahead because of the arrogance involved. But, shoot, as in the gallows humor of the Eighth Air Force, āNo guts, no Air Medals.ā
Evaluating Last Yearās Predictions
Letās begin with reviewing successes and embarrassments one year ago today. Two mistakes: I thought the US economy would accelerate to 3 percent growth, and I saw Czar Vladimir as more dangerous than he has been.
Got right: the US federal government has been inert in 2015, Europe and Japan are still no-growth messes, China did slow down, and the Fed did lift off from zero, but mortgage rates ended where they began. Not bad. China was the toughie last year and is again now.
Year of the Crazy
But, looking forward now, theyāre all tough. China has years of dogs and horses; 2016 is going to be the Year of the Crazyāas unpredictable as any year in my memory.
In our racket, the Fed is paramount. Fed forecasting is already crazy: the Fed says itās going to raise the overnight cost of money by about 1 percent per year for the next three years. Financial markets growl back: No youāre not. Wagers are set now in markets, privately and in big trades: the Fed wonāt make it far above 1 percent before having to retreat. Thatās an immense disagreement.
Long-term moneyābonds and mortgagesāthink long term. Duh. Next year the bond marketās view of the future is overdue for big lurches. The wrong kind of news will dramatically change the marketsā estimate of the Fedās course and rock mortgages a quarter-percent or more over a weekend. Crazy means volatile. Look for overshoots and reversals. Mortgages in 2015 never rose above 4.25 percent nor fell below 3.75 percent. In 2016, the high-low range should be twice that.
New surprises begin with next weekās wad of December data, from Christmas sales to Fridayās employment and wage report, surprise magnified by the holiday down-time.
āThe wrong kind of news….ā The worst news for us would be any combination of these: accelerating gains in US wages, rising US inflation, or US jobs stubbornly gaining 200,000 or more each month. Any one of those would force markets to reconsider Fed-doubt. Burned last year, now I think US GDP will not accelerate, but itās those Fed-sensitive components that matter.
Crazy 2016? CRAZY!?! Donald Trump, and the other dozen all trying to flank each other on the right. Donald freakinā Trump. Every one of them promising faster US growth, more jobs and higher wages. Whatās-her-name too. The Fed says weāre growing too fast now. Yellen: āWe donāt need more than 100,000 new jobs each month.ā The Fed is on track to tighten at least three times before the election. This group of candidates is not a bright lot, but do we think they wonāt notice the Fed?
Do I want to see Yellen get the Trump treatment? See the Fed politicized as never before? Great.
Then look outward. Every day the US is more sensitive to overseas economies. Japan has been in deflation and recession for so long that weāre used to it. Nobody owns its bonds except itself. An exceedingly unlikely recovery might do some harm outside, but stick with exceedingly unlikely. Europe has been the biggest help holding down our rates. An unexpected recovery there would hurt, raising rates there and ending the attractiveness of our bonds, but the euro currency should prevent anything but occasional lifelike twitching.
In 2015, China took over from Europe as most important. It has slowed more than anyone thought, collapsed commodity markets and the nations exporting the commodities. China will still grow, but its growth now will be destructive to the rest of us, new money for internal stimulus sourced by predatory exports. A true revival in China would help the world and hurt rates, but thatās going to happen only via reform.
Chinaās reforms are stymied by internal contradiction: no one ever has found a way to modernize by repression, or to liberalize by censor, or to innovate by edict.
Be glad weāre here, crazy and all. Happy New Year!
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