Investors and savers almost everywhere are as perplexed as ever. Major changes have swept the globe in recent years. It is important to understand the shifts that are underway, as they will in turn drive future outcomes in the world.
Of course, much of this is not new. We have documented many of the current global macro-trends in past issues. The major alerts to these ongoing epochal shifts have been visible for some time. For example, the financial crises (Global Finance Crisis, GFC) and an apparent shift to populism (as well as other trends) in the political spectrum are the outgrowths.
While such developments have already been evident for quite some time to analysts, only more recently is the fuller picture coming to the attention of the broader public. The loudest bellwethers of these new groundswells were the pro-Brexit vote in Britain and the election of Donald Trump in the United States. These developments shocked many policymakers and globalists. There were many more indications that “populism” was likely to gain momentum (Syriza Party in Greece, Podemos Party in Spain Geert Wilders in the Netherlands, etc.). There are likely more to come, possibly also in France over the next few months.
What is perhaps less visible is the enormous significance of the shifts in global geopolitics. These potentially have monumental implications for economies and financial markets.
During a 60-year period of multilateral and internationalist leanings, the globe was showered with the wealth-enhancing benefits of trade cooperation and globalization. This trend is now reversing … even if only for a time. As long as this pendulum continues to swing to anti-globalization, dangers of conflict will rise exponentially.
The ultracompetitive (and relatively unfettered) policy environment of the past globalization era left a lot of bitter people behind as economic inequality became extreme. As such, a popular backlash has been underway. The globe is now swinging back to imperialism and bilateralism (the kind of policies that were influential in the first half of the last century). Spelling this out, what it means is that a shift to pro-sovereignty and nationalism is underway, in the pursuit of national interests … i.e. America First, Britain First and similar chants. Donald Trump is not the only populist.
With all these changes, understandably, the Main Street and professionals — from economists to money managers — are perplexed. On top of this, investors have had to contend with unconventional monetary policies around the globe. The JCB (Japan Central Bank) and the ECB (European Central Bank) continue to spew QE (Quantitative Easing) onto the world’s liquidity scene of a combined US$1.5 trillion per annum. This causes extreme distortions. It therefore is difficult to determine the true value of financial assets.
It is no surprise that surveys show “geopolitical uncertainty” to be at extreme highs. There exists a mindset that virtually anything can happen. Yet, what is doubly confusing is that despite the high level of uncertainty, financial markets have remained relatively buoyant.
Here, a comment on the U.S.’s role in current conditions is appropriate. Wall Street has been happily celebrating the new promises of corporate tax reductions, eased regulations for the financial sector and a host of other “positive” initiatives of the new Trump administration.
The stock market bonfire since U.S. election day has added as much as $3.3 trillion in value (for which Trump has claimed credit). Is this reasonable? Are the benefits of new Trump policies hugely overblown?
Consider just one statistical reference point. Total income taxes paid by corporations in the U.S. amount to $320 billion per annum. Were tax cuts of a third to be implemented (likely a long shot) the U.S. stock markets will have already appreciated in value by 30 times the expected benefit of lower corporate taxes.
Geopolitical analysts will claim that U.S. presidents are shaped by their global environment and their destiny … not the other way around. Great legacies can only be achieved with a lot of luck and a facilitating backdrop. As such, it is only reasonable to ask the question: How long can the Trump honeymoon continue?
Reason would argue that some disappointment will set in sooner rather than later. Frankly, fulfilling the expectations put upon Trump would require god-like status to achieve. There is an anticipation of a “fantastic and phenomenal” “new tomorrow.” Realistically, anticipations can change abruptly, and to suggest that the current “nirvana” is vulnerable would not be a courageous forecast.
However, there are some complicating factors. Consider that the U.S. stock market at present represents half of the value of the entire world stock market. This compares to the U.S.’s share of the global economy of 25%. U.S. stocks are now the most expensive in 10 years. Furthermore (according to a composite valuation model), U.S. stocks are not the most expensive vs. bonds in 9 years. Finally, the valuation of the U.S. stock markets vs. the rest-of-world (as may already be deduced) is at the highest extreme in modern financial history.
Admittedly, there are a lot of economic problems around the world. China is facing a slowdown and is juggling high debt levels. Japan is still struggling to resume sustainable economic growth. And, the EU is grappling with very serious challenges — internal economic imbalances, possible additional country exits, and the financial indebtedness of some of its member countries.
There exists an unlikely combination of extreme and incongruous conditions in the world at present. The probability of surprises and disappointments seems very high.
About the Author: Wilfred J. Hahn is a global economist/strategist. Formerly a top-ranked global analyst, research director for a major Wall Street investment bank, and head of Canada’s largest global investment operation, his writings focus on the endtime roles of money, economics and globalization. He has been quoted around the world and his writings reproduced in numerous other publications and languages. His 2002 book The Endtime Money Snare: How to live free accurately anticipated and prepared its readers for the Global Financial Crisis. His newest book, Global Financial Apocalypse Prophesied: Preserving true riches in an age of deception and trouble, looks further into the future.