“Kee” Points with Jim Kee, Ph.D.


  • IMF Outlook
  • Financial Shocks
  • Limited Impact of Tax Cuts?
  • Geopolitical Shocks
  • Inward Policies

We have completed our annual market updates here at STMM, and for Kee Points this week I thought I would share the key takeaways from my part of the talks.

 

IMF Outlook

The International Monetary Fund (IMF) reported stronger global growth in 2017 than in 2016, with growth in 2018 expected to be stronger still. There are a lot of concerns out there, from whether the Fed will raise rates too high or too quickly, to whether an infrastructure bill will be passed. But the IMF listed four specific areas of potential concerns or shocks that would threaten the positive outlook, and these are what I addressed in my portion of the market updates:


Financial Shocks

1) Financial shocks: Last summer, then Fed Chair Janet Yellen suggested that the odds of another financial shock like 2007-2009 occurring in our lifetime is about zero, largely because of better regulatory oversight and bank financial health. Yellen is not really prone to overstatement. And inflation is due to pick up a bit with stronger growth, but I don’t expect a real inflation breakout (headlines to the contrary). And I see the dollar moving into the $1.20 to $1.30 euro range as normalization more than anything else. So monetary/financial concerns weren’t on the top of my list.

 

Limited Impact of Tax Cuts?

2) The US tax cuts won’t be as impactful to business investment spending as is hoped: My sense is that this outcome is less likely because the tax cuts are occurring amidst a turnaround in the regulatory mindset towards less regulation. The real unknown here is the sense of permanence, as tax and regulatory changes are more impactful to real long-view capital spending if they are deemed to be more permanent than temporary (i.e. lasting more than just one or two election cycles). To be sure, the US has experienced some pretty dramatic political swings in recent years, from the total Democrat sweep in 2008, to the rise of the Tea Party in 2012, to the Republican sweep in 2016. But I do expect to see a pickup in business spending, commensurate with the pickup we’ve seen in business confidence. So this wasn’t on the top of my list of concerns either.

 


Geopolitical Shocks

3) Geopolitical shocks: Geopolitical concerns are ever-present, from North Korea to Russia to the Middle East. But I mentioned in our market updates that prior shocks have tended to have a transient impact on markets. In prior bull markets, shocks ranging from the Cuban Missile Crisis, to the Kennedy assassination, to Watergate caused an average 4%-5% decline in markets that rebounded fairly quickly. So I mentioned this as less of a concern as well. 


Inward Policies

4) Inward policies: Trade wars, that is. The rise of protectionism. This was the one that I felt was the biggest true threat, if pursued, and we saw a little bit of that last week with tariffs proposed for steel, aluminum, and perhaps even auto imports. Wealth is created by production or specialization and exchange, and a true global trade war would be a threat to the web of specialization and exchange that characterizes today’s interconnected global economy. But true political free traders are really kind of rare, both here and abroad, so there’s always the potential for interventionist rhetoric and gamesmanship as well as true trade restrictions. During the Great Recession, the world recognized global interdependence quite clearly, and all of the fear mongering over things like China dumping Treasuries to crash US markets, etc., never occurred. It was quite the opposite–an almost unprecedented global effort to restore confidence and cooperation (and a hugely underreported story!). I’m hoping that’s what we’ll see more of in 2018, and that’s what I’m watching most closely.