It ain't so much the things we know that get us into trouble.  It's the things we know that just ain't so.  

— Attributed to several American writers

The most important events in 2014 were not anticipated.  At the end of 2013 and early 2014, parallels between 1914 and 2014 were focused on the disputes in the South China Sea, not Russia seeking to secure its sphere of influence in central Europe. US Treasury yields, the key benchmark for global capital markets, were universally expected to increase as the Federal Reserve slowed its purchases. Instead,10-year Treasury yields fell to 115bp to hit 1.85% in mid-October and were still trading a lowly 2.15% in early December.

Despite being fully aware of US shale oil production and soft world demand, no one expected a 40% drop in crude oil prices. The consensus favored Japanese stocks that were expected to be lifted by the BOJ's aggressive monetary policy and yen depreciation. However, until late October when the BOJ increased its efforts, the Nikkei was lower on the year and for its part the yen stronger until early September. 

We had recognized that the divergence among the high-income countries was a key characteristic of the investment climate, and have been writing about it in the past six months. This has now become the new consensus. While the logic is still compelling, we can provide more value by considering what can go wrong with divergence rather than simply reiterating what we have been saying ad nauseam.  

Could the US Disappoint?  

The divergence investment theme is based on positive developments in the US and not-so-positivedevelopments elsewhere.  If the consensus ends up being wrong, the US narrative may be the most susceptible to disappointment. There seems to be three different ways that could unfold.  

First, growth in the US could disappoint. The contraction in Q1 2014 GDP was largely, even if not exclusively, a function of poor weather.  The volatility of the weather makes this difficult to incorporate into economic forecasts.  

After the winter weather subsided, the US economy enjoyed the fastest six months of growth in over a decade, from the April through September period.  This rate cannot be sustained, and a return to trend growth, which may be closer to 2.5% is not unreasonable. Poor growth in Europe and Japan and the slowing of China act as a headwind on US growth. The strength of the dollar may also dampen growth. Slower growth may also coincide with slower improvement in the labor market.   

Second, the Federal Reserve has habitually over-estimated the degree to which its mandated goal of price stability is approached.  If the core PCE deflator, the Fed's preferred measure of inflation, continues to undershoot, it is not clear that a decline in the unemployment rate itself, unless accompanied by stronger wage increases, would spur the Fed into action. While the officials may look past the decline in oil and gasoline prices, the secondary impact, such as on transportation and shipping costs, may feed through into core measures.