- Good. The Fed tightens (of course, now some see it delayed to 2016, but I digress) before the deflation / currency collapse (not the Dollar), such action could actually lead to a collapse of some emerging market currencies and create the panic necessary to get investors off the sidelines and out the risk curve.
“Risk on” trade emerges big time. Rates down, then up rapidly, which keeps our January 2015 outlook intact. The current rise in rates will reverse hard and probably not exceed 2.6, yields drop to 1.35% likely & outside 1.15%. This scenario is not dependent on the Fed tightening. It is dependent on a currency collapse or rapid drop in prices in certain countries, but not necessarily large aggregate drops in general price levels. Just enough to get the re-pricing that real money is waiting for. Greece does not exit the EMU. They will eventually. High volatility.
- Bad. The Fed does nothing, ECB continues to believe and practice QE, global growth continues to languish, investors cautiously buy-in to the neo-Keynesian rescue plan, then rates could just twist with a bias to higher rates. The 10yr struggles to reach 2.9 and probably stays below 2.8%. This scenario could usher in a significant drop in rates late in the year to 1.35% and 1.15% outside but unlikely. Greece does not exit the Economic and Monetary Union (EMU). Calm compared to 1), much like 2014.
- Ugly. EMU shrinks. Euro screams to the upside because Greece exits the EMU. (There could be a knee jerk reaction of a large drop in the Euro, but long-term buyers will come in strong because it will strengthen the possibility of the Euro’s long term survival. Dollar suffers. Oil gets close to $75. US rates rise to 3.4% with 1.64% set for the year & the low for the second half staying above 2.1%. Wild volatility, but not as bad as 1)
I will expand upon the mid-year update today, Monday June 8 on Lykken on Lending at 1:00 PM ET. Typically Dave Lykken interviews his guests about halfway through the one hour program.
Here is the link to the MarketLogics outlook in January 2015. http://bit.ly/ML_2015_Forecast