The Year Ahead: Will the US and Global Expansion Continue in 2018?

January is a month of resolutions and predictions, and perhaps more often than not, both tend to be abandoned come spring. While we don’t have a magic crystal ball to predict where the markets may be headed next, we do have a team of respected professionals who recently assembled to discuss whether they think last year’s economic momentum could continue—and where they see potential threats on the horizon.

The full transcript of the podcast follows.

Host/Richard Banks: Hello and welcome to Talking Markets with Franklin Templeton Investments: exclusive and unique insights from Franklin Templeton.

I’m your host, Richard Banks.

Ahead on this episode—a start to the new year, and the big question on many of our minds is—will the US and global expansion continue?

Host/Richard Banks: Ed Perks, CIO of Franklin Templeton Multi-Asset Solutions, Stephen Dover, CIO of Templeton Emerging Markets Group and Michael Hasenstab, CIO of Templeton Global Macro, sit down with Katie Klingensmith. Katie, take it away.

Klingensmith: I think there’s a lot to watch out for in the world. And a big question to get us started is when do we think that this current period of US and global expansion will end and what signs should we be looking for. Michael?

Hasenstab: I think the next couple of years from our macro standpoint look pretty good. We know we don’t have any huge signs of overcapacity and we need to remember expansions don’t die of old age. They die because something was in a structural imbalance. Even though we’ve been going on for like eight years, which is longer than almost any expansion, we haven’t had the overinvestment, which is why growth has been lower. But it also takes away one of the prerequisites for a recession. I think monetary policy is going to start to tighten in the US but it’s still pretty loose globally.

There is a lot of deregulation happening in the banking sector which can put more credit into the market, so I think that’s a decent environment for risk. But what our team is spending the time on and what hopefully can be of value, is [by not] telling you the world is rosy; you’re living in it right now you kind of feel it. That’s not helpful.

What we’re trying to do is think about how this all ends because it has to end at some point. I think there are a couple of things unique about this expansion. We have printed so much money. Never in the history of central banks have we printed this amount of money. That has obviously distorted the US government bond market beyond recognition. Any other part in history, if you had 3% growth and 2% interest rates, you’d have 5% 10-year [US Treasury] yields, and we struggle to get to 2.5%. So we know we’re completely out of whack, and this behavior has pushed people into a lot of risky assets, increasingly illiquid, risky assets.