No prizes for halftime scores

Last November, I submitted my predictions for 2016 in a piece titled “Looks Like Lower and Flatter for 2016.”

By “lower and flatter,” I was referring to longer-term U.S. interest rates and the yield curve, respectively. My thoughts were that a number of factors, most of them outside the United States, would keep inflation well at bay and actually continue to inspire dark thoughts of deflation in Europe and Japan. Additionally, a lower growth recalibration for China and emerging market economies due to a strong U.S. Dollar (USD) would drive rates lower. This summer, there was serious speculation that the Bank of Japan (BOJ) would actually resort to “helicopter money” to try and ignite inflation, and the European Central Bank (ECB) seemed on a course to deepen their drive for negative interest rates. So for nine months I was right, actually 10, if you count December 2015! However, the election of Donald Trump on November 8, 2016 destroyed the call. Literally overnight, markets began to price in a very high probability of what central banks have been trying to do, with little or no success since 2010, global economic reflation. And with that, my 2016 call was destroyed! Yields skyrocketed and while the U.S. Treasury yield curve actually flattened, it flattened because a more hawkish Federal Reserve pushed short- to medium-term rates up sharper than longer term rates, not something I called for.

Thinking of this reminds me of the 1974 film, “The Gambler,” starring James Caan. Caan plays degenerate gambler Axel Freed. In one scene, Axel has just lost huge bets on a game. Axel’s bookie comes to his house in the middle of the night to collect. In the era before cable TV and ESPN, Axel went to bed thinking he won. He didn’t. Axel, stunned, says to the bookie, “But Harvard was way up.” Jimmy the bookie cuts Axel off and says, “They don’t give out no prize at halftime Axel.” And so it is with my 2016 call. No prize for being right for three quarters.

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