The Forecast Issue
There will be no blog tomorrow as I am getting a private viewing of the Florence Nightingale Museum.
The first article from 2017 follows, with a caution. While the great unpredicted political surprises of 2016, notably Brexit and the election of Donald Trump, are now in my crystal ball and those of all others, the political, diplomatic, stock market and economic surprises to come are still unpredicted and unpredictable. I have a few notions but they have not yet been confirmed in the real world, although I have acted upon them and forecast stock favorites for various publications which garner forecasts at the wending of the year.
The one thing I am sure of is that there will be more shocks in 2017 and they will arise from events we know nothing about now. Events will again prove chaotic and surprising.
We face a period of tax cuts, protectionism and trade barriers, and infrastructure spending, although all the details will still have to be haggled over. And as we all know, the Devil is in the details. Tax cuts involve sharing out the pie between interest groups, sectors, and clumps of taxpayers in different brackets with different sources of income and wealth. Trade policy is not a simple arithmetic matter of cutting imports while boosting exports in a world where the money to pay for US corn exports has to come from the sale of foreign cellphones, where the price of a Boeing airplane is paid for from the profits of oil exports. And just rolling out shovel-ready projects to boost the economy turns out to be much harder than it seems, as was proven during the Bush-Obama transition.
I expect the US to finally get out of its deflationary funk under the new Administration, but it will not be as quick and easy as some (including Donald Trump) expect. There are potential trouble points for the program he presents. While his own party controls Congress, there are plenty of anti-deficit hawks in positions of power. Others support a liberal economy and free trade, part of recent orthodoxy. Moreover Trump's promises to revive American Industrial Revolution sectors like coal, steel, metal-bashing, making things right in the USA, which got him the white blue collar vote, may not succeed.
If the economy turns up as expected we will once again see good old inflation coming back. That will be fed by full employment (which is close already based on how joblessness is counted, if not in the real economy.) Cutting taxes will cut bureaucracy (which everyone wants less of) but it will also boost the government deficit which also is inflationary. Bringing home production from abroad will cost more, because we do not have spare capacity in our Old Economy sectors nor a billion country Chinese fighting for a factory job to move up in the world. Getting rid of Obamacare will cut the work force (because sick people have to stay home) and increase wages some more (because the better system Trump promised will have to be crafted and paid for, with the Obamacare beneficiaries at the fore.)
Then there is foreign policy. No, the US will not exit the United Nations. We will not try to remake Nato into a shopping mall where security is sold to foreign countries for cash. We will not be able to block Chinese Pacific Rim ambitions without a defense policy and budget. We will also need allies who will be looking after their own interests which our policy must align with, or they won't be our allies for long.
Beating up on Mexico and Canada will cost us a lot of exports and efficiency, cutting the supply chain which runs through the three NAFTA territories. Forcing China to revalue the renminbi against the dollar will increase the cost of what we buy there (which is the point) but also will be inflationary. Whatever Trump and his Jewish relatives get up to in the Middle East will require more not less military spending, unlikely to be long offset by the benefits of cozying up to Vladimir Putin. Russo-Iranian interests are ultimately not compatible with the US posture in the region, and also represent an existential threat to Israel.
These are givens which will face the new Trump Administration once it has begun to govern. What this means for investors is discussed below.