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Investor Fate to Pivot on Trade and Politics in 2017

Investor Fate to Pivot on Trade and Politics in 2017

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Friday, 23 December 2016 05:38 PM Current | Bio | Archive

2016 has turned out to be an interesting year. 2017 promises to be the same.

There was a great deal of idle chatter about the new normal of the post-financial crisis world.

It turns out that it is more likely to be the new abnormal. This is not a recasting of past trends with perhaps a somewhat lower growth rate and a somewhat less prosperous feel.

This is a more chaotic environment where past norms offer little to no direction for the future.

So, what should investors consider in 2017?

The first issue has to be politics. The rise of the political economy has been in train for some time. The mathematical certainties of the models of the 1970s have long since given away to a more realistic approach. However, we should not get carried away by the political noise.

Politicians are not nearly as important as they think they are. Economists are as important they think they are, but that’s because nearly everything comes down to economics in the end.

The influence politicians have on economics is rarely immediate, with very few exceptions. Most of the political noise is just that, noise, in the short term at least.

Politicians can influence the longer term. No economist seriously thought the U.K. would be plunged into recession by the U.K.’s referendum result this year, but it will influence U.K. trend growth. Donald Trump’s plans for the United States are very unlikely to change the near-term outlook, because they will not be implemented quickly enough, but the long term growth of the United States will be impacted.

Similarly, the political noise in Europe in 2017 is likely to be more long-term than cyclical in the main.

One area where there can be more immediate impact from politics is trade. Largely because Trump does not have to refer to Congress to be a full-blooded protectionist. The tone of the appointments that have been made on trade is not especially promising.

However, we should remember that the global model of trade that has developed over the past 25 years was ending anyway. Longer and longer supply chains have being reversed as capital for labor substitution comes in. That does mean that stagnation or even the reversal of globalization will not produce a jobs bonanza in the developed world. It will create some low skilled jobs, but the labor of Asia is more likely to be replaced by the capital, not the labor of the OECD.

A potential force for trade tension does heighten the vulnerability of the U.S. dollar.

Protectionism is unlikely to reverse the U.S. current account imbalance and U.S. stimulus could well increase the U.S. current account imbalance.

The U.S. becomes more and more dependent on foreign capital inflows. At the moment, the United States needs around $2.7 billion dollars of inflow every day. Not to raise the value of the dollar, but to stop it from collapsing in free fall. That is, to put it in context, more than the daily GDP of the Netherlands.

As global savings rates decline, there is a tendency to sell dollars. When people save, they tend to prefer U.S. assets. When people shop, they tend to prefer European goods and services. If the world is more likely to spend than to save, then the world is more likely to buy euros than to buy dollars. And this is before we even consider the issues of protectionism and retaliation of some of the world’s largest holders of dollars, which is of course China.

Finally, inflation: Inflation is back as a topic in 2017. This is partly because the oil price normalization will reveal that inflation never actually went away.

Beneath the oil effects, most inflation rates are running at normal or near-normal, but partly it’s because where inflation rates do start to rise, it is likely to be because of higher prices for the sorts of things where people notice higher prices. Inflation becomes more visible, in short. And with the media picking up on that, we’ll likely to get more popular chatter about inflation and with that more of a focus from investors.

Remember, however, inflation is still primarily a labor market and therefore local issue. There will be variations around the world.

So, 2017 promises to be an interesting year. One which will keep economists busy and hopefully and relatively gainfully employed.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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2016 has turned out to be an interesting year. 2017 promises to be the same.
inflation, economy, investors, trump
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2016-38-23
Friday, 23 December 2016 05:38 PM
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