As April ends and May begins the soil in the north central states in the USA is very wet, not firm, and if you were to drive over it you would most likely get stuck.  The current political and financial state of the US, EU, Japan, and China are also not very firm, filled with potential potholes and sinkholes.

In the last four weeks international unrest has greatly increased: Syria was accused of using chemical weapons against its own people. Russia is accused of lying about the removal of the chemical weapons from Syria and of aiding and abetting Assad.  President Trump without asking the world’s permission, during his meeting with Chinese Premier Xi, bombed Syria and the military installation which the US believes the chemical weapons came from.  Russia then accused the US of acting illegally according to international law.

North Korea has been firing ballistic missiles toward Japan and others and making threats against the whole world.  The US issued statements that NK needs to behave or else, causing military dictator Kim Jung Un to say he would destroy the US and daring them to retaliate.  Trump then sent 5 ships off the coast of Korea to participate in war games with Japan, Australia and South Korea.  Russia then sent an aircraft carrier 25 miles off the coast of the US and the Chinese have mobilized 250,000 troops on the northern border of NK.  Putin has made it clear that things are spiraling out of control and cautions all sides not to take military action in a speech on Thursday April 27^th.

Along with these events the US dropped the largest non-nuclear bomb in existence on top of a series of ISIS tunnels in Afghanistan.  ISIS, however, has continued terrorist actions in France and other nations over the last week.

Politically, the Netherlands is trying to form a coalition government in the next 60 days or they will have another set of elections.  France has just had the first round of elections leaving LaPenn (the anti-establishment, anti-EU candidate) and Macron (the establishment candidate) to battle one another in a runoff election on May 9^th.  PM May of the UK has called elections 3 years early hoping to gain more seats and strengthen her ability to negotiate the Brexit from the EU, as the negotiations are not going well.  Italy has not called elections yet, but the anti-establishment candidate has a commanding lead.

On the economic front: the EU is treading water with a nearly zero growth rate, the US growth rate was reduced after the first quarter from 2.8% to .2% by the Atlanta Fed, China’s debt is scaring everyone including them, but Russia had one of the most improved economies in 2016 and is pegged to be one of the best preforming economies in 2017.

President Trump unveiled his tax plan this week which doubles the deduction for married couples, lowers the US Corporate tax from one of the highest rates at 35% to 15%, and reduces the number of tax brackets from 7 to 3. It eliminates the estate/death tax, retains mortgage and charitable deductions, but eliminates other deductions… more details to follow.

On April 28^th, the government is slated to run out of money, but will probably pass a temporary extension for a week.  A huge fight is brewing whether to raise or not raise the debt ceiling and at this point the various Washington factions each think they can win, so unless something changes a battle is almost guaranteed.  If the debt ceiling isn’t raised in the next month or two there will be a government shutdown, like there was during the Obama administration.  This time, however, things are different and no one knows what Trump, the Freedom Caucus, the Dems or the rest of the House and Senate will do.

US and global markets have not factored in a US government shutdown, a new war, another EU exit or non-establishment elected leader, so if one or more of the events occur, it will certainly rattle global markets.

Until next time,

Fulton Sheen

Media Source Links

Congress Does Bare Minimum to Keep Government Open Next Week (4-28-17

https://www.bloomberg.com/politics/articles/2017-04-28/house-does-bare-minimum-to-keep-u-s-government-open-next-week

US Economy Expands at the Slowest Pace in Three Years (4-28-17) Bloomberg Video https://www.bloomberg.com/news/videos/2017-04-28/u-s-economy-expands-at-slowest-pace-in-three-years-video

Federal Reserve Bank of Atlanta GDP Forecast for 2017 (4-27-17) https://www.frbatlanta.org/cqer/research/gdpnow  |

https://www.frbatlanta.org/-/media/Documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

White House Unveils Trump’s Opening Tax-Cut Bid (4-26-17)

https://www.bloomberg.com/news/articles/2017-04-26/white-house-unveils-trump-s-opening-bid-for-biggest-tax-cut

EU Toughens Brexit Stance in Sign U.K. Vote Won’t Alter Approach (4-20-17) https://www.bloomberg.com/politics/articles/2017-04-20/eu-toughens-brexit-stance-in-sign-u-k-vote-won-t-alter-approach

These Economies Are Seen Improving Dramatically This Year (3-20-17)

https://www.bloomberg.com/news/articles/2017-03-20/these-economies-are-seen-improving-dramatically-this-year

 

So How Did It Turn Out (updated 4-3-17)

The following events will very likely create a lot of volatility in both the political landscape as well as the global marketplace.  Any one of these events would be sufficient to create reverberations, but put together, they should create a high degree of uncertainty. Two of the four of the events below happened.

• The Federal Reserve meets next week on March 14-15 and will raise interest rates
• Dutch Elections will be held on March 15^th
• The UK plans to trigger Article 50, which will actually exit the EU
• French Elections are April 23^rd

There looks to be an almost 90% certainty that the Federal Reserve will raise interest rates, (they raised them .25 points) which normally means the USD will go up and the stock & bond market will go down.  This will cause borrowing in the US to become more expensive and businesses may choose to hold back expanding, mortgage payments will rise and consumers may not want to take on more debt at higher rates.  It also makes US debt (US bonds & treasuries) rates rise which increases the debt service payments that the US Treasury has to make on the now $20 trillion it owes the rest of the world, creating even a greater deficit.  This is especially true since a vast majority of the $20T is short term debt, a year or less which means it automatically goes up with interest rates like an ARM-mortgage.

On the same dates next week, the citizens of the Netherlands will be voting in their parliamentary elections, the results of which will not only decide which party will be in the majority, but also whether the Netherlands will stay or exit the EU.  Gerritt Wilder and the freedom party are currently leading in the polls and the same dire predictions which were made against Donald Trump and the UK exiting the EU are being made against him. Wilder’s party didn’t win the majority, but his party came in second in the amount of seats.  In a parliamentary system, if one party does not win an outright majority, it must form a coalition government which means they must work with other parties to achieve the number of seats necessary to form a working majority under one prime minister; if this can’t be achieved in 90 days they have to have new elections.  The winning party may or may not achieve this as they have already vowed not to work with Wilder’s party.  So what happens next? We’ll have to wait and see for the next 90 days, which continues to create uncertainty in the EU.   The EU is scared to death that another country may have a referendum and exit, but this would be the first exit of an EU nation currently using the Euro, which means it would go back to its original currency.  The Netherlands along with Germany is the only other solvent nation in the 19 Euro nations.  Their exit would hurt the European Central Bank (ECB) making them less solvent than they are already.

Prime Minister May, wants to trigger Article 50 before the end of March, which will mark the UK’s formal departure from the EU.  The only question is whether that will be a soft/negotiated exit or a hard/complete expulsion from the EU markets.  A soft/negotiated exit could take years, a hard exit with no negotiations would be immediate and would completely close EU markets to the UK.  Either option will create problems for both the EU and UK.  However, realistically the chances of a deal are not good.  In my opinion, the UK is in a no win situation and it would be in their best interest to do a hard Brexit.  They should ignore the EU, who want to make an example out of Britain, because they want to scare off other EU nations planning on exiting.  The UK’s future may be bumpy this year, but the EU’s prospects look much worse, and they are not in very good negotiating position because they are going to have to focus their attention on other potential exits of major members such as the Netherlands, France and Italy.  If these nations exit, the EU is over.

In April, French elections will determine the final two candidates who will run against each other in the final election a few months later.  Currently, another Trump-like candidate, Marie Le Pen, is leading all the polls.  If she is elected, she has promised to have a referendum to exit the EU.  Just like with Trump, Wilder and Brexit, all kinds of dire predictions and consequences are being pronounced if Le Pen wins.  Following the April elections, there will be an additional three months of uncertainty which will continue to rock world markets.  Although elections are not currently scheduled after the resignation of Italy’s prime minister in December, the leading candidate and party is another Trump-like figure who has promised an EU exit referendum.  Also three-time Prime Minister Berlusconi is proposing to bring back the Lira, the former Italian currency.

So hold on, as a whole lot of shaking is coming our way in the coming weeks.  For those of you waiting to exit before a lot of expected shaking, this may be one of those times.

U.K.’s May Battles Party Rebels for Power to Trigger Brexit (3-11-17)
https://www.bloomberg.com/news/articles/2017-03-10/u-k-s-may-faces-tory-brexit-backlash-over-her-no-deal-threat
Traders Prepped for the Fed. Then What (3-10-17)
https://www.bloomberg.com/view/articles/2017-03-10/traders-prepped-for-the-fed-then-what
Enter Berlusconi A Man a Ban and His Plan to Restore the Lira (3-9-17)
https://www.bloomberg.com/news/articles/2017-03-09/enter-berlusconi-a-man-a-ban-and-his-plan-to-restore-the-lira
The Euro Is Drifting Apart and the End of QE Could Worsen It (3-3-17)
https://www.bloomberg.com/politics/articles/2017-03-03/that-ever-closer-euro-still-hasn-t-arrived-as-qe-nears-its-end
Dutch Election Wide Open as All Vie to Pick Up Wilders Votes (3-5-17)
https://www.bloomberg.com/politics/articles/2017-03-06/dutch-election-wide-open-as-parties-vie-to-pick-up-wilders-votes
The Euro Is Drifting Apart and the End of QE Could Worsen It (3-3-17) https://www.bloomberg.com/politics/articles/2017-03-03/that-ever-closer-euro-still-hasn-t-arrived-as-qe-nears-its-end
Rutte Warns of Dutch Chaos If Populist Wilders Wins Election (3-2-17)
https://www.bloomberg.com/politics/articles/2017-03-03/rutte-warns-of-dutch-chaos-if-populist-wilders-wins-election
Italy Splitting into Oblivion (2-24-17) http://www.reuters.com/article/us-italy-eu-commmentary-idUSKBN1631QK
Populism Is Shaking the Edifice of Central Bank Independence (2-27-17)
https://www.bloomberg.com/news/articles/2017-02-27/age-of-populism-shakes-pedestal-of-central-bank-independence
Le Pen Gains in French Polls as Security Concerns Win Voters (2-20-17)
https://www.bloomberg.com/politics/articles/2017-02-20/le-pen-advances-in-french-polls-as-security-concerns-sway-voters-izef48iu