Monday, February 10, 2014

3 predictions for 2014

Without turning this into a year ahead-type note, I wanted to highlight what I think could be three big surprises for the year: 

Currency Wars – the big one, China! At what point does China and the RMB say "No Mas?"; 

Japan – what if the squeeze on real incomes and the squeeze on the SMEs is so strong that the BOJ does NOT deliver more new easing beyond March year-end? The JPY has been a one-way trade and is now the major funding currency of the global carry trade – any sign that the BOJ and Prime Minister Abe are blinking would be very difficult for the broader global markets; and lastly, the 

Fed – to taper or not to taper – what if the data become even more volatile and mixed? Does the Fed reverse taper? What about credibility? And what if the PCE reading drops below 1%? Going from over 2% to 1.1% is disinflation and "good" for all assets in a QE world, but a sustained move below 1% is not good for risk assets and growth expectations and would surely prove, once and for all, that QE is little more than money illusion. The new Chair of the Fed may end up with a major credibility gap, having been so wedded to this policy. And what would it mean for Abenomics (albeit in Japan there is at least an attempt to force some real economy reform).