Themes in Global Economies 2017

I believe the following two themes will shape markets for 2017:

  1. The rise of a conservative populist nationalism as a reaction to a decade of liberal expansion
    1. Which will have to confront the reality that technological globalization is entrenched in the modern world
  2.  A new phase of global economic recovery that is ushered in by increased consumer confidence

For Every Action There is a Reaction

Year of the Unlikely

For many people, 2016 will be remembered as a year full of unlikely events. For some it will be a tragic year in which the ugly fears of human nature seeped through the cracks of the foundation of progress. For others it will be a triumphant year where underdogs took on the establishment and made their voices heard after years of repression.

In hindsight, this resurgent right has not come out of nowhere. The last financial crisis made right-wing Corporate America the scapegoat, and left-wing policies have flourished for a decade as a result. But while global markets are on track for bullish growth to take hold, some segments of the population in these recovering post-industrial economies have been undeniably left out.

Out with the Old

In the US for example, the DJI has beaten record levels and is expected to crest an almost mythical 20,000 level this year. Housing markets have turned and new homes are being built again. Unemployment levels have reached as low as 4.3%, which in economic theory is the “natural” unemployment level.

However, for about 63 million people who voted for Donald Trump, this recovery has left them behind. Many of these Americans are rural or blue-collar workers whose way of life was brushed off by left-leaning policies. For liberal Americans, the extension of increased government aid to this segment of working-class Americans should have been more than enough. However, the charity was not gladly accepted. What the blue-collar American wanted was to have security in their way of life, not the Silicon Valley promoting, innovation charged direction that left-leaning Americans supported.

A similar story can be told across many post-industrial nations with resurgent populist policies. While these movements can be easily portrayed as xenophobic and jingoistic, they are reaction to a very real economic shift.

The Left-Behind in the Spotlight

In 2016, I mentioned that corporate earnings will likely increase as cost cutting measures become implemented to rebalance books. And that has occurred, with companies ahead of the curve that I mentioned, such as Bank of America, delivering impressive results over the year. However, this rebalancing has been especially severe on the working-class as robotics and automation replace more and more human jobs. For Corporate America, these cuts are a necessity. But this time, there is no easy way back into the work force for those who are laid-off, as we are not seeing the extinction of an industry, but of an entire class of wage earner. So despite unemployment being at natural levels, many Americans have taken pay cuts and experienced reduction of position in order to keep the lights on. Many are still loaded with the debts they carried when they were at higher paying positions. To make matters worse, often times the housing turn has not yet reached them, and they have no easy access to equity.

So they shouted in anger, and here we are now, full of uncertainty. To what extent will President Trump reverse the course of globalization? To what extent will similar populist movements take hold across other post-industrial countries? How will these new political tides affect an increasingly tense geopolitical landscape as the connected world seems to get more and more crowded?

Investment Themes

Good News for Bulls

In the end, facts will be facts. Consumer spending is higher and even retailers are not proving to be as doomed as previously thought. New administrations are always under pressure to enact new policies and these will have to pass partisan lawmaking bodies. Expect to see growth in popular bipartisan areas like education, health-care and small business growth.

We will see increases in infrastructure spending and simplification of tax codes. Technological progress will continue, but ideally, there will be more effort to retrain instead of cut, as corporate earnings continue to grow. Companies which begin to promote internal advancement and training programs will be set up for the future. As private companies have the most leeway for this, I expect IPO markets to heat up again.

Symbolic Wars

The world will get over the election of Donald Trump and it will survive Brexit. It will brush off the election of Marine Le Pen and other such leaders if that does happen. Xenophobic movements are broadly weakened by an unafraid and connected youth, one segment that is increasingly discovering its voice.

In terms of economic policies, tariffs and trade wars are hot topics. However, enacting such measures beyond superficial and symbolic acts will likely prove more difficult then President Trump and cohort expected. Though a great metaphor, building a wall on the Mexican border will do little to prevent the determined from crossing, and will certainly do little to prevent the large network and drugs and arms that are trafficked through both ways of the border.

Make the Dollar Great Again

I expect a bullish dollar to be a trend, since the US recovery seems to be slightly ahead of the recoveries of other post-industrial countries.

While certain industries that had been the darling of the past administration, such as Green Tech and Bio-Pharma, may suffer from the lack of attention, other industries like Manufacturing and Consumer Goods will strengthen as the economy finds its new normal. This is not to say that old titans will prosper, but those who adapt best to a connected world will be able to generate more revenue.

In terms of Technology, companies will continue to find ways to capture more and more economic rents from consumers, but increasing competition may not strengthen the industries so much as divide them.

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