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, “No guts, no Air Medals.” Begin with reviewing successes and embarrassments one year ago. Two mistakes: I thought the US economy would accelerate to 3 percent growth, and 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, the Fed did lift off from zero, but mortgage rates ended where they began.

  • The Fed says it’s going to raise the overnight cost of money by about 1 percent per year for the next three years.
  • 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.
  • Every day the US is more sensitive to overseas economies.

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, “No guts, no Air Medals.”

Begin with reviewing successes and embarrassments one year ago. Two mistakes: I thought the US economy would accelerate to 3 percent growth, and 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, 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.

But, looking forward now, they’re all tough. China has years of dogs and horses; 2016 is going to be the Year of the Crazy. As unpredictable as any year in my memory.

In our racket, the Fed is paramount. Fed forecasting is already crazy: The Fed says it’s going to raise the overnight cost of money by about 1 percent per year for the next three years.

Financial markets growl back: No, you’re not. Wagers are set now in markets, privately and in big trades: The Fed won’t make it far above 1 percent before having to retreat. That’s an immense disagreement.

Long-term money — bonds and mortgages — thinks long term. Duh. Next year, the bond market’s view of the future is overdue for big lurches. The wrong kind of news will dramatically change the markets’ estimate of the Fed’s 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.

News surprises begin with this week’s wad of December data, from Christmas sales to Friday’s employment and wage report, surprise magnified by the holiday down-time.

“The wrong kind of news….” 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 its Fed-doubt. Burned last year, now I think US GDP (gross domestic product) will not accelerate, but it’s those Fed-sensitive components which matter.

Crazy 2016? CRAZY!?! Donald Trump, and the other dozen all trying to flank each other on the right. Donald freakin’ Trump. Every one of them promising faster US growth, more jobs and higher wages. What’s-her-name, too. The Fed says we’re growing too fast now. Yellen: “We don’t need more than 100,000 new jobs each month.” 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 won’t 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 we’re 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 that’s going to happen only via reform.

China’s 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 we’re here, crazy and all. Happy New Year!

Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.

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