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Happy New Year!

With 2015 out of the way, it’s time to look forward. But as we’ve shown many times, the best way to draw a line into the future is an extrapolation from the past. Such is the real tradition at New Year’s – looking back and ahead at the same time.

Besides, the stillness of the present time moment is usually more of a hangover.

Better than cheese, at least to the investment savvy mouse.

Better than cheese, at least to the investment savvy mouse.

How did Barataria do last year? Through the 156 posts, reliably every MWF, there were a solid 3.9 million pageviews. These generated 4.6 k wordpress “likes” and just over 2k comments. Thank you all for your readership and contributions to the cause!

While that’s great, the real numbers for Barataria were more involved.  We made three keypredictions about the economy.

The first came at the start of the year. Since 2015 and 2016 are the years of transition, leading into the predicted 2017 year things really start to change, the most important prediction for the year was that there would be enough of a change to move attitudes. The call was for:

  1. A relatively flat stock market,
  2. The start of increases in wages, and
  3. Another 3 million jobs gained.
TBills used to look like this. Today, they are electrons.

TBills used to look like this. Today, they are electrons.

This prediction was pretty much spot on. The S&P500 started the year at 2058 and ended at 2044. Taking away the wild sings in the middle, that’s about as flat as you can get – with the slight downward trend enough to break the long cyclical bull market which has been with us since 2010. Wages also started to rise more appreciably, with the median household income finally getting back to where it was at its last peak in 2008, rising 5.2% year over year. This trend should only continue as we added 2.6M jobs in 2015, pushing us closer to full employment.

Another prediction, made mid-year, was for interest rates to fall as the Federal Reserve raised the Fed Funds Rate. This more or less happened as the benchmark 10yr Treasury Bill, the key indicator, did fall from a yield of 2.32% (in the 200 day moving average) to 2.12% just before the rate increase actually came. Since that time it’s bumped up to 2.22%, right in the middle of the range. But that actual increase came so late in the year the predicted medium-term effect has not taken shape.

The last six months for the 10yr TBill. From Yahoo! Finance.

The last six months for the 10yr TBill. From Yahoo! Finance.

The Chinese Yuan (Renminbi).

The Chinese Yuan (Renminbi).

Why is this so difficult? It’s hard to tell how much of the “carry trade”, which is to say borrowing in US Dollars to invest abroad, has come home yet. There are signs that very little has, which is to say that somewhere between $3 trillion (the net excess gained since 2008) and $9 trillion (the total US Dollar carry trade) will repatriate. The smaller figure alone is about 5 months of US T-Bill trading, so it’s certainly a big number.

The last prediction was for a 3.7% increase in holiday shopping. We don’t have the final figures in, but despite a lot of gloom and/or doom MasterCard reports a 7.9% increase in purchases year over year. Since a lot of that came online it’s hard to tell what will be finally reported.

This sounds like 2.5 out of 3, with the call on interest rates looking good but not done.

That’s all good as far as it goes, but what does that tell us for 2016? We can reasonably expect stocks to trend downward at the start of the year in a regime of rising interest rates. But the second half of the year is much trickier.

What keeps the global economy keepin' on.

What keeps the global economy keepin’ on.

If the money coming back to the US is a flood some of it will come into the stock market, giving a big bump at the end of the summer. That is the best guess we have all around, especially if low interest rates for consumers at the start of the year continue to spark retail sales and new mortgages. Reports of that activity won’t hit until after July, so it’s unreasonable to expect enthusiasm until then.

We should see a little more economic growth with the additional money and confidence, which Barataria will now predict at 2.5% for the year. With another 5M jobs added and unemployment looking like a problem of the past confidence will return in 2016.

Interest rates will start to rise substantially around July, however, if the stock market picks up. We can expect the 10yr note to be more like 2.5%, which is not a huge increase.  But it may go up from there as the long-term effect of rate hikes sets in.

What does this mean taken together? Confidence will be returning along with the money we can expect flowing back into the nation. Which takes us to the final prediction:

This will be a good year for Democrats. With Hillary Clinton already a better than odds-on favorite to win the election we can expect her to be the main beneficiary.

9 thoughts on “Happy New Year!

  1. May each of you in St. Paul receive a new baby, a Maserati and Ted Cruz in your home this evening. And may you have an interesting 2016!

  2. Good calls! I think you have something with the 10yr bond but it doesn’t appear to be dropping as much as it is stable. Short term bonds are up with the 2 year at about 1%, but that’s all that seems to be rising. When do we get an inverted yield curve? 🙂

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