The future of liberalism

How to make sense of 2016

Liberals lost most of the arguments this year. They should not feel defeated so much as invigorated
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FOR a certain kind of liberal, 2016 stands as a rebuke. If you believe, as The Economist does, in open economies and open societies, where the free exchange of goods, capital, people and ideas is encouraged and where universal freedoms are protected from state abuse by the rule of law, then this has been a year of setbacks. Not just over Brexit and the election of Donald Trump, but also the tragedy of Syria, abandoned to its suffering, and widespread support—in Hungary, Poland and beyond—for “illiberal democracy”. As globalisation has become a slur, nationalism, and even authoritarianism, have flourished. In Turkey relief at the failure of a coup was overtaken by savage (and popular) reprisals. In the Philippines voters chose a president who not only deployed death squads but bragged about pulling the trigger. All the while Russia, which hacked Western democracy, and China, which just last week set out to taunt America by seizing one of its maritime drones, insist liberalism is merely a cover for Western expansion.

Faced with this litany, many liberals (of the free-market sort) have lost their nerve. Some have written epitaphs for the liberal order and issued warnings about the threat to democracy.

Others argue that, with a timid tweak to immigration law or an extra tariff, life will simply return to normal. That is not good enough. The bitter harvest of 2016 has not suddenly destroyed liberalism’s claim to be the best way to confer dignity and bring about prosperity and equity. Rather than ducking the struggle of ideas, liberals should relish it.
Mill wheels
 
In the past quarter-century liberalism has had it too easy. Its dominance following Soviet communism’s collapse decayed into laziness and complacency. Amid growing inequality, society’s winners told themselves that they lived in a meritocracy—and that their success was therefore deserved. The experts recruited to help run large parts of the economy marvelled at their own brilliance. But ordinary people often saw wealth as a cover for privilege and expertise as disguised self-interest.

After so long in charge, liberals, of all people, should have seen the backlash coming. As a set of beliefs that emerged at the start of the 19th century to oppose both the despotism of absolute monarchy and the terror of revolution, liberalism warns that uninterrupted power corrupts.

Privilege becomes self-perpetuating. Consensus stifles creativity and initiative. In an ever-shifting world, dispute and argument are not just inevitable; they are welcome because they lead to renewal.

What is more, liberals have something to offer societies struggling with change. In the 19th century, as today, old ways were being upended by relentless technological, economic, social and political forces. People yearned for order. The illiberal solution was to install someone with sufficient power to dictate what was best—by slowing change if they were conservative, or smashing authority if they were revolutionary. You can hear echoes of that in calls to “take back control”, as well as in the mouths of autocrats who, summoning an angry nationalism, promise to hold back the cosmopolitan tide.

Liberals came up with a different answer. Rather than being concentrated, power should be dispersed, using the rule of law, political parties and competitive markets. Rather than putting citizens at the service of a mighty, protecting state, liberalism sees individuals as uniquely able to choose what is best for themselves. Rather than running the world through warfare and strife, countries should embrace trade and treaties.

Such ideas have imprinted themselves on the West—and, despite Mr Trump’s flirtation with protectionism, they will probably endure. But only if liberalism can deal with its other problem: the loss of faith in progress. Liberals believe that change is welcome because, on the whole, it is for the better. Sure enough, they can point to how global poverty, life expectancy, opportunity and peace are all improving, even allowing for strife in the Middle East. Indeed, for most people on Earth there has never been a better time to be alive.

Large parts of the West, however, do not see it that way. For them, progress happens mainly to other people. Wealth does not spread itself, new technologies destroy jobs that never come back, an underclass is beyond help or redemption, and other cultures pose a threat—sometimes a violent one.

If it is to thrive, liberalism must have an answer for the pessimists, too. Yet, during those decades in power, liberals’ solutions have been underwhelming. In the 19th century liberal reformers met change with universal education, a vast programme of public works and the first employment rights. Later, citizens got the vote, health care and a safety net. After the second world war, America built a global liberal order, using bodies such as the UN and the IMF to give form to its visión.

Nothing half so ambitious is coming from the West today. That must change. Liberals must explore the avenues that technology and social needs will open up. Power could be devolved from the state to cities, which act as laboratories for fresh policies. Politics might escape sterile partisanship using new forms of local democracy. The labyrinth of taxation and regulation could be rebuilt rationally.

Society could transform education and work so that “college” is something you return to over several careers in brand new industries. The possibilities are as yet unimagined, but a liberal system, in which individual creativity, preferences and enterprise have full expression, is more likely to seize them than any other.

The dream of reason
 
After 2016, is that dream still possible? Some perspective is in order. This newspaper believes that Brexit and a Trump presidency are likely to prove costly and harmful. We are worried about today’s mix of nationalism, corporatism and popular discontent. However, 2016 also represented a demand for change. Never forget liberals’ capacity for reinvention. Do not underestimate the scope for people, including even a Trump administration and post-Brexit Britain, to think and innovate their way out of trouble. The task is to harness that restless urge, while defending the tolerance and open-mindedness that are the foundation stones of a decent, liberal world.


2017 Outlook - Unbreakable

by: Eric Parnell, CFA

 
Summary
 
- Is the U.S. stock market a superhero? Is it unbreakable?

- The Superman II dilemma.

- Implications for 2017.
 
"Are you ready for the truth?"
- Elijah Price, Unbreakable, 2000
 
 
Is the U.S. stock market a superhero? It sure seems like it given its remarkable performance throughout the post financial crisis period. For no matter what challenges has confronted it along the way, the U.S. stock market has overcome to advance to new highs. But with each passing year, both the market valuations and the risk stakes become increasingly higher. Will the U.S. stock market prove itself to be truly unbreakable in 2017? Or will it eventually drown under a flood of pressures that finally become too insurmountable to overcome?
 
 
A Legendary Tale
 
Upon reflection, the journey of the U.S. stock market over the past several years has been truly remarkable. For it was not all that long ago from the summer of 2007 through March 2009 when a banking car wreck nearly collapsed the global financial system. One might have reasonably expected emerging from a near death experience that those participating in the U.S. stock market might require deeply discounted valuations for years after the trauma of watching the value of their investments evaporate so quickly before their eyes.
 
But not so for the U.S. stock market. Not only did it quickly become comfortable with returning to premium valuations, but it has hardly skipped a beat in moving to the upside in the eight years that followed. From Latvia to Dubai to Greece to Italy and Spain to Crimea to Greece to Brexit to Trump to Italy just to name a few headline grabbers along the way, each and every time U.S. stocks paused, shrugged momentarily, and subsequently surged to the upside.
"Do you know what the scariest thing is? To not know your place in this world. To not know why you're here."
- Elijah Price, Unbreakable, 2000
 
 
The S&P 500 Index (NYSEARCA:SPY) is the proverbial David Dunn of global capital markets. If it took human form and loaded onto a train with 131 other passengers, it would emerge completely unscathed from the tragic accident that follows. In fact, it would likely use the occasion to rally further to the upside.
 
But what has become increasingly scary when looking forward for capital markets is the following. Exactly why do U.S. stocks find themselves here today? Is it truly immortal? Or does it find itself where it is today for reasons much like the technology and housing bubble that are a total fantasy and may ultimately prove unsustainable in the end?
 
What makes the U.S. stock market including the S&P 500 Index truly stand out as superhero is how it has performed during the post crisis period versus the rest of the world. From the moment when the financial crisis started to seep into capital markets on July 19, 2007 through today at the end of 2016, the S&P 500 Index is now more than +75% above its pre-crisis highs.
 
The mere mortal developed international stock market as measured by the MSCI EAFE Index (NYSEARCA:EFA), however, is still lower on a nominal basis by a cumulative -6%.
 
 
The dampening effects of the U.S. dollar on international stock market returns, you might proclaim!
 
Even if you accounted for the recent strengthening of the U.S. dollar (NYSEARCA:UUP), which is easy to forget was marginally weaker on net during the post crisis period through the summer of 2014, the EFA is only marginally higher on a cumulative basis. In short, not much of a difference.

What about emerging markets and their higher economic growth rates. Mere mortals once again. For not only is the MSCI Emerging Market Index (NYSEARCA:EEM) still cumulatively lower by nearly -10% relative to where it was at the start of the financial crisis, but it has gone effectively nowhere for the past seven years and counting.
 
 
But what about the fundamentals? Isn't the superior performance of the S&P 500 Index being driven by the remarkable earnings recovery seen since the calming of the financial crisis?
 
Simple facts. In the third quarter of 2007, the S&P 500 Index generated as reported earnings of $84.92 per share. For the most recently completed quarter where final data is available in the second quarter of 2016, the S&P 500 Index generated as reported earnings of $86.92 per share.
 
In short, earnings are effectively no higher today then they were nine years ago. And these are nominal earnings readings that are not adjusted for inflation. When accounting for inflation, as reported earnings today are actually more than -10% below where they were in 2007 Q3.
 
Companies are effectively still paying investors less today in earnings than they were nearly a decade ago. But how much are investors willing to pay for these earnings? Back in 2007 Q3, the S&P 500 Index peaked at 1,576 and sported a price-to-earnings ratio of 18.5 times earnings, which is fairly expensive in its own right. Today, the S&P 500 Index just wrapped up 2016 at 2,238, which has its price-to-earnings ratio at a much more remarkable 25.8 times earnings, which is among the highest levels in the recorded history of the U.S. stock market.
 
Put simply, the superhuman rally in U.S. stocks throughout the post crisis period has had much less to do with fundamentals. In fact, fundamentals are arguably worse today. Instead, what is more true is that stocks across the rest of the world are reflecting the broader economic reality of a tough slog these last many years, while U.S. stocks find themselves magically floating through the stratosphere despite the lackluster fundamentals. As a result, U.S. stocks find themselves second only to Denmark as the most expensive stocks in the world on both a 10-year cyclically adjusted price to earnings (CAPE) and price-to-book value basis.

But don't the historically low bond yields help explain why U.S. stocks can sport such premium valuations today? Perhaps, but historical precedent tells a different story. For bond yields were just as low throughout the 1940s and 1950s, yet stock price-to-earnings ratios remained consistently in the high single digits to low double digits. And this was during a time period of consistently strong economic growth unlike today.
 
"Can I tell you a secret? I'm going to be very, very sad if this doesn't work out the way I think."
- Elijah Price, Unbreakable, 2000
 
 
Of course, it is no secret that the yellow sun that has shined on U.S. stocks throughout the post financial crisis period has been the steady flow of stimulus from global central banks.
 
 
Up until the end of 2014, it was the U.S. Federal Reserve that was doing the stimulus pumping.
 
And in the years since, it has been the Bank of Japan and the European Central Bank that has been providing the power.
 
The plan all along? Artificially inflate asset prices so that wealthy investors would realize the gains and trickle it down through the rest of the economy through increased consumer spending and capital investment. You know, because the artificially inflated asset prices from the tech bubble worked so well, and inflating a housing bubble in order to support the global economy emerging from the bursting of the tech bust also turned out swimmingly. Third time apparently is a charm. Except it hasn't been, as the wealthy have hoarded their stock market gains through recycling their gains back through the markets through increased dividends and share buyback activity, neither of which are productive activities that are doing anything to revive the global economy.
The Superman II Dilemma
 
All of this brings us to today. The U.S. stock market looks like a superhero. But its powers have been sustained all along by the steady flow of monetary stimulus from global central banks around the world. And as we enter 2017, the powers that have sent the U.S. stock market flying high into the sky are set to start going away.
 
The U.S. Federal Reserve finished adding stimulus more than two years ago now and is now tightening policy. According to the pundits, the Fed is expected to add two to three more rate hikes in 2017. The People's Bank of China is also out of the stimulus game, having already drained $700 billion from its own balance sheet since mid 2015. While still pumping, the European Central Bank has started tapering its asset purchase plan. And the Bank of Japan is showing increasing signs of standing down as well.
Clark Kent: "Looks like from now on you'll have to have a bodyguard with you."
Lois Lane: "I don't want a bodyguard. I want the man I fell in love with."
Clark Kent: "I know, Lois. I wish he was here."
- Superman II, 1980
 
 
Unfortunately for many participants in the U.S. stock market, they have become so filled with the hubris that comes with the market being seemingly invincible that they now believe they can simply carry on without the super powers that have delivered U.S. stocks to such great heights.
 
Monetary stimulus is going away? No matter, as the baton will simply be passed from monetary policy to fiscal stimulus that will start on January 20 with the installation of a new administration in Washington DC. It is time for the markets to shed its super powers, as fiscal policy love is all that we need to save the day from here.
 
If only it were that easy. Remember, it was less than two months ago that capital markets considered a Trump presidency unthinkable given the policy unknowns that would come with such an outspoken individual that is previously untested in the political realm. But in the weeks that followed the election, this sentiment completely changed. All of the sudden, the new administration would be giving every investor everything it ever wanted almost immediately.
 
Such is the euphoria of new found love. Unfortunately for U.S. stock market investors, such love also brings with it complete delusions about reality. For thinking fiscal policy love will be enough to replace your monetary policy super powers is a good recipe for finding your once seemingly invincible portfolio suddenly bruised and bloodied in a diner in the middle of nowhere and the policy you thought you would love so much buried to death by unanticipated earthquakes both within and between Capitol Hill and the White House.

Such is the dilemma for policy makers and markets today. Before Superman took the leap and switched to mere mortal, the possibility always lingered out there that he could make a success of being "normal". But it didn't take long after taking the leap after an ill fated visit to an average diner to realize that it just wasn't going to work out. The U.S. economy and stock market are now attempting a similar leap as we head into 2017. Monetary policy makers around the world are now standing down and the U.S. stock market is now working to shed its super powers and looking to fiscal policy in trying to transition to being "normal".
 
Unfortunately, history offers us no past precedent of an economy that has been able to successfully make this switch, much less do so seamlessly and without a lot of problems along the way.
 
But unlike Superman that could simply reclaim his super powers and turn back the clock once he quickly realized the switch was just not going to work out as planned, the U.S. stock market will not have the same luxury going forward. For global monetary policy makers have already gone to this "trying to be normal" well several times in the past with jarring results. But this time around they are seemingly coming to the conclusion that supporting a U.S. stock market superhero is not only a recipe for future growth, but it is also having the negative spillover effect of helping to foster increasing income inequality and social unrest. In short, after so many stops already and more than $12 trillion in assets already added to major central bank balance sheets along the way, the Fortress of Solitude crystals well is essentially dried up for monetary policy makers at this point.
 
Implications For 2017
"It's all right to be afraid, David, because this part won't be like a comic book. Real life doesn't fit into little boxes that were drawn for it."
- Elijah Price, Unbreakable, 2000
 
 
As we enter 2017, the U.S. stock market super powers are quickly fading. We are now entering a juncture after so many years where it is time for the U.S. stock market to return to the real life that nearly every other asset class across capital markets have been living for so many years now. And this return to reality could not be coming at a worse time for the U.S. stock market.
 
For the coming year will be nowhere close to the comic book that investors have been drawing for it to close out 2016. Instead, it is bound to be increasingly messy and sometimes unruly as the year presses on.

First, we have a new administration entering the White House at the end of January that will be bringing an entirely new and untested approach to communications. While this may work out stupendously, it also runs the daily risk that a selected tweet on any given day could result in unintended consequences that could spillover into capital markets including stocks.
 
Moreover, no matter how much optimism some may have about the new leadership coming to Washington, it is still completely unknown how the execution of these policies will play out due to the lack of a historical track record for the President-elect. They may all go extremely smoothly and turn out even better than expected. Then again, they may turn out entirely differently and potentially negatively.
 
Second, we have a slate of major political elections across Europe (BATS:EZU) that, depending on how they play out in the coming months, could increasingly point to the eventual unraveling of the European Union. The Dutch (NYSEARCA:EWN) are up first in March followed by the French (NYSEARCA:EWQ) in April and May and then by the Germans (NYSEARCA:EWG) anytime between August and October. And the Italians (NYSEARCA:EWI) may also end up holding an election of their own in the coming year as well with a banking system (NASDAQ:EUFN) in the country that is teetering on the brink of contagion sparking crisis.
 
While superhuman U.S. stocks may have shown the power to shake off these tremors up to this point, a more mortal U.S. stock market may prove less resilient in the coming year depending on how these elections play out.
 
Then there is the United Kingdom (NYSEARCA:EWU), which will be initiating the process of making their exit from the European Union in the first half of 2017. While many investors proclaimed 'Brexit' a non-event for the U.S. stock market given the way it was able to shake off the outcome of the vote, the market response may be much different when the actual effects of the vote start to be felt.
 
Next is arguably the biggest and most important wild card of them all in China (NYSEARCA:GXC). The world's second largest economy is chock full of bubbles and distortions from debt to real estate to bond yield volatility to capital pouring out of the country.
 
The risk of a major policy accident coming out of China is rising dramatically, and any such impacts would not be limited to the U.S. stock market but would likely be felt negatively across various asset classes around the world including bonds (NYSEARCA:BND) such as U.S. Treasuries (NYSEARCA:TLT) and commodities (NYSEARCA:DJP) such as gold (NYSEARCA:GLD) and oil (NYSEARCA:OIL).

Another is the impact on U.S. corporate earnings from all of the uncertainty spreading across the globe coupled with the persistently strengthening U.S. dollar. For while domestic fiscal policy may be set to become more supportive at some point down the road, if global economic conditions have become more uncertain at the same time that earnings are being dampened by currency effects, such a combination is typically not a recipe for higher stock prices.
 
These are just a few of the many known risks confronting U.S. stock market investors as they enter 2017. And these do not account for the various unknown risks that may bubble to the surface in the coming year.
 
 
Unbreakable?
"They call me Mr. Glass."
- Elijah Price, Unbreakable, 2000
 
 
Before going any further, it is important to emphasize the following point. The U.S. stock market has saved the investing world for the past eight years since the financial crisis. It has truly been superhuman to this point. And this fact must be respected going forward. It is still a superhero until proven otherwise. For just when you're ready to count a superhero out, they overcome again and again. Thus, counting the U.S. stock market out today is in many ways just as risky as sticking with it. Investors have been well served by staying long U.S. stocks, and they should continue to do so with the appropriate portion of their investment portfolios until such time when the U.S. stock market finally shows signs of being finally defeated. In other words, now is not the time to be all in on stocks, nor has it been for some time from a risk management perspective.
 
But despite its persistent superhuman strength, the U.S. stock market is in a fragile state as it enters the New Year. Earnings remain lackluster despite optimistic forecasts that may or may not come to pass. Valuations remain at historical highs that are well in excess of the rest of the world. Monetary policy is quickly fading away at the same time that the fiscal policy outlook remains uncertain despite the flood of recent optimism. The geopolitical market environment is filled with risks that may become increasingly difficult to successfully navigate. And even if everything turns out better than expected, it stands to reason how much longer the U.S. stock market can maintain its relative outperformance versus the rest of the world, which is already running notably long at nine years and counting.
 
The number of risks for the U.S. stock market are sufficiently large and the magnitude of these risks sufficiently meaningful that attempting to predict where stocks will be 12 months from now is folly. Instead, a reasonable forecast strategy for the U.S. stock market given where we are heading into the coming year is to break the calendar into quarters, for the world may look very different come the end of March versus what it looks like today given all of the variables at work today.
 
And when looking out over the next three months from where we sit today, probability supports the following outcomes:
 
U.S. stocks over international stocks and emerging stocks (still despite the U.S. valuation premium)
 
Value (NYSEARCA:IWD) over growth (NYSEARCA:IWF)
 
Large caps over small caps (NYSEARCA:IWM)
 
Defensive stocks (NYSEARCA:XLP) (NYSEARCA:XLU) (NYSEARCA:XLV) over cyclical (NYSEARCA:XLI) and interest rate sensitive stocks (NYSEARCA:XLF)
 
Stocks over commodities including oil (NYSEARCA:USO) and copper (NYSEARCA:JJC)
 
Gold over stocks
 
Bonds (NYSEARCA:AGG) over stocks
 
U.S. Treasuries (NYSEARCA:IEF) over spread product
 
Municipal bonds (NYSEARCA:MUB) over U.S. Treasuries
 
Investment grade bonds (NYSEARCA:LQD) over high yield bonds (NYSEARCA:HYG)
 
Of course, given all of the outside variables coming into play in the next few months, the range of outcomes surrounding these various scenarios is much wider than normal. Just like any superhero story, unexpected events could arise at any point along the way that could upend these probabilities and lead us to entirely different outcomes. As a result, investors should be much more prepared in the coming year in particular to adjust as needed to changing market conditions than they have been in the recent past.

This leads to a key final point. Regardless of how things play out over the coming year, investors should anticipate much greater volatility (NYSEARCA:VXX) versus what we have seen to this point in the post crisis period. For when a hero is finally forced to cast off its super powers, the air of invincibility can increasingly give way to a feeling of uncertainty and unease.
 
And it is possible that we could begin to see these forces start to unfold as quickly as the first trading week of the New Year.
 
All of this highlights the particular importance of true diversification in an investment portfolio as we enter 2017 to protect against such risks. Instead of wringing one's hands the next time trouble strikes in hoping that a superhero will return to save the day, an investor can empower and protect themselves from trouble today by continuing to own stocks while also diversifying into other asset classes that can hold their own when it otherwise looks like the world may be coming to an end. This more than anything else, is the best strategy heading into what may be an eventful and exciting year in 2017.


Global reflation continues into 2017

by: Gavyn Davies



As the global economy enters 2017, economic growth is running at stronger rates than at any time since 2010, according to Fulcrum’s nowcast models. The latest monthly estimates (attached here) show that growth has recovered markedly from the low points reached in March 2016, when fears of global recession were mounting.

Not only were these fears too pessimistic, they were entirely misplaced. Growth rates have recently been running above long-term trend rates, especially in the advanced economies, which have seen a synchronised surge in activity in the final months of 2016.

The financial markets have, of course, responded powerfully to the change in global growth, which was first picked up by the nowcast models in mid year. As the FT’s John Authers points out in his entertaining article on Hindsight Capital, the winning trades in the second half of the year were all linked to the theme of global recovery and reflation.
Equities outperformed bonds, cyclicals outperformed defensives in the equity markets, industrial metals rose relative to precious metals, Japanese equities surged and German bunds fell back. In all cases, these trades started to perform well in July, and they enjoyed a powerful acceleration in November and December, presumably driven by Donald Trump’s election victory as well as stronger economic data, notably in business and consumer surveys.

The big questions at the start of 2017 are whether the markets have now fully responded to the reflationary trends in global economic data, and to expectations of a policy bias towards stronger growth from the Trump administration.

Policy and Growth

The key upcoming event on economic policy is, of course, the incoming US president’s inauguration address on 20 January, when the likely balance between “good Trump” (tax cuts, infrastructure spending and deregulation) and “bad Trump” (protection and increased geopolitical risks, especially with regard to China) will be reassessed.

Markets certainly seem to be priced for a very favourable outcome on the US policy mix — perhaps too favourable. The possibility that Mr Trump will label China as a “currency manipulator” early in his administration looms as a serious risk to buoyant financial markets in coming weeks.

On global growth, however, there has been no sign yet of any impending slowdown. Consensus forecasts for global GDP growth were revised downwards early in 2016, with the largest downgrades coming in the US, where business investment once again disappointed the optimists. After February 2016, however, the pattern of downgrades was broken, and growth forecasts stabilised for the first time in several years.
In assessing the future of the “reflation trade”, it is important to watch two factors: whether activity nowcasts are beginning to lose momentum, as they have done repeatedly during the faltering global economic recovery after 2009; and whether asset prices cease responding to good news on activity, suggesting that investors’ expectations have run ahead of themselves.





We have not seen either of these danger signals yet. The GDP forecasts produced by the nowcast models suggest that the most likely outcome for the 2017 calendar year is that consensus GDP forecasts will need to be upgraded, for the first time in many years. Although we would not place too much weight on these statistical predictions for more than a few months ahead, they are just as valid as mainstream forecasts produced by large-scale econometric models, or by expert opinion in the financial sector, if not more so.

Economists have always found it very difficult indeed to predict major cyclical turning points in activity, which is why the markets are so sensitive to changes in incoming data. These are best tracked through the nowcasts.

Growth running above trend, especially in the advanced economies



The growth rate in global economic activity is currently running at 4.1 per cent, compared with an estimated trend rate of 3.8 per cent. This represents a vast improvement on the growth rates recorded in 2015 and early 2016, when growth dipped to below 2.5 per cent at times. As noted in last month’s report, the global rebound since early 2016 has been broadly based, with all the main regions contributing to the improvement. The breadth of the acceleration is encouraging, compared with previous episodes since 2010, when improvements have been more narrowly based, and have quickly petered out.

In recent months, activity in the advanced economies has continued to improve markedly, while activity in the emerging markets has been steady at around trend rates. The latest estimate for the AEs shows activity growth running at 2.5 per cent, a rate achieved only rarely during the post-crash economic expansion.

Meanwhile, the EMs are growing steadily at close to their 6 per cent trend rate. Recent growth rates have been about 2 percentage points higher than achieved in 2015. The EMs have therefore ceased to be a drag on the global expansion, thanks to stabilisation in Russia and Brazil, and to above-trend growth following the policy stimulus in China.



The US leads among the major advanced economies…

Within the AE block, the rise in activity growth in the US late in 2016 has been particularly impressive. Although this has been evident more in survey data than in “hard” economic data, the nowcast models have found that surveys have been reliable early indicators of changes in the activity growth rates in the past.

Furthermore, according to Jan Hatzius at Goldman Sachs, financial conditions in the US will remain positive for growth at least until mid 2017, despite impending tightening by the Federal Reserve. After that, the likely fiscal stimulus by the Republicans will begin to support the economy.

In the eurozone, expansionary monetary policy by the European Central Bank is set to continue for most of 2017, and fiscal policy has turned modestly expansionary. In China, policymakers may rein back the 2016 stimulus to credit and fiscal policy, but there is unlikely to be any major reversal of policy ahead of the 19th Communist Party Congress in the autumn.



Forecasts for 2017 from the nowcast models

Finally, the latest set of forecasts derived from the nowcast models for 2017 are shown below.

As noted above, these are “statistical” predictions that are not derived from fully specified macroeconomic models (and therefore make no attempt to allow for policy changes and other economic events exogenous to the nowcasts), but they can be useful in providing a guide to likely revisions to consensus GDP growth forecasts in the months ahead.

On this occasion, they seem to suggest fairly clearly that upgrades are more likely than downgrades in the US, the eurozone and China during the first half of 2017.

If this occurs, there may be further room for the reflation trades in the financial markets to perform well for a while longer — unless a protectionist American president upsets the apple cart.


Is It Too Late To Join The Gold Rally? Here Are Our Thoughts Based On Speculative Trader Positioning

by: Hebba Investments



- For eight weeks in a row speculative traders have sold their gold positions.

- For the second week in a row gold has risen despite speculative traders selling gold positions.

- At 35,000 gold contracts net-long, there remains a significant upside if gold reverses to its average net-long position seen in 2016 of 168,000 contracts.

- There remains a good reason to own gold based on solely speculative traders positioning, and an even better reason to own gold based on its fundamentals.

- We think this early 2017 rally in gold has much more room to rise.

 
The latest Commitment of Traders (COT) report shows that traders continued to reduce their net long in gold for the eighth week in a row - despite gold rising for the second week in a row.
 
This is a very unusual occurrence and it tells us that despite the bearishness shown by traders, other factors must be supporting gold. That is usually a bullish factor, and taking into consideration the relatively low net-long position of gold traders, it shows that if trading sentiment turns then there can be significant upside in gold.
 
We will get more into some of these details but before that let us give investors a quick overview into the COT report for those who are not familiar with it.
 
About the COT Report

The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
 
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investors a way to see what larger traders are doing and to possibly position their positions accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.

The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three-day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued it has already missed a large amount of trading activity.
 
There are many different ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the exports on it.
 
What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.
 
This Week's Gold COT Report
 
 
This week's report showed a drop in speculative gold positions for a eighth straight week as longs decreased their positions by 2,324 contracts on the week. On the other side, speculative shorts increased their own positions by 4,363 contracts on the week. After the COT reporting week closed (Tuesday) gold continued to rise to around $1172 per ounce, which tells us notwithstanding a big drop in gold early next week, we should see our first positive week in COT net-long positioning next week.
 
With slightly over 34,000 net speculative gold long contracts outstanding, there is plenty of room to move up if trading sentiment changes. After eight weeks of declines in speculative trader positions, we wouldn't be surprised to see gold rally a bit here as the gold trading pendulum swings from bearish to bullish.
 
Moving on, the net position of all gold traders can be seen below:
 
 
 
The red-line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, the decline in speculative traders continues as the net long position in gold reaches 35,000 contracts. It seems all the speculative froth in the gold market from the mid-summer highs is now gone, and a move up to 100 or 150 thousand net long contracts would not be historically high - which would lead to a gold price easily over $1200 per ounce.
 
As for silver, the action week's action looked like the following:
 
 
 
The red line which represents the net speculative positions of money managers, showed a slight increase in speculative positions for the week of around 3,000 contracts. Silver has been a bit counter-intuitive as the silver net long position is still hovering near some of the historical peaks and is not close to decade low positions as we see in gold. We are not sure what to make of this except that when it comes to silver, speculators are holding to positions at a much greater comparative rate than with gold.
 
That can be either positive or negative - we simply do not know.
 
Our Take and What This Means for Investors
 
Based on the latest COT report, we saw something unusual as speculative traders continued to sell gold positions but gold rose during the COT reporting week. At current levels, solely based on speculative positioning, gold remains very attractive with a lot of room for speculative traders to add to positioning.
 
For comparison's sake, the average net speculative gold position during 2016 was around 168,000 net long gold contracts. That means based on current levels, we could see another 130,000 net speculative gold contracts added to simply bring traders to their 2016 average - which could easily mean $100 added to the gold price.

Even based on mean reversion, gold has further to move to get back to its short-term average.
 
 
 
All of these things do not include any of the fundamental factors we mentioned in our Uncomfortable Truths piece about gold and the economy looking forward.
 
Despite the rise in gold to begin 2017, we believe there is plenty of room for traders to add to positions if sentiment changes, which should move gold much higher as we reach historical averages. Thus we do not believe it is too late for investors to accumulate gold and the ETFs such as the SPDR Gold Trust ETF (NYSEARCA:GLD), and Physical Swiss Gold Trust ETF (NYSEARCA:SGOL).
 
Traders are holding silver positions much tighter than with gold so by that variable alone, it is not oversold. But its historical correlation with gold should keep its price in tow with gold on any moves up, so the silver ETF's such as iShares Silver Trust (NYSEARCA:SLV) also make sense for investors looking for at least a reversion to the mean.


The Luck of the Donald

Ironically, Trump’s opponents have set him up for some major successes.

By William McGurn



“Everything in life is luck.” The words are attributed to Donald Trump and they continue to make regular appearances in the press notwithstanding that the president-elect long ago declared it fake news. “I never made this ridiculous statement,” he tweeted in 2014, in language that sounds much closer to the spirit of @realDonaldTrump.

Even so, it takes nothing away from Mr. Trump’s stunning Nov. 8 victory to note that he enters the Oval Office a very lucky president. For notwithstanding the formidable challenges ahead—a dangerous world in which American leadership has been diminished, an anemic domestic economy that has led record numbers of Americans to give up hope of finding work, to name two—the curious politics of the moment has set him up for some bigly successes early on. The irony is that it is not so much Mr. Trump’s friends as his enemies who have put him in this lucky position.

The list is long. So let’s start from the top:

Barack Obama. Remember President Obama’s vow that he wasn’t going to wait for Congress to act? Well, he didn’t. And it wasn’t just executive orders. On everything from the nuclear deal with Iran and the Paris agreement on climate change to fossil fuels, immigration and transgender bathrooms, the administration has relied principally on executive authority to impose the Obama agenda.

But as this editorial page has noted, what can be done by the pen can be undone by the pen. By relying on executive power instead of the hard work of persuading Congress to pass legislation, Mr. Obama has set Mr. Trump up for some wonderful photo-ops as the new president uses his own executive authority to undo large chunks of the Obama legacy.

John Kerry. Put it this way: If you wanted to make Mr. Trump an instant hero to Israel, what would you do? The answer is you’d have America abstain from a U.N. Security Council resolution condemning the Jewish state—and then have the secretary of state give a speech like the one he just delivered knocking the coalition government of Benjamin Netanyahu as the “most right-wing in Israeli history.”

Whatever Mr. Kerry thought he was doing, his out-the-door slap at Israel is of a piece with the booing that the mention of Jerusalem received at the 2012 Democratic National Convention. At the beginning of this presidential race Mr. Trump raised fears about how pro-Israel he would be when he said he’d be “neutral” between the Israelis and Palestinians. Now he’s a hero simply for not insulting and demeaning the elected choice of the Israeli people the way Mr. Obama has.

Sally Jewell. Throughout the election Mr. Trump made coal miners his special cause, promising to restore mining jobs killed by Obama-era regulations. Interior Secretary Jewell is apparently hard at work making it easier for Mr. Trump to show he’s making good on his promise. The vehicle is an 11th-hour rule that would give federal regulators more power to deny coal-mining permits.

Here’s the gift: The rule goes into effect a day before Mr. Trump is sworn in as president. That leaves 60 legislative days for Congress to stop it from going into effect under the Congressional Review Act. Already Senate Majority Leader Mitch McConnell has promised that Republicans will use that act to kill the regulation. Which will likely end with a nice ceremony with Mr. Trump surrounded by grateful coal miners as he announces how he and his party have saved the industry from another coal-killing regulation.

Harry Reid. In 2013 the then-Senate majority leader was determined to stop the then-Republican minority from blocking Obama nominees. So he pushed through what the New York Times called “the most fundamental alteration of its rules in more than a generation.” Under the Reid rules, President Obama needed only a simple majority to get his nominees through, not the 60 votes to stop a GOP filibuster.

Plainly this made it easier for President Obama. But President Trump will enjoy the same advantage in a Congress where his party already has a majority in both houses.

Ted Cruz. When Justice Antonin Scalia died in February, the Texas senator ran an ad highlighting the importance of the Supreme Court on issues from the Second Amendment to religious liberty, highlighting a clip from an old interview in which Mr. Trump called himself “very pro-choice” and concluding “we cannot trust Donald Trump with these decisions.”

In May Mr. Trump responded by releasing a list of jurists broadly in the Scalia tradition. Now he can claim a mandate because he had released these names. So once again, Mr. Trump’s critics—in this case constitutional conservatives—have set him up to make good on one of his most important campaign promises.

Right now the punditry is chattering on about how Mr. Obama is using his remaining time in office to box Mr. Trump in. Maybe. But so far Mr. Trump has been blessed by his enemies’ bad judgment.

And nothing they are now doing suggests his luck—or their bad judgment—is going to change.


Get an Education

by Jeff Thomas




Back in the ’60s, an interviewer asked the “King of Folk Music”, Bob Dylan, what his goal in life was. Bob answered something to the effect of:

“I want to make enough money to go to college, so one day I can be somebody.”

Bob had a good sense of irony. And certainly, he was always more inclined to think outside the box than to follow the well-trodden path. That was part of what made him so interesting and part of what made him so successful. A similar sentiment was expressed in a song by his peer, Paul Simon:

“When I think back on all the crap I learned in high school, it’s a wonder I can think at all.”

In those days, just like today, the customary idea of success was that you attended university for a number of years, you received a degree, and then you would be given a job where you could wear a necktie and receive a salary that had an extra zero behind it.

Then, as now, that’s quite true for anyone who seeks a career in engineering, medicine, law, etc., but less so for virtually everyone else. Those who pursue a degree in gender studies or 18th-century French literature are likely to find that, after they graduate, they’ve learned little or nothing that translates into potential income.

Of course, universities value such courses highly and professors love to teach them. After all, they never really left school themselves. They went straight from being students to being teachers and never had to learn to be productive in the larger world. As such, they are the very worst advisors to students wondering what courses to take in order to one day seek employment.

This is not to say that such subjects are uninteresting; it’s just that employers don’t hire people because they’re interested in their courses. They hire them based upon whether they’ve acquired knowledge that’s applicable to their businesses.

There will always be a need for engineers, doctors and lawyers, but the pursuit of studies that stand little chance of producing a return may be a waste of a significant chunk (or all) of your parents’ savings, or may result in years of indebtedness in the form of a college loan. In addition, you could be wasting several prime years at a time when your energy and imagination are at a peak.

Recently I was asked my opinion by a young woman who was considering university. She’s not only bright, but sensible and organised beyond her years. My suggestion was that she enter a university in another country (away from her parents), and take some basic courses in business management, accounting, economics, etc. After a year, she should plan to drop out and travel the world for a year with a backpack. Her parents should give her enough money so that she’d be alright if she runs into unforeseen problems, but, aside from that, she should try to work her way around the world doing a variety of jobs. In doing so, she should follow her own choices and her own timetable.

Were she to do this, I believe she’d return home after the two years with the self-confidence, self-reliance and adaptability to take on virtually anything. Her “education” from that time would stay with her the rest of her life. As Albert Einstein stated,

“Education is not the learning of facts, but the training of the mind to think.”

Today, especially in the US, there’s a push toward the concept of everyone going to university, with some leaders and would-be leaders suggesting that university education should be available to all, for free. They don’t mention how it might be possible for the already-imposed-upon taxpayer to pay for this enormous additional cost, other than to “tax the rich some more”. (This is not exactly what makes up a viable business plan.)

Nor do they offer an opinion on what happens when the great majority of people have university degrees, but the great majority of jobs don’t require them. (Could it be that they’re imagining a society where no one accepts the job of collecting the garbage; where no one pursues a career as a fireman, a mechanic or a carpenter?)

In my own country, I’ve often heard parents chide their children, “You need to study more – do you want to end up in construction?” (Children here are generally encouraged to pursue careers in law or the financial industry.)

A good rule of thumb regarding education is to follow what you seem to be best at. Most of us are best at the things that we find interesting. If we’re endowed with an excellent memory and love to study books, we might be good candidates for a degree in medicine or law. If not, even if we eventually manage to obtain a degree, it’s unlikely that we’ll excel in one of those fields.

And there’s another concern that’s very rarely discussed in the ivy halls – the future.

We’re entering what I believe will be a period of the most dramatic economic change that any of us will see in our lifetimes. There are many job titles that are attracting many students today that may diminish or even virtually disappear in a few short years.

We’re presently facing an economic crisis much like the one in 1929, but far more devastating, since the conditions leading up to it are so much worse. After a crash, bankers, brokers and other financial industry professionals will be out of work. Many of those jobs will not return in the foreseeable future. New graduates, hopeful of entering the industry, will find that they have no chance of obtaining even an entry-level position.

Following the immediate loss of those jobs, an economic wind-down will take place that will trim away jobs in most other fields as well.

In such an economic climate, some new jobs may appear as a result of the changed economic landscape. Auto dealerships may close, whilst mechanic shops remain busy. Large supermarkets may struggle, whilst new low-overhead roadside stands fare better.

However, in general, a country that’s mired in depression is likely to be a difficult place to make a living, especially for those who have just exited university.

The great advantage that graduates have is that they typically are unmarried, have no mortgage and are free to travel – on a shoestring if necessary. And, whenever there’s a depression in some countries, there are other countries that are largely unaffected by the depression or are actually benefitting from it.

In such countries, there’s invariably a demand for expansion of goods and services and the provision of new goods and services. Few of those with a degree in sociology or fashion design are likely to find a wealth of opportunity in such a situation. And, similarly, employment will be difficult to find for those who pursued calculus and analytic geometry. (Confession: I took these courses and have never benefitted from them.)

But for those who have taken some basic business and economics courses, what was learned can be adapted to virtually any future endeavour. Those who observe a growing economy objectively are likely to spot any number of entrepreneurial possibilities.

And this is where we turn again to our friend Albert Einstein, in the photo above. Those who have used their educations to broaden their ability to think will be those who find themselves at the forefront of an expanding economy. In such an economic environment, success is more likely than in a collapsing one, which makes it more forgiving when you make mistakes. And when you don’t make mistakes, you’re rewarded many times over.

As has always been true, education can be the key to open up the future. Whether it does will depend, in large part, on what definition of education you pursue.