Many things happened in 2017 that no one anticipated or expected. The Dow finished at 24,719.22, the highest annual close in history. On January 24th, the markets opened with the Dow at 26,307, Gold at $1,357 and silver at $17.33. The US economy and markets were not expected to do as well as they did. President Trump’s tax reform & deregulatory actions helped boost market expectations.
In the first month of 2018, President Trump issued some of the promised tariffs on solar panels and washing machines which are a part of his America First plan. The US government also shut down, only to be refunded a few days later for three more weeks. It will probably shut down again in February, as the Democrats and Republican threaten each other with the political hammer of a future shut down. The one person in Washington who is benefitting is President Trump, who is continuing to stand firm on immigration and getting the border wall built. Stay tuned for Feb 8th when the US government runs out of money again.
The WSJ reported, “Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies critical to home mortgages, but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down.” WSJ also expressed concerns about the market saying:
Bond yields are on the rise again, and it’s making shareholders jittery. They are right to worry, as low yields are the main support for historically high stock valuations. Shares are very expensive compared with their own history on almost every measure, but compared with locking in a paltry 2.5% for 10 years they don’t look so bad. Working out this equity risk premium is contentious, to put it mildly. Worse, we know that when investors are overly optimistic they overestimate earnings, making it look like the reward for holding equities is higher. If the narrative changes, bond yields could rise rapidly. Perhaps 2018 is the year inflation fears finally arrive.
Rising bond yields are causing shareholders to worry, as low rates are the main support for historically high stock valuations. One positive correction in the banking market is the repeal of the Jimmy Carter era mandatory requirement for banks to lend to low income borrowers, which was a major contributor to the 2008 financial and real estate crisis.
US Imposes New Tariffs, Ramping Up ‘America First’ Trade Policy (1.22.18)
https://www.wsj.com/articles/u-s-imposes-trade-tariffs-signaling-tougher-line-on-china-1516658821
Congress Passes Three-Week Spending Bill to End Shutdown (1.22.18) WSJ
https://www.wsj.com/articles/senate-expected-to-advance-bill-that-would-end-shutdown-1516641107
Deadline Passes, Triggering Shutdown (1.20.18) WSJ
Shares Are Wildly Overpriced. But Bonds May Be Even Worse (1.11.81) WSJ
https://www.wsj.com/articles/shares-are-wildly-overpriced-but-bonds-may-be-even-worse-1515694390
Trump Officials Seek to Change Rules on Lending to the Poor (1.10.10) WSJ
Government Shifts Gears on Fannie Mae, Freddie Mac (12.16.17) WSJ
https://www.wsj.com/articles/government-shifts-gears-on-fannie-mae-freddie-mac-1513515600
Senate Passes Sweeping Revision of U.S. Tax Code (12.2.17) WSJ
https://www.wsj.com/articles/senate-passes-sweeping-revision-of-u-s-tax-code-1512197717
World Markets
EU and UK markets and economies continue to perform well in spite of the ups & downs of Brexit talks. Bloomberg reported Europe’s growth resurgence is showing little sign of losing steam. Angel Talavera, an economist at Oxford Economics in London Said, “The rebound in the hard numbers provides a more consistent growth picture for the eurozone.” The latest forecasts predict that Germany, France and Spain will all grow 2 percent or more this year. In Italy, where elections are one of the key risk factors, expansion may slow to 1.4 percent from 1.6 percent. Christian Lips of NordLB Hanover said, “We are optimistic for 2018 and expect the upswing to continue with similar momentum … However, the currently positive corporate and consumer sentiment should not obscure the fact that the forecast for 2018 is subject to considerable risks, including geopolitical conflicts, political risks, Greece, and elections in Italy.”
EU businesses are letting Brussels know they are not happy with US regulatory reform & tax reform, because it makes their top heavy bureaucracy, over regulated and over taxed system less competitive. This is a perfect example why competition is positive. Bloomberg reported that the International Energy Agency predicted the US is positioned to dominate global gas and oil markets for many years to come, thanks to their resumption of crude oil sales and the shale oil production. In New Zealand, home purchases by non-citizens have been banned in an attempt to quell the property value bubble created by foreign home buyers. The US has dropped out of the top 10 most innovative countries in the world, South Korea holds the number one seat, Sweden is number two for the second year in a row. Singapore, Germany, Switzerland, Finland, Japan and France, placed in the top 10 as well. President Trump ruffled more feathers in Brussels right before he exited the annual International Finance meetings in Davos Switzerland, by threatening retaliation against the EU unfair trade policies.
President Trump Hints at Retaliation Against EU for Unfair Trade Policies (1.28.18) WSJhttps://www.wsj.com/articles/president-trump-hints-at-retaliation-against-eu-for-unfair-trade-policies-1517157101
The U.S. Drops Out of the Top 10 in Innovation Ranking (1.24.18)
Euro-Area Economic Boom to Roll on After Strong Start to 18 (1.15.18)
U.S. Tax Plan Draws Attacks Abroad, Prompts Calls for Cuts in Response (12.11.17) WSJ https://www.wsj.com/articles/european-finance-chiefs-hit-out-at-u-s-tax-plans-1513000469
U.S. to Dominate Oil Markets After Biggest Boom in World History (11.13.17)
New Zealand Bans Foreign Home Buyers (10.25.17) BBC | https://www.bbc.com/news/amp/business-41745129
Central Banks
Most Central banks are talking interest rates hikes, and US, UK & Australian banks have already began raising rates. While the EU economy has seen improvement, it’s not enough to stop printing money and raise interest rates, but they are giving lip service to scaling down their bond buying. Japan and many EU nations are staying pat and keeping their negative rate positions. Italy’s fragile economy is very concerned about the ECB raising interest rates, thereby reducing the amount of Italian debt that would be purchases by the EU, potentially derailing its meager recovery. In December, former Federal Reserve Chair Janet Yellen raised the bench mark interest rate and said the Fed expects to raise rates three times in 2018; new Fed Chair Jerome Powell expects to raise them as well. There is potential for change in Fed policy, as President Trump has appointed a new chairman and three new Federal Reserve Board members.
Fed Raises Rates, Eyes Three 2018 Hikes as Yellen Era Nears End (12.13.17) https://www.bloomberg.com/news/articles/2017-12-13/fed-raises-rates-while-sticking-to-three-hike-outlook-for-2018
European Shares Down as ECB Leaves Rates Untouched (12.14.17) WSJ
ECB to Scale Down but Extend Bond-Buying Program (10.26.17) WSJ
https://www.wsj.com/articles/ecb-to-scale-down-bond-buying-program-into-2018-1509018685
Italy Faces Challenge of Living Without ECB Alchemy (10.29.17) WSJ
https://www.wsj.com/articles/italy-faces-challenge-of-living-without-ecb-alchemy-1509274805
Currency
Bloomberg’s dollar index approached its lowest level in three years as the euro extended gains that have pushed it to its strongest positioning since 2014. Mexico’s peso was the big outperformer as emerging currencies gained, while the yuan reached a two-year high as the People’s Bank of China raised the currency’s fixing. The dollar remains under pressure after five straight weeks of declines, despite solid U.S. growth. The German central bank’s decision to include the Chinese yuan in its own reserves was another factor dragging on the dollar. On Jan 14, The Bloomberg Dollar Spot Index declined 0.6 percent to the lowest in about three years. The euro climbed 0.6 percent to $1.2274, the strongest in more than three years. The British pound increased 0.6 percent to $1.3811, the strongest in about 19 months. The Japanese yen appreciated 0.5 percent to 110.53 per dollar, hitting the strongest in more than four months. The Mexican peso jumped 1.2 percent to 18.8176 per dollar, the strongest in almost six weeks. On January 24, at the world finance meetings in Davos Switzerland, the US made it clear that the USD value is going lower, making US products more competitively priced in the international market place.
Hong Kong is a rare exception in the world. The Hong Kong Monetary Authority, the country’s central bank, is among the best capitalized on the planet. Plus, the government is awash with cash and routinely runs substantial budget surpluses. Hong Kong has virtually zero debt and nearly $1 trillion Hong Kong dollars ($126 billion) in net foreign reserves. At some point Hong Kong will be depegging form the USD and when it does it will shoot up in value.
Gold Rally Picks Up Steam as Dollar Falters (1.27.18)
https://www.wsj.com/articles/gold-rally-picks-up-steam-as-dollar-falters-1517054401
White House Declares Open Season on the Dollar at Davos (1.24.18)
Dollar Slide Deepens as Euro Strength Saps Stocks: Markets Wrap (1.14.18) https://www.bloomberg.com/news/articles/2018-01-14/asia-set-for-equity-gains-on-economic-optimism-markets-wrap
Own This Currency No Its Not a Cryptocurrency (10.18.17) SMC
Cryptos
The biggest surprise in 2017 was the crypto currency market expansion into the mainstream which left every other market in its dust. Even Bank of America’s chairman Jamie Dimon had to eat his own words. Crypto currencies are now in hedge funds, banks, retail and business purchases, they are here to stay and they are going to expand into both the investment and everyday buying and selling of world markets. However, the SEC and other market regulators are making moves to try and reign in the wild wild west crypto currency market.
Bitcoin continues its unpredictable radical ups and downs, however after a 1000% plus gains in 2017, but in 2018 has been mostly down. Bloomberg reported:
Bitcoin was overbought and sentiment was ecstatic,” said Ari Paul, chief investment officer of BlockTower Capital Advisors. “This is an overdue correction triggered by South Korean regulation fears.” In South Korea, a hotbed of trading, regulators warned they may shut down cryptocurrency exchanges completely after limiting their operations. China is said to have intensified its curbs on trading of the digital coins, extending restrictions to over-the-counter and peer-to-peer platforms after banning exchanges last year. In the U.S., the Securities and Exchange Commission asked at least 15 funds to pull applications this month for bitcoin-related exchange-traded funds. Bloomberg went on to write, In 2018, things will be different,” says Eugéne Etsebeth, formerly of the South African Reserve Bank. “G7 central banks will start buying cryptocurrencies to bolster their foreign reserves,” he affirms, concluding: “Central bank money will pour into cryptocurrencies.” Here is a voice not of the bitcoin glee club or the moon-mad fringe… but a former central banker… a totem of the establishment. Our agents have also forwarded us the following dispatch, by way of Peter Smith, CEO of Blockchain: I think this year will be the first year we start to see central banks start to hold digital currencies as part of their balance sheet.
Germany has developed some of the most sophisticated crypto platforms. The German people have embraced cryptocurrencies because of their love for cash and irritation with the EU central bank negative interest rates and money printing, both of which have lowered the value of German currency. Even the IMF is looking into creating its own crypto currency; I suspect the crypto craze will continue its invasion into markets, businesses and banks in 2018.
Bitcoin Finds a Home in Cash-Loving Germany (1.17.18) WSJ
https://www.wsj.com/articles/bitcoin-finds-a-home-in-cash-loving-germany-1515330000
Bitcoin Steadies After 26% Slump as Traders Brave Volatility (1.7.18)
SEC Statement on Cryptocurrencies and Initial Coin Offerings (12.11.17)
SEC Chairman Jay Clayton | https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11
SEC Halts a Real Initial Coin Offering (12.12.17) WSJ
https://www.bloomberg.com/view/articles/2017-12-12/sec-halts-a-real-initial-coin-offering
IMF’s Lagarde says digital currencies could boost its own SDR (9.29.17) Reuters
Debt
In January, Venezuela’s oil industry has continued it’s decent into collapse. The S&P declared Venezuela in default on their bond payments which they paid late, but there is little hope in their ability to make any future is payments; default looks to be a foregone conclusion for 2018.
According to Bloomberg, “US delinquencies on subprime loans made by non-bank lenders are soaring toward crisis levels. Fresh investment has dried up and some of the big banks, long seen as potential suitors, have pulled back from the auto lending business. To top it off, state regulators are circling the industry, asking whether it preyed on borrowers and put them in cars they couldn’t afford.”
Reuters reported that China announced deleveraging, asset management and other financial reforms and is moving very quickly to implementing these reforms. The IMF and international rating agencies have been encouraging them to do this for some time. Bloomberg also reported:
A Chinese central bank official said China should allow local governments to go bankrupt to help rein in regional authorities’ excessive borrowing. Vice Finance Minister Zhu Guangyao said on Saturday that addressing “hidden debts” of local governments and state-owned companies’ debts are key to prevention of systemic financial risks, the China Securities Journal reported. China may very well devalue its own currency later this year, as they did in 2015, in order to pay off some of their debt. .
Venezuela Has Some Bad News and Some Really Bad News (1.18.18)
China Central Bank Official Says Bankruptcy May Benefit the Country (12.24.17) https://www.bloomberg.com/news/articles/2017-12-25/pboc-official-says-local-government-bankruptcies-are-needed
Subprime Auto Defaults Are Soaring, and PE Firms Have No Way Out (12.21.17) https://www.bloomberg.com/news/articles/2017-12-21/subprime-auto-defaults-are-soaring-and-pe-firms-have-no-way-out
Markets Get Wake-up call from China’s Post-congress Deleveraging Moves (11.28.17)
Venezuela’s Bondholder Meeting Is a Bust as S&P Declares Default (11.14.17) https://www.bloomberg.com/news/articles/2017-11-14/venezuela-s-bondholder-meeting-is-a-bust-as-s-p-declares-default
Brexit
The only thing the UK & EU have agreed upon is the divorce settlement. The battle lines for Brexit remain immovable with each side saying the other must relent. Foreign Secretary Boris Johnson and Environment Secretary Michael Gove say the country’s best hope lies in setting its own regulations, even if that means tougher trading restrictions. According to Bloomberg:
Johnson fired a fresh salvo over the weekend, using an interview with the Sunday Times to call for a “liberal Brexit.” He said the advantages of leaving the EU haven’t been properly outlined to the public. He said the U.K. must strike a trade deal that gives it the power to discard EU laws, and that failure to do so would render Britain a “vassal state” of Brussels.
The prospects of a soft Brexit (negotiated settlement) appear low, with a hard Brexit (exiting the EU market with no trade deal) looking far more likely. As long as both sides at least pretend to be negotiating, the formal trade agreements remain in place, so the UK might as well string it out, since they know that hard exit is the most likely outcome.
UK & EU Reach an Agreement on Brexit Divorce Terms (12.8.17) WSJ
https://www.wsj.com/articles/u-k-european-union-reach-deal-on-brexit-divorce-terms-1512716442
May Risks Brexit Row Over Migration and Trade During Transition (12.17.17)
Political Unrest
There is great political unrest throughout the nations and it does not appear the turmoil will subside anytime in the near future. Much of this turmoil is being caused by the clash between the rise of nationalism and the push for globalism. It’s happening in the UK, US, Poland, Spain Italy, Austria and many other nations. People in the EU, don’t want be Europeans, they want be British, Italian, Polish, etc. People are resisting becoming one global community, they want to be nations with their own unique culture history and identity and this trend seems to be increasing.
According to the WSJ: Italy’s President Sergio Mattarella dissolved parliament Thursday and called elections for early March, a vote that will highlight the economic and political problems still stalking Europe and the country’s role as the weakest flank in the currency union. The vote—the latest in a series of momentous elections in Europe—will be in line with the overwhelming trends of 2017, featuring a fractured electorate, continued pressure from populist movements and predictions of a struggle to form a cohesive government. But for many European leaders, Italy remains the most worrisome spot in the eurozone, given the huge size of its public sector debt, its weak banks and poor competitiveness. The elections, set for March 4, aren’t likely to put those concerns to rest, as the center-left tries to fend off a populist upstart and the return of Silvio Berlusconi, the 81-year-old whose political rebirth is further shaking up politics. The 5 Star Movement—the anti-establishment group that stormed Italian politics during the crisis on popular anger with legacy politicians—could win about 30% of the vote.
Italy experienced much conflict with the EU throughout 2017, resulting in the growing anti-EU sentiment among its citizens and political candidates. Depending on the outcome of Italian elections, Italy may propose its own referendum to exit the EU.
German Chancellor Angela Merkel, who was supposed to be the strongest leader in the EU, has not been able to form a cohesive government. The WSJ reported, “The failure of Ms. Merkel has left Germany in one of the worst political crises of its postwar period. The poll also showed that 67% of Germans think Ms. Merkel’s best days as chancellor are behind her. If they are not, Ms. Merkel will have to rule Germany with the first minority government in its postwar history or ask voters to return for a second ballot.”
Poland is ignoring EU court rulings against it and is being looked at like a rogue state by the EU. Catalan separatist have won elections once again in Spain and continue their quest for independence. The European Union is anything but united.
The EU is not alone in its political and economic uncertainty, Venezuela is being sanctioned by most of the Western nations, further complicating their deteriorating economy. Turkey just invaded Syria and is attacking the Kurds, ignoring warnings from the US, UK, Russia. China just accused the US of incursion of their territory in the South China Sea. Palestinian UN reps called for countries to repeal their recognition of Israel as a nation. Saudi Arabia is positioning itself for a territorial conflict with Iran, and the Iranian people have been violently protesting their government. This is just few of these international incidents, as many others nations are experiencing financial and territorial disputes.
US legislators and the Trump Administration are continuing to shake up world economies and foreign policy by: recognizing Jerusalem as the capital of Israel, reducing funding to the UN, putting new trade tariffs into effect, raising interest rates, immigration policies, tax reform and pushing America First policies.
As Turkey Invades, Kurds See Betrayal Once Again (1.23.18) WSJ
https://www.wsj.com/articles/as-turkey-invades-kurds-see-betrayal-once-again-1516709168
Next Year in Jerusalem (12.22.17) WSJ | https://www.wsj.com/articles/next-year-in-jerusalem-1513984384
Turkey’s President Dismisses U.S. Call for Restraint Along Syria Border (1.22.18) WSJ
DHS Secretary Reveals Crackdown is coming against leaders of Sanctuary Cities (1.17.18) GB https://www.theblaze.com/news/2018/01/17/dhs-secretary-reveals-crackdown-is-coming-against-leaders-of-sanctuary-cities-heres-what-she-said
Merkel Begins Last-Ditch Effort to Form Coalition Government (1.7.18) WSJ
https://www.wsj.com/articles/merkel-begins-last-ditch-effort-to-form-coalition-government-1515338103
Iranians Protest Over Economic Malaise (12.30.17) WSJ
https://www.wsj.com/articles/iranians-protest-over-economic-malaise-1514579608
Italy’s President Calls National Elections as Country Grapples with Economic Pain (12.28.17) WSJ | https://www.wsj.com/articles/italys-president-calls-national-elections-as-country-grapples-with-economic-pain-1514481781
Poland Risks Being the EU’s Rogue State (12.10.17)
Catalan Separatists Have a New Plan to Defy Madrid’s Authority (11.25.17) https://www.bloomberg.com/politics/articles/2017-11-25/catalan-separatists-have-a-new-plan-to-defy-madrid-s-authority
Australian Government Loses Majority After Court Ousts Dual-Citizen Lawmakers (10.27.17) WSJ https://www.wsj.com/articles/australian-government-loses-majority-after-court-disqualifies-lawmakers-1509076826
Austrian Vote Paves Way for Nationalist Party to Enter Government (10.15.17) https://www.bloomberg.com/news/articles/2017-10-15/austria-shifts-to-right-in-election-that-empowers-nationalists
Conclusion
The last weekend in January finance ministers, treasurers, directors and financial services business met in Davos Switzerland to access & discuss the current state of global economies and markets. Many of the attendees were upbeat and the IMFs Christine Laguard expected growth to be on the increase in 2018. President Trump, US Treasurer Mnuchin and a large US delegation arrived and put a damper on globalist aspirations. President Trump declared that America was open for business and that the world has nothing to fear and will benefit from his America First policies. Central bankers and many global leaders aren’t happy about US policy, but international corporations doing business in the US were supportive. US markets continue rise and optimism continues to prevail. The EU, Japan, the emerging markets all seem to be moving in a positive direction. Unfortunately, the other thing that is rising along with the markets in these nations is their debt. Many economies like the EU and Japan are still being fueled by artificially low interest rates, and money printing. We enter 2018 with a positive outlook and rising markets, but there are undercurrents that will eventually push to the surface and have to be dealt with.
Business, Political Leaders Size Up Trump’s Speech at Davos (1.27.18) WSJ
https://www.wsj.com/articles/business-political-leaders-size-up-trumps-speech-at-davos-1516983624
Davos 2018 Updates From the World Economic Forum (1.27.18) WSJ
https://www.wsj.com/livecoverage/davos-2018?mod=wsjapp
White House Declares Open Season on the Dollar at Davos (1.24.18)
Trump Tells Davos America First Will Benefit the World (1.26.18)
The IRS’s Guidance on Property Taxes Has the U.S. Confused (12.28.17)
Tax Changes Are Coming Monday Here’s When it Will Affect You (12.29.17) MSN | http://www.msn.com/en-us/money/taxes/tax-changes-are-coming-monday-here%e2%80%99s-when-it-will-affect-you/ar-BBHt4wp?li=BBnb7Kz&ocid=UE07DHP
Russia Skirts U.S. Sanctions With $27 Billion Arctic Gas Plant (12.9.17) WSJ
https://www.wsj.com/articles/russia-skirts-u-s-sanctions-with-27-billion-arctic-gas-plant-1512731306
CFPB Chief Mulvaney Says Days of Pushing the Envelope Are Over (1.24.18)
Fulton's Perspective on Global Economies, Markets & Political Events 