Ambrose Evans-Pritchard is back in the Fairfax press and the UK Telegraph talking up the prospect of a 2017 crunch:
Trump’s reflation rally will short-circuit. Rising borrowing costs will blow fuses across the world before fiscal stimulus arrives, if it arrives.
By the end of 2017 it will be clear that little has changed. Powerful deflationary forces retain an invisible grip over the global economy. Bond yields will ratchet up further and then come clattering down – ultimately driving 10-year US yields below zero before the decade is over.
I worry about the extreme nature of Evans-Pritchard’s calls and the timing more than I worry about the general direction.
I’m on board with the thought that the Trump effect will be transient. Will everything come crashing down in 2017? Maybe, but if the Trump tax cuts get passed in the first 100 days and implemented as soon as possible, the tax cuts are unlikely to be in much before the middle of the year. So, as poorly targeted and regressive as the tax cuts are, they are large, so I’m struggling to understand how the effect will have faded by the end of the year.
Will Trump clamp down on spending (as Evans-Pritchard suggests) hard enough to crash the US economy? Maybe, but that seems to be a large logical leap when we are really not sure what Trump is going to do.
More from Evans-Pritchard on the Trump effect:
Once markets accept that Trump is not bluffing – that he means to smash globalism – euphoria will give way to alarm, but for now Wall Street remains intoxicated on wishful thinking.
This may be true. Then again Trump may be taking an extreme position with China/Mexico/Canada to negotiate back to a more reasonable one. I don’t know which is true. Evans-Pritchard doesn’t know. I am not even 100% confident that Trump knows.
If we are in for a trade war in 2017, then Ambrose is right about the effect on the stock market and bond rates. But, I struggle to understand what Trump will and won’t do (as does most of the market), and trade wars are not a natural Republican policy whereas tax cuts are.
So, I’m not saying that a credit crunch won’t happen in 2017. And I do worry markets have gotten ahead of themselves in the Trump reflation rally. But, I’m wondering about the wisdom of basing your expectations on being certain about what Trump will and won’t do.
Now is the time for flexibility in your investment outlook.