What We Worry About
Author: Greg Valliere
February 7, 2019
WE’VE BEEN CONSISTENTLY UPBEAT about the U.S. economic fundamentals, which still look solid. But we’re in an industry that has to worry about what might go wrong, so let’s look this morning at what worries us on the policy front:
DEFICITS: In a full employment economy, deficits should be falling but red ink will soon exceed $1 trillion annually — and no one seems to care. Both parties are equally complicit and equally indifferent; policies to reduce the deficit are considered politically toxic. The long-term issue is borrowing costs, as paying interest on the debt becomes a major economic drag by early in the next decade. Yet the threat posed by dramatically higher deficits wasn’t even mentioned in Tuesday’s State of the Union address.
SUBPOENAS AND INDICTMENTS: The concept of bipartisanship is laughable, as Democrats launch an all-out assault on Donald Trump and his inner circle — his tax returns are back in play, the House Intelligence Committee will re-open its probe of possible collusion with Russia, and sealed testimony from key Trump aides will be released to Robert Mueller’s staff, which will focus on perjury indictments. Impeachment in the House is possible this spring; conviction in the Senate is still unlikely, but this will be very bumpy ride.
EUROPE: Economic growth in key countries such as Germany is increasingly anemic, amid growing concerns that a “messy Brexit” could plunge the U.K. into chaos in late March. And then there’s the tear gas in Paris and other French cities as young radicals revolt against a system that seemingly ignores their concerns; will this anger spread to other countries? For now, the EU seems safe, but some members like Italy still want to evade budget rules.
A SLOW SLOG ON TRADE: It’s unrealistic to expect a final U.S.-China deal by the March 2 deadline, and a delay could increase the threat of stiffer American tariffs. The deadline probably will get extended, and a splashy Trump-Xi summit may produce an agreement in principle by summer. But this will take time; key issues (including enforcement mechanisms) are unresolved. And trade agreements that seemingly were resolved — such as a modest NAFTA replacement — could encounter stiff resistance in Congress.
TAXES: Democrats running for president are trying to out-bid each other on tax hikes: raise the top rate, impose a wealth tax, dramatically hike the estate tax, etc. Polls show astonishingly strong support for tax hikes, which are favored by Democrats, Republicans and — especially — young people. The Trump tax cuts will remain in place into 2021, but then there could be significant changes if a Democrat captures the White House. By early in the next decade, corporations and wealthy Americans could be vulnerable on this key issue.
BOTTOM LINE: An increasingly dovish Fed will counter some of these concerns; former Fed Chair Janet Yellen said yesterday that the central bankers’ next move could be a rate cut. But the economic outlook isn’t the problem — it’s the pervasive policy uncertainty, largely in Washington, which the markets can’t overlook.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
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The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
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