As we’ll see, a great deal will happen in the first third of the year that could (and likely will) radically change the course of events in the last two-thirds. Furthermore, the possible outcomes are in the hands of inherently unpredictable individual humans otherwise known as politicians (and not just in the US, thank you very much!) instead of dispassionate market forces. Fancy quantitative models will be of little help.
Instead of trying to answer questions about the future, I’ll try to list those we should be asking as 2017 opens. These are the things that I sit and meditate about when I consider the future of economics, markets, and investing. Today’s economy is something like an old-fashioned Swiss watch. It’s a thing of beauty when all those delicate little gears mesh just right. If you ever take the time to actually study the inner workings of the marvelous manifestations of human ingenuity that keep us all alive, it is difficult not to come away awestruck by the ability of the human mind to craft such complexity. But if any of the gears get just a little out of whack, the entire contraption can grind to a halt.
I’m going to have a few things to say about the recent FOMC meeting, and we’ll use it as a springboard to chew the fat about the new season and upcoming episodes of our very own soap opera: As the Fed Turns. Just as devotees of As the World Turns used to speculate about what their favorite characters were up to, we can have a little fun opining about the Fed’s next moves. Now, a Trump presidency offers a lot of potentially juicy drama, too, and we’ll certainly want to chat about it. And of course, we won’t be forgetting that this is soap opera with real-world implications for the markets and our investment portfolios.
Today we’ll look at stock valuation several different ways, see what history tells us about the future, and then think about how to react. There are good reasons to think that the Trump rally could morph into the stereotypical and expected Santa Claus rally. Toward the end of the letter, I will comment on why. It’s actually kind of a rational process. And then what?
Italians are headed to the polls this Sunday (and thus this letter is reaching you a little earlier than usual) – but no one is quite sure what is on the ballot. On the surface, the voters are considering whether to approve constitutional reforms that should make the government operate more effectively (or not, depending on your point of view). But many people think the real question is whether the current government should stay in power and whether Italy should remain yoked to the Eurozone.
Last week’s letter with my thoughts on what Trump should do generated more responses than any other letter had in the last 17 years. As you might suspect, with a topic so controversial, not everyone agreed with me.
I’m going to depart from the normal format of my letters, where I talk about the economic realities we face and how we should invest, and instead offer my view of what I think the Trump administration and the GOP-led Congress should do.
I think many of my readers are in the same boat I’m in: we are still sorting out the implications of last Tuesday’s election. My style is generally not to shoot from the hip but to think about things before I start to write. When I have adopted the “ready–fire–aim” style of writing, I have usually found myself going back and asking, “What was I thinking?” And the answer is that I wasn’t doing enough thinking.
It is quite conceivable that we could be approaching $30 trillion in national debt by the time the president is inaugurated in 2021. Make whatever assumption you want to about interest rates, the level of taxable revenues in current models suggests that interest could easily be consuming more than 15–16% of revenues by then. And growing… That is not a sustainable model.
It turns out most companies are doing well, but a small group shows results so dismal that they weigh down the entire market. Worse, that group may not recover nearly as fast as some analysts think. We will see why in a little bit.