Central Banker of the Year – Mario Draghi, ECB: with all the drama of an Italian Opera, he launched the year with overwhelming monetary accommodation pushing the Euro closer to parity with the dollar, and most government bonds across Europe to or through 0% yields; then he closed the year by under-delivering the next leg of QE. Don’t give up on the ECB and the European bond markets just yet…Europe remains heavily indebted, the ECB has an important role in making that debt sustainable and creating inflation…and there are many more levers the ECB can and will have to pull in 2016.
Best Drama Series – J Yell and the Feds: it was always going to be hard to top the ECB after their start to the year, but Yellen and the Fed did their best. After guiding the markets to rate increases in June and September, they backed away both times losing increasing amounts of credibility. Transparency and credibility are keys for the Fed if they ever hope to successfully engineer a normalization path for Fed Funds, regardless of how shallow they make it.
Bond of the Year – Russian local debt: it returned about 40% for 10 year maturities…see how easy investing in emerging market debt is?! The pressure is now really on the emerging market debt team with Brazil. The fundamentals surely look lousy, but do you hold your nose and buy 10 year local debt at 15 ½% (2% higher than Russia last year!!!) because if you don’t – someone else might?
Currency of the Year – Chinese Renminbi: Hard to believe a lousy couple percent devaluation could essentially take out nearly the entire global financial markets over the summer. Can a debate really be had as to whether the ‘unpegging’ had anything to do with joining the IMF’s strategic currency basket, or it was more a necessary step to help along the painful adjustment that is looming? We’ve seen this movie before…years of debt accumulation and overinvestment lead to excesses which must be purged…not exactly good news for the global economy.
Comeback Player of the Year – US Government Bonds: The 10 year started the year with a yield of around 2.2% and is still yielding around 2.2%. Honestly, doesn’t a market know when it’s supposed to be dead!? Maybe the Fed will hurry up and raise rates a lot or we’ll be writing about yields through 2% next year.
Unsung Hero – European Corporates: I don’t even want to make a distinction between High Yield or Investment Grade because without the performance of corporates in Europe, global credit managers would have had a yucky year. Whether it was European bank capital notes or good old industrial junk bonds, European credit performed extremely well as stronger balance sheets and the tailwind of QE created significant demand.
Villain in a Leading Role – a tie, TIPS and Oil: It’s not really their fault – they are just two misunderstood assets. Inflation, or the lack of it, is surely the real culprit. In theory, the >$12T in central bank balance sheet expansion which has occurred over the last 7 years is ready to be ignited and create an inflation surge. It’s just that the Japanese have shown us how difficult it is to find the matches to light that spark. Maybe the global debt overhang is the real villain that keeps the matches perpetually wet.
Best Psychological Thriller – Brexit: So…it’s a waste of time for the UK to be part of the EU…but Scotland MUST remain a part of the UK?
Most Valuable Player – Quantitative Ease: It doesn’t look like it created above trend growth anywhere, it doesn’t look like it created inflation anywhere, it does look like it helped make egregious debt burdens sustainable, and it does look like it’s pretty good at inflating financial asset prices. If it weren’t for Bernanke and his threatening Counter-Factual, policy makers might have moved onto something else by now. I suppose as long as equities keep going up and bond yields stay low, what’s not to like?
Holiday Wishes for 2016 – no policy errors from policy makers globally and investment returns that help clients reach their objectives!