2017: What Could Go Wrong?


Mauldin Economics published an article on questions we should be asking and what we should be on the lookout for as 2017 opens. Summary below:

  • The biggest change will happen in Washington when Trump takes office. He will be in position to approve many Republican initiatives that Obama blocked:
    • Tax Reform: US system needs major reconstruction; sources saying House members want to pass an initial tax cut quickly and defer more complicated changes for later; easy initial tax cut is to remove Obamacare tax; tax cut for the wealthy won’t stimulate economy enough; putting a high tariff to products at Walmart, Costco, Amazon will be inflationary for the shoppers (most of us); look at the immediate one-time negative effect on inflation in Japan when they increased sales tax few years ago
    • Energy: Obama’s heavy environmental regulations are major impediments to US energy independence; watching to see if new administration approves more gas export terminals and pipelines; if Trump wants to play hardball with OPEC, Trump could even impose a tariff on imported petroleum products
    • Economic Stimulus: Hearing mainly tax-credit privatization programs; plenty of shovel-ready projects or could create them quickly – some will not be very profitable in the short run so they may not happen under a tax-credit scheme
    • Trade: Import-dependent businesses are on pins and needles; we will see some new US-China trade agreement but hard to expect; appointment of Peter Navarro is making many people nervous; agree with Stephen Mnuchin who prefers to do bilateral than regional trade agreements – trying to get agreement from 15+ countries that all have competing interests makes any trade document so unwieldy; Obama threatened the UK around trade deals in the event of a Brexit but Trump and Mnuchin say UK will always be at the front of the line
    • Banking: one reason stock market has gone bananas is prospect of banking deregulation; Dodd-Frank as presently constructed could aggravate matters in a crisis because it prevents Federal Reserve from stepping in but the FDIC simply cannot act fast enough; all for restrictions on too-big-to-fail banks and prefer they increase capital reserves but we have written rules to regulate the 1% large banks which has nothing to do with 99% of the banks in the country
    • Federal Reserve: at least two nominees to Fed’s Board of Governors and possibly three soon after Trump takes office; Trump will get to nominate both the chair and vice chair and when Yellen departs, remaining members will consider leaving as well; meanwhile, Fed is in middle of long-overdue policy turn; negative rates probably won’t happen under Trump-appointed Fed
  • Black swans: George Bush had no idea 9/11 would hit less than eight months into presidency; god forbid we get something like that again but similarly unforeseen crisis is possible
  • Canadian bubble: after two years of low oil prices, avoided recession but not much growth; Canada is by far US’ biggest trading partner; housing bubble that looks increasingly ready to pop; home prices in Vancouver and Toronto have nothing to do with oil prices but Hong Kong Chinese and other Chinese buying property; US energy policy will impact Canada (maybe Trump will let Keystone go forward)
  • Crowded exits in Europe: Italian bank crisis seems delayed but nothing’s fundamentally changed; Monte dei Paschi has at least 36% of its loan portfolio in nonperforming category; saving Italian banks will take hundreds of billions of euros and Italy does not have that; individual Italian investors have at least $200 billion in junior, subordinated debt; Italy is the most dangerous economic issue on the world front; Merkel may have to surrender wish to accept more Middle East refugees – people will instead pile up in Italy, Greece, and Turkey all of which have their own problems; Merkel is not going to want to acquiesce to Italian demands for relief on its banking issues prior to election; France and Germany will hold elections in 2017; UK will formally begin Brexit in 2017; NATO – defense alliance partially overlaps with EU but includes Turkey; Trump wants other member states to increase their defense spending – Baltic countries and Poland are very concerned about Russian aggression
  • Asian angst: Beijing not pleased with Trump’s phone call with Taiwanese President; China is holding domestic economy together with massive debt; new liquidity can’t leave the country due to capital controls but it results in asset bubbles; Trump needs to give Chinese leaders a face-saving way to accept demands without causing instability; job market is very tight in Japan (available worker has two job offers on average) – but wages are flat or even falling; this shows how difficult it is to escape a deflationary spiral; unlike China, Japan really is devaluing currency; a lot of Japan’s exports go to China so Trump’s new policy with China will impact demand; hundreds of millions of Indian workers don’t have bank accounts and debacle of paper-money crackdown may cost India a point or two of GDP growth
  • I haven’t even mentioned Africa, Middle East, Australia, or Latin America – they all hold potential problems for the global economy, too
Source: Mauldin Economics
Image Source: Rappler

Additional Read: The Pessimist’s Guide to 2017 [BLOOMBERG]


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