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IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
JANUARY 11 , 2017
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We begin a New Year at IntelDigest, a year of new challenges and opportunities in the global economy. Old problems persist into 2017; are there new solutions to these problems? We will see if new policies of a unified Republican government can overcome long-standing economic trends which threaten to plunge America into recession, or worse.
Ours is still the leading economy in the world. We may no longer dominate the world economy as we did in the post-war (WWII) years, but American business and industry still leads, and the American government still carries the greatest influence around the world. For all their economic strength, China and Japan and the European Union stand in second place to the United States.
The performance of the American economy in the next few years has the potential to “lift all boats” in the global economy, or allow Moby Debt to sink the fleet. (Too dark?).
Today, we discuss the transition from the Old to the New. In coming weeks, we will delve into the myriad issues facing our country and our society:
Policy Issues, such as Tax Reform, Infrastructure Development, Trade Policy and Offshoring, healthcare and retirement, a Trump Doctrine in foreign affairs, the National Debt, Fiscal Responsibility
Societal Issues, such as Nationalism, The Future of Work, survival of the American Middle Class, Technological Advances and their impact on productivity and employment, Fake News and Fake Economics
Geopolitics, such as our relations with our allies around the world and with China and Russia, the status of the European Union, struggles in the Islamic world
Investment in Gold and Silver, the Trump Trade, direction of the markets, investing in China, robotics and automation, a rebound in commodities
As they say in Television, stay tuned …..
Transition
For much of the last 15 years, world economies have been dominated by monetary policies of The Federal Reserve and other major central banks. These policies can most kindly be referred to as “experimental.” In the most radical experiment ever undertaken by central banks, interest rates were brought lower and lower until they hit Zero (and below).
By manipulating the “price of money” to unheard-of levels, the central banks have altered all the global economies and distorted prices and values. This manipulation has encouraged massive borrowing, by both governments and corporations. As explained in the December 14 issue of IntelDigest:
U.S. corporations now carry on their balance sheets the highest level of financial risk in our history. Companies took advantage of the historically-low interest rates served up by The Federal Reserve and other central banks, and borrowed unprecedented amounts of money. In every year from 2010 through 2015, U.S. corporations borrowed at least a Trillion Dollars.
Did this borrowing spur growth in the economy? It did not. Many companies used the funds to buy back shares rather than increase capital expenditures, productivity and sales.
Individuals have had their savings accounts devastated by this manipulation. Although some have taken advantage of ultra-low rates to borrow for real estate speculation and personal expenditures, the vast majority of individuals and families have endured stagnant savings while reaping no benefit in the credit markets.
It is telling that … despite the lowest cost of borrowing in history … the home ownership rate in the U.S. is at its lowest level in 45 years!
With a new administration about to take office, it now appears that monetary policy will share the spotlight with some aggressive new fiscal policies.
Opinions on Donald Trump are as divided as the American electorate, and it is difficult to predict what policies and pronouncements may come from The White House (via Twitter) after Inauguration Day. However, it is likely that an unorthodox presidency will “shake things up” in the federal government and the economy.
As we discussed in the November 23 issue of IntelDigest:
…. the broad markets have rallied in the short-term … and will probably do so into early next year … on the expectation that a Trump presidency will be good for business. The President-Elect has vowed to lower taxes (especially on corporations), commit Hundreds of Billions of Dollars to infrastructure spending, and reduce government regulation. Investors are encouraged, and have piled into equities since Election Day.
A unified Republican government is already seen as pro-business, which should continue to buoy the markets in the short-term. Aggressive fiscal policies … if the President-Elect and Congress follow through on promises … would be viewed as a welcome change of pace from the years of domination and experimentation by the Federal Reserve.
Indeed, lowering corporate tax rates and encouraging repatriation of profits from overseas is likely to be near the top of the agenda for the new administration. This is a policy which can pass the Congress with less controversy than other proposals likely to come up in the first 100 days.
The Trump Agenda also focuses on substantial … some would say “dramatic” … public works and infrastructure projects, taking advantage of the historically-low interest rates to rebuild roads, bridges, ports, airports, et al.
Democrats have long favored such a program, but the Republican-controlled House and Senate blocked Obama Administration proposals. The Trump Administration will probably be able to push at least $500 Billion of projects through Congress.
From an investor’s viewpoint, Infrastructure spending would favor industrial companies, the construction sector, and materials. While corporate tax reforms would provide a boost across most markets. Market movement in the Spring and Summer of this year will be tied to the success or failure of the new administration.
Will Trump and the Republicans succeed in pushing such an agenda forward? If they do, will it actually help to grow the economy faster and start to work off our vast National Debt? Will The Fed throw a monkey wrench into the works?
In upcoming issues of IntelDigest, we will survey those new policy proposals which are likely to become law, and examine their impact on the economy and markets. We will discuss the “Trump Trade,” which is expected to be inflationary, and follow the reactions of the Federal Reserve to the economic initiatives of the Congress and the President.
There will be much to discuss over the course of this New Year, and we hope that you will find value in our work.