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Tuesday
Aug152017

Transcript of my Speech in Tokyo on global monetary policy, big banks & geo-politics in the Trump era

The following is the transcript from my speech: Shifting US-Japan Geo-Politics, Banking Landscape and Financial Regulations in the Trump Era. It was given on July 11, 2017 at the Canon Institute for Global Studies in Tokyo, Japan:

 

President Trump has talked a lot about America First. Over the last 6 months, we have seen that America First means that the United States could also be excluded from the rest of the world’s trade policy. For instance, Japan and the European Commission (EC) have recently agreed to an economic partnership agreement (EPA), which could be the largest trade agreement ever. This is an example of the United States being excluded from trade alliances. The new climate in the United States has created opportunities for other countries like Japan.

The shift toward America First and isolationism is not wholly because of President Trump. It is the result of a trend that started approximately 10 years ago. It has much to do with the lack of regulation in the US banking system.

Prior to 1999, the United States regulated banks under the Glass-Steagall Act. This Act required that banks separate their commercial banking operations from their trading, speculation, and securities businesses. That act was repealed in 1999, and the repeal has had a number of consequences.

For one thing, the repeal led to a series of corporate scandals in the United States just a few years later. It also led to the creation of the “Too Big to Fail” concept. It allowed Citigroup, JPMorgan Chase, and Bank of America to become conglomerate banks. It led each bank to increase the risks they hold, and it increased the interdependency of banks throughout the world.

That increased risk and interdependency eventually resulted in the global financial crisis. And yet banks still hold many of the same risky investments they had prior to the crisis, and are still interdependent.

Many in the United States have been talking about reintroducing the Glass-Steagall Act in order to mitigate that risk and interdependency. When President Trump ran for office, he discussed this. It was in the Republican platform as well. 

However, since the election, two interesting things have happened. President Trump gave an interview in which he said he still needed to think about Glass-Steagall. Since then, he has not talked much about it. Meanwhile, Secretary of the Treasury Steven Mnuchin has said that President Trump does not intend to bring back the old Glass-Steagall Act, but is rather considering a “21st century Glass-Steagall” that would merely require banks to set aside money for emergencies related to risky investments rather than actually restructure. 

I would like to talk more in detail about some of the risks that banks now face in order to highlight why the discussion about regulations like Glass-Steagall is so important.

One emerging risk today is corporate defaults. Thanks to quantitative easing, there is a lot of cheap money available in the market right now. According to S&P Global Ratings, as a result of all the cheap money, corporate debt is expected to climb from $51 trillion today to $75 trillion by 2020. At the same time, the global speculative-grade default rate is now 4.2 percent. This is the highest level since 2009, which was the worst year of the financial crisis. A total of 162 companies defaulted in 2016. This is the second time we have seen annual defaults above 100 since 2009. This has a large impact. When companies default, jobs suffer, research and development suffers, and the market suffers. It reduces confidence, which can catalyze a crisis.

Even with the level of risk we are seeing around corporate defaults today, central banks continue to buy assets, to the tune of $200 billion per month. Will this pace slow in the future? Many are now talking about whether the central banks will change their policies on quantitative easing. The Federal Reserve has been slowly raising interest rates. On the other hand, the Bank of Japan has announced that it will begin an ‘unlimited’ Japanese Government bond buying program.  

One issue surrounding quantitative easing is that it is honestly very difficult to tell what the true effect of this policy is. There is no guarantee that when a central bank purchases bonds that it will result in more long-term hires or higher wages, for example. We cannot look at inflation or deflation to see how quantitative easing has impacted the market, because the money from quantitative easing doesn’t go to consumers. It goes to banks and financial speculators. We cannot be certain that any of the money has gone toward jobs or infrastructure. No regulatory requirement even attempted to guarantee that. 

That said, there are some who feel that quantitative easing has been successful in revitalizing our economies. In June, Fed Chair Janet Yellen said in a speech, “Would I say there will never, ever be another financial crisis? You know probably that would be going too far, but I do think we are much safer, and I hope that it will not be in our lifetimes and I don’t believe it will be.”

This remark echoes a similar comment made by former Fed Chair Ben Bernanke in 2007 just before the financial crisis. Partly because of that, it is really difficult to accept what she is saying. For instance, the Federal Reserve subjected a number of banks to stress tests this year, and 34 banks passed. However, those tests don’t look at massive corporate defaults. They don’t look at interdependency. There are risks they don’t consider.

The risks faced by banks in the United States today are greater than even before the financial crisis. The amount of assets that the big six banks hold is about 70% to 80% larger than it was prior to 2008. The amount of deposits they hold is about 40% higher. For these reasons, I think we need to be really careful about the rate at which defaults are increasing, how stocks are supported by share buybacks, and other risks fed by artificial, or conjured money.

Central banks around the world are now pursuing a coordinated zero percent money policy and increasing their assets. The big three central banks in the United States, Europe and Japan now hold assets equivalent to about 17% of global GDP. If this money was liquidated into the real economy instead, it would have a huge positive impact. 

In recent years, central banks have used quantitative easing to inject more liquidity ostensibly into the economy. However, as I mentioned, that liquidity hasn’t necessarily reached the real economy. Quantitative easing has failed to produce real sustainable growth. There have been very low increases in wages throughout the world. For many people, even though their country’s economy may be considered stable by generic measures mostly touted by central banks and governments, their personal economies are instable.

One outcome of that is that people are starting to question the ability of their governments to understand the economy. When that happens, people tend to vote out whoever is in power. This is one of the things that I think contributed to Trump’s victory in the United States. In turn, the economic situation globally has affected political decisions domestically, and those decisions are affecting our international alliances.

The shift in our policies toward international alliances might again have an impact on the global economy. It’s a circle. President Trump seems to be shying away from multilateral agreements and toward more isolationist ideas. The last time the United States did that was in the 1920s. In fact, isolationist policies were one of the reasons there was such a speculative mood in the United States in the 1920s, and that speculation led to the financial crash of 1929.

It looks like, for the time being, the United States will continue to act in a more isolationist manner. That is good and bad. It is bad from the standpoint of general global connectedness. It is good for other countries, including Japan. It gives other countries the opportunity to take on a stronger role in the international community. Japan is already moving to do that, as we can see with the Japan-EU EPA.

Ever since President Trump came into office, alliances excluding the United States have been completed much more rapidly. These alliances were already being planned and executed before he came into office, mostly since the financial crisis to be sure and apprehension about the current dollar-based monetary system, but he seems to have accelerated them. This is happening all over the world. China is getting involved in more alliances. Japan is as well.

I was in Mexico a couple of weeks ago and I spoke with people there about the North American Free Trade Agreement (NAFTA) and trade alliances. Since President Trump has come into power, he has been talking about how to get Mexico to pay for the wall he wants to build between the United States and Mexico. He has also made a number of negative comments about Mexico and about NAFTA. Furthermore, President Trump has also pulled out of the Trans-Pacific Partnership (TPP). Prime Minister Abe seems to be trying to save the TPP. He will not be able to move forward with the United States, but with all that has happened, we now have countries like Mexico that are looking at the situation with the United States and actively wanting the TPP to continue without the United States. Japan could thus, take a larger leadership role regarding the TPP.. 

With President Trump continuing to push his wall idea, US-Mexico relations are deteriorating. This presents a very good opportunity for China to develop its alliance with Mexico. When I spoke in Mexico, a trade delegation from China was there at the same time. These sorts of things are already happening more frequently. There has been movement on the part of other countries to create alliances outside of the partnerships with the United States ever since the financial crisis. With the election of President Trump, these movements are only accelerating. 

The Japan-EU EPA is a major agreement that has impacted that movement. Japan is a part of the shift that we are seeing as power in the international community moves slightly away from the United States. To a large extent, Japan can greatly influence how this shift plays out. Japan is already also involved in a number of other large trade deals, such as the TPP or the Regional Comprehensive Economic Partnership (RCEP). These deals could create a large amount of trade, and Japan is playing a leadership role in their negotiations. These deals are being worked out in opposition to US policies. Unless US policies change soon, they will move forward.

And as the rest of the world moves forward with its own deals, the situation in the United States today is one in which the financial crisis and the concept of “Too Big to Fail” has led many to question whether we don’t need more regulation in the banking sector to avoid another crisis.  However, many of the senior people in the Trump administration seem to be not very interested in bringing back something like the Glass-Steagall Act, so not enough is happening. There is action taking place around military spending. Although the new budget hasn’t passed yet, the draft does include a large boost for the military. We have a lot of people now working in Congress to figure out how the new budget will work, whether they can cut corporate taxes, or cut social spending, and so on.

The latest draft budget will increase defense spending by approximately $53 billion. It earmarks an extra $2.8 billion for spending on homeland security. To make that budget balanced, President Trump is cutting from social insurance programs and institutions related to international alliances. President Trump’s isolationist tendencies are not supported just by the things he says; if the budget is passed, that isolationism will be carried out through budget cuts.   

Meanwhile, he is doing no meaningful work on his campaign promise to bring back the Glass-Steagall Act. In fact, there is movement in his ranks toward further deregulation. A recent bill passed in the House of Representatives, dubbed “The Financial Choice Act”  called for the loosening of banking regulations. If this new legislation is passed, it will likely just require that banks hold onto more money for emergencies, in reserves, rather than actually separate deposits and lending activities from speculative ones. 

I think the lesson here is that there is a lot of inconsistency in what President Trump has said and what his administration is doing, and I think that people around the world understand this and that it is catalyzing the shifts in power and new economic alliances that we are seeing globally. The Trump presidency is accelerating the movement of world currencies away from the United States dollar.

Alongside all of that is the problem of whether or not the markets are sustainable at their current levels. They are not. There is a lot of risk in markets and in the economy right now. There exists a large disconnect between how the financial sector feels about the economy and how normal people outside of the financial sector feel about it. There remains a disconnect between how politicians view the economy and markets and the banking and monetary system and how it's viewed by populations on the ground. This dichotomy fueled by ongoing money conjuring policies can't end well, it can only result in another crisis. The question isn't if, but when. 

 

Thursday
May042017

The Trump Family Empire Expands

(Note, this piece first appeared in TomDispatch, May 2nd)

President Trump, his children and their spouses, aren’t just using the Oval Office to augment their political legacy or secure future riches. Okay, they certainly are doing that, but that’s not the most useful way to think about what’s happening at the moment. Everything will make more sense if you reimagine the White House as simply the newest branch of the Trump family business empire, its latest outpost.

It turns out that the voters who cast their ballots for Donald Trump, the patriarch, got a package deal for his whole clan.  That would include, of course, first daughter Ivanka who, along with her husband, Jared Kushner, is now a key political adviser to the president of the United States.  Both now have offices in the White House close to him.  They have multiple security clearances, access to high-level leaders whenever they visit the Oval Office or Mar-a-Lago, and the perfect formula for the sort of brand-enhancement that now seems to come with such eminence. President Trump may have an exceedingly “flexible” attitude toward policymaking generally, but in one area count on him to be stalwart and immobile: his urge to run the White House like a business, a family business.

The ways that Jared, “senior adviser to the president,” and Ivanka, “assistant to the president,” have already benefited from their links to “Dad” in the first 100 days of his presidency stagger the imagination. Ivanka’s company, for instance, won three new trademarks for its products from China on the very day she dined with President Xi Jinping at her father’s Palm Beach club.

In a similar fashion, thanks to her chance to socialize with Japanese Prime Minister Shinzo Abe, her company could be better positioned for deal negotiations in his country.  One of those perks of family power includes nearing a licensing agreement with Japanese apparel giant Sanei International, whose parent company’s largest stakeholder is the Development Bank of Japan -- an entity owned by the Japanese government.  We are supposed to buy the notion that the concurrent private viewing of Ivanka’s products in Tokyo was a coincidence of the scheduling fairy. Yet since her father became president, you won’t be surprised to learn that global sales of her merchandise have more or less gone through the roof.

Here’s where things get tricky. We can’t pinpoint the exact gains generated from any one meeting of the next generation Trump. They rely on the idea that, because their brand was so huge to begin with, profits and deals would have come anyway. That’s why we won’t ever see their books or tax returns.

Conflicts of interest? They now permeate the halls of 1600 Pennsylvania Avenue, but none of this will affect or change one thing President Trump holds dear -- and believe it or not, it’s not the wishes of his base in the American heartland.  It’s advancing his flesh and blood, and their flesh-and-blood-once-removed spouses and relatives.

Federal Regulations and Trump Family Interpretations

The Trumps and Kushners will behave in ways that will benefit their global businesses. There’s just one catch.  They have to get away with it, legally speaking. So the first law of family business in the Oval Office turns out to be: get stellar legal counsel. And they’ve done that. Their lawyers have by now successfully created trusts that theoretically -- but only theoretically -- separate Ivanka from her businesses and deflect any accusations over activities that may, now or in the future, violate federal rules. And there are two of those in particular to consider.

The Code of Federal Regulations is a set of rules published by the executive departments and agencies of the government. Title 18 section 208 of that code deals with “acts affecting a personal financial interest.” This criminal conflict of interest statute states “an officer or employee of the executive branch of the United States Government” can’t have a “financial interest” in the result of their duties. What that should mean, legally speaking, for a family occupying the executive office is: Ivanka could not have dinner with the president of China while her business was applying for and receiving provisional approval of pending trademarks from his country, if one of those acts might impact the other. To an outsider, the connection between those acts seems obvious enough and it’s bound to be typical of what’s to come.

Meanwhile, there are real penalties for being convicted of violating this rule. These include fines or imprisonment or both as set forth in section 216 of Title 18.

Certain lawyers have argued that Ivanka’s and Jared’s appointments don't violate Rule 208 or other nepotism statutes because they are not paid advisers to the president. In other words, because Ivanka doesn’t get a salary for her service to her... uh, country... conflicts automatically vanish. She’s already done her Trumptilian best to demonstrate her affinity for ethical behavior by cordoning herself off from her business responsibilities (sort of). According to the New York Times, “Ivanka has transferred her brand’s assets into a trust overseen by her brother-in-law, Josh Kushner, and sister-in-law, Nicole Meyer.” Phew, no family connections there!  Or maybe she just doesn’t care for her siblings-in-law.

But not all assets, it turns out, are created equal. So the daughter-in-chief will, it seems, keep her stake in the Trump International Hotel, a 15-minute stroll from the White House, which just happens to boast "the Ivanka Trump Suite" and "The Spa by Ivanka Trump." ("The Spa by Ivanka Trump™ and Fitness Center transitions guests from the Technogym setting of the Fitness Center to the tranquil spa haven that is calming, balancing, purifying, revitalizing, and healing...") There, many a foreign diplomat or special interest mogul can "calm, energize, [and] restore" himself or herself, while angling for an "in" with the family. We don’t know precisely the nature of what the Trump family stands to gain from the hotel because its books aren’t made public, but it’s reasonable to assume that we’re not talking losses. Besides this other D.C. domain, Ivanka and Jared will remain the beneficiaries of their mutual business empires now valued at about three quarters of a billion dollars, according to White House ethics filings.

But wait. There’s an even more explicit rule against using public office (like, say, the White House) for private gain: Title 5 section 2635.702. On that subject, the section states that “an employee shall not use his public office for his own private gain, for the endorsement of any product, service, or enterprise, or for the private gain of friends, relatives, or persons with whom the employee is affiliated in a nongovernmental capacity.”

Okay, that’s wordy. And though the rule doesn’t apply to the president or vice president -- we have Nelson Rockefeller to thank for that, but more on him later -- for any other executive office position, the rule explains that “status as an employee is unaffected by pay or leave status.” That means that you can’t say someone is not an employee just because she isn’t drawing a paycheck, which means she isn’t, in fact, exempt just because she can’t show a W-2 form.

The second rule of family business is undoubtedly: control the means of enforcement. And President Trump just got his man onto the Supreme Court, so even if ethical charges rose to the highest court in the land, the family has at least a little insurance.

Bankers and Presidents: A Walk Through History

The idea of powerful bloodlines collaborating is nothing new in either business or politics. At the turn of the twentieth century, mogul families routinely intermarried to spawn yet more powerful and profitable business empires. And when it comes to Oval Office politics, American history is littered with multi-generational public servants with blood ties to presidents.  Abraham Lincoln’s oldest son, Robert, a Republican, served as secretary of war in the administrations of Presidents James Garfield and Chester Arthur, and finally as U.S. minister to Great Britain during President Benjamin Harrison’s administration. Dwight D. Eisenhower’s son, John, became a decorated brigadier-general, served as assistant staff secretary in the White House while his father was in office and was later appointed ambassador to Belgium under President Richard Nixon (once his father’s vice-president). But neither of them inflated the coffers of the family business in the process.

Whether family business connections might influence prominent figures in the White House isn’t a subject new to the Trump era either. In 1974, when Gerald Ford, who took over the presidency after Richard Nixon’s impeachment, nominated Nelson Rockefeller to be his vice president, Nelson’s brother David ran the Chase Manhattan Bank (now JPMorgan Chase).  Questions naturally arose about the notorious wealth and political reach of the Rockefeller family. Nelson, the grandson of oil magnate John D. Rockefeller, had even worked at the bank and had been on the boards of multiple oil companies.

That same year, the Department of Justice conveniently concluded that conflict of interest laws did not apply to the office of the vice president -- but not before Democratic Senator Robert Byrd asked, “Can't we at least agree... that the influence is there, that it is a tremendous influence, that it is more influence than any president or vice president ever had?"  And yet, as fabulously wealthy and linked in as Nelson Rockefeller was, his situation doesn’t even compare to the family business tangle in the Trump White House.

There have been other family members than the Trumps and Jared Kushner in positions of significance in the White House. When, for instance, Woodrow Wilson fell gravely ill in 1919, his second wife, Edith, stepped in to act on his behalf, essentially running the government in a blanket of secrecy from his bedside. Her intention, however, was never to make hay with a family business, but to ensure that her husband’s policies prevailed.  The two Bush presidents, with a business and banking legacy that snaked back a century, were elected, not handed power.  And though Bill Clinton’s reign in the Oval Office enabled wife Hillary to garner enough public recognition (and banking connections) to successfully run for senator in New York State, become secretary of state under President Obama, and launch two ultimately unsuccessful presidential bids, the Clintons only became super-wealthy after Bill’s time in office. Though their charity foundation’s ties to foreign governments remain suspect, they never had a private business while Bill was in the White House.

What can’t be found in the historical record is someone’s child, wife, or relations holding court in the West Wing while expanding a family business, no less a network of them. The present situation, in other words, is unique in the annals of American history. Only 100 days into Donald Trump’s presidency, he already has something of the look of the authoritarian kleptocrats elsewhere on the planet who siphon state wealth into their own bank accounts and businesses.

And remember, the Trump empire is also the Kushner empire.  Jared's family business depends on global investors hailing from countries that just happen to be in his White House portfolio. He, for example, led the efforts to prepare for the state visit to Mar-a-Lago of the Chinese president (while the Kushner business was engaged in high-level talks with a major Chinese financial conglomerate).  A Russian state-owned bank under U.S. sanctions whose chairman met with Jared in December referred to him as the head of Kushner Companies, though he was already visibly if not yet officially a Trump adviser.

He is similarly the administration’s point man for Middle East “peace,” even though his family has financial relationships with Israel. Meanwhile, in his role as head of the newly formed White House Office of American Innovation, the potential opportunities to fuse government and private business opportunities are likely to prove endless.

Nepotism on Parade

Faced with the dynasty-crushing possibility of selling his business or even placing it in a blind trust, Donald Trump chose instead to let his two older sons, Eric and Donald Jr., manage it. Talk about smoke and mirrors.  While speaking with Forbes in March, Eric indicated that he would provide his father with updates on the Trump Organization “quarterly” -- but who truly believes that father and sons won’t discuss the family empire far more frequently than that?

The family has already racked up a laundry list of global conflicts of interest that suggest ways in which the White House is likely to become a moneymaking vehicle for the Trump line. There’s Turkey, for instance, where the Trump Organization already has a substantial investment, and where President Trump recently called President Recip Tayyip Erdogan to congratulate him on his power-grabbing, anti-democratic victory in a disputed election to change the country’s constitution.  Given Trump business interests globally, you could multiply that call by the world.

Meanwhile, Ivanka’s brand isn’t just doing business as usual, it’s killing it. Since 2017, according to the Associated Press, “global sales of Ivanka Trump merchandise have surged.” As a sign of that, the brand’s imports, mostly from China, have more than doubled over the previous year. As for her husband, he remained the CEO of Kushner Companies through January, only then abdicating his management role in that real-estate outfit and 58 other businesses, though remaining the sole primary beneficiary of most of the associated family trusts. His and Ivanka’s children are secondary beneficiaries. That means any policy decision he promotes could, for better or worse, affect the family business and it doesn’t take a genius to know which of those options he’s likely to choose.

Kleptocrats, Inc.

Despite an already mind-boggling set of existing conflicts of interest, ranging from business affiliations with oligarchs connected to the Iranian Revolutionary Guard to the Secret Service and the Pentagon leasing space in Trump Tower (for at least $3 million per year), the Trump family business is now looking to the glorious, long haul. The family is already scouting for a second hotel in Washington. Trump has reportedly used nearly $500,000 from early campaign money raised for his own 2020 presidential bid to bolster the biz. It’s evidently been poured into “Trump-owned restaurants, hotels and golf clubs,” as well as rent at Trump Tower in New York City.

According to the latest polls, the majority of registered voters believe that the installation of Ivanka and Jared in the White House is inappropriate. But that could matter less to Donald Trump. Ask Stephen Bannon or Chris Christie what happens when Ivanka or Jared don’t like you.  That’s the family version of mob-style power.

Ivanka noted in her book, The Trump Card: Playing to Win in Work and Life, that “in business, as in life, nothing is ever handed to you.” Except, of course, when your father is president and he hands you the keys to grow the family business on a silver platter.

Four decades ago, at a Senate hearing on his potential conflicts of interest, Vice President Rockefeller was asked, “Can you separate the interests of big business from the national interest when they differ?"  It’s a question some senator should pose to Ivanka and Jared, replacing “big business” with “big family business.”

Making the future yet murkier, the family may be on the precipice of major problems. The most striking of them: Kushner’s marquee building, 666 Fifth Ave (an 80-story, ultra-luxury Manhattan skyscraper) has a greater than 25% vacancy rate. It hasn’t made enough money to even cover its interest payments for several years, and in two years it will have to pay principal as well on its $1.2 billion mortgage. That’s going to hurt if foreign companies don’t step in to staunch the flow of dollars out of the firm and that, undoubtedly, could require a quid pro quo or two.

In our era, it’s no secret that presidents leave office with the promise of quickly growing exponentially wealthier. But for the first family to gain such wealth while still in the White House would be a first.  Yet the process that could make that possible already seems to be well underway. All this, as Donald Trump, his children, and his son-in-law continue to carve out an unprecedented role for themselves as America’s business-managers-in-chief, presiding not so much over the country as over their own expanding imperial domains.

Tuesday
Jan032017

My Political-Financial Road Map for 2017

Happy New Year! May yours be peaceful, safe and impactful!

As tumultuous as last year was from a global political perspective on the back of a rocky start market-wise, 2017 will be much more so. The central bank subsidization of the financial system (especially in the US and Europe) that began with the Fed invoking zero interest rate policy in 2008, gave way to international distrust of the enabling status quo that unfolded in different ways across the planet. My prognosis is for more destabilization, financially and politically.  In other words, the world's a mess.

Over 2016, I circled the earth to gain insight and share my thoughts on this path from financial crisis to central bank market manipulation to geo-political fall out, while researching my new book, Artisans of Money. (I’m pressing to hand in my manuscript by February 28th – the book should emerge in the Fall.)

I traveled through countries including Mexico, Brazil, China, Japan, England and Germany, nations epitomizing various elements of the artisanal money effect. I spoke with farmers, teachers and truck-drivers as well as politicians, private and central bankers. I explored that chasm between news and reality to investigate the ways in which elite power endlessly permeates the existence of regular people.

In last year’s roadmap, I wrote we were in a “transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability.”    

That happened. Going forward, as always, there’s an endless amount of information to process. The state of economies, citizens and governments remains more precarious than ever. Major areas on the upcoming docket include – central bank desperation, corporate defaults and related job losses, economic impact of political isolationism, conservatism and deregulation, South America’s woes, Europe’s EU voter rejections, and the ongoing power shift from the West to the East.

For now, I’d like to share with you some specific items - which are by no means exhaustive, that I’ll be analyzing in 2017.

1) Watching the Artisans of Money (Central Banks)

On December 16th, 2015, after equivocating for seven years, the Fed raised rates by 25 basis points. To hedge itself against its own decision, the Fed claimed that despite this move (that the financial press considered indicative of an actual policy shift) its "stance of monetary policy remains accommodative after this increase.” Sure enough, the Dow opened January, 2016 with a 10% drop. The US stock market exuded its worst 10-day start to a year since 1897. Other global markets fared worse.

Four hikes were initially predicted for 2016. We got just one. Another 25 basis points followed – nearly to the day, on December 14, 2016. The Fed has now forecast another three hikes, for 2017. If you do the math, consider the reasons behind the Fed’s wishy-washy language, and ignore economic rhetoric, that translates to one hike this year.

Last year, I noted that the Fed’s December 2015 rate move was “tepid, and it’s possible the Fed moves rates up another 25 or 50 basis points over 2016, but less likely more than that.” This happened. Given the tempestuous state of the world and over-optimism surrounding Trump’s ability or desire to follow through on certain campaign vows, I see no reason for a different rate pattern in 2017.  

2) Volatility for Stock Markets

Following a volatile start to 2016, markets rebounded. Not because fundamental economic conditions of the world’s major countries improved instantly or geo-political tension declined. But as other major central banks took over the cheap money mantle.

 

The cavalry appeared. The Bank of Japan hit negative rate territory in January, 2016. The European Central Bank adopted negative rates in March, 2016.  As a result of these major central banks equalizing the cost of global money back to zero, the stock market bubble marched on.  And if that wasn’t enough to show that liquidity and crisis concerns still exist, both central banks introduced additional manifestations of quantitative easing during the year with the ECB extension in time and BOJ extension up their yield curve.

In November, Donald Trump’s victory further elevated stock markets, especially sectors most likely to be deregulated by the incoming billionaire club administration, like banks.   

Yet, the idea that any President can control the economy with a tweet and a set of disparaging or aggrandizing comments is foolish.  Once the hype of a reality TV show president subsides into prevailing political and economic uncertainty, stock and bond markets will end the year crumbling in the dust of broken promises.

3) Rising Corporate Defaults and Oil Prices

Extending a disturbing trend, the number of large global corporations that defaulted in 2016 outpaced those in 2015 by 40 percent. The figure for 2016 hit 150, making 2016 the worst year for corporate defaults since the financial crisis.

If Trump wants to make America great again, he should start by examining the leverage in corporate America, where 2/3s of global corporate defaults occurred. Of those, 50 out of 63 globally, were in the oil and gas sector.  (Emerging markets accounted for 28 defaults and Europe for 12).  S&P expects the default rate to rise in 2017. And if Trump’s nominee for Secretary of State, Rex Tillerson, has anything to do with it, oil prices won’t move up much for 2017. This will mean more defaults in that sector. Based on his recent statements, his policies are cushioned in the ideology of pumping more oil, not less. 

4) Turmoil in South America

Last year, given how scandal-plagued Brazil was, I thought no matter what happened regarding now-former Dilma Rousseff’s government, its markets would slip along with its economy. Yet, against all logic, interim President Michel Temer, even more plagued by scandal than his ejected predecessor, got a Hail Mary from the international investor community. Much of that had to do with Wall Street’s old friend Henrique Mereilles nabbing the minister of finance spot (having run Brazil’s Central Bank under President Luiz Inácio Lula da Silva (a.k.a. “Lula”) from 2003 to 2010.)

I also said that Argentina wouldn’t be having a “walk in the park.” The new centrist government removed currency capital controls in order to attract foreign money, which had the side effect of crushing the Argentinean peso.  Unemployment and general angst increased. A group of protestors recently stoned the car of President Macri amidst growing resentment of his austerity measures.

Venezuela, a nation dependent on oil for 96% of its exports has erupted into total chaos. As perhaps the desperation move “currency controls” or restrictions were introduced in early December President Maduro announced  plans to withdraw the 100 bolivar note which makes up 77 percent of all currency in circulation and closed the borders to stop people holding Venezuelan currency outside of the country.  That caused mass panic and Depression like bank lines, looting and violence. The government chose to keep the 100-note in circulation until January 20. That’s a temporary measure.  So is a large year-end bond issue from the government forced on the state banks. Things will get uglier. Restricting currency circulation is a harbinger of the war on cash everywhere.  Contagion in South America is more likely to be acute this year.  

5) First Half: Rising Dollar/ Sideways Gold, Second Half: Reverse and Cash

Last year, I said that despite other countries (and the IMF) seeking to battle the almighty Greenback, global malaise would “keep the dollar higher than it deserves to be.”

Then, I expected gold “to rise during the summer as a safe haven choice” which it did and to “end the year lower in US dollar terms” which it also did.   This year, it’s likely that the dollar will remain strong in the beginning given the recent Fed hike, expectations of more, and initial enthusiasm for Trump’s promises. This will keep a lid on gold.  

Yet once it becomes clear that US economic conditions remain lackluster and inequality rampant, the dollar will weaken and gold will appreciate.  In the backdrop, though the US remains the world’s biggest gold holder, nations like China, India and Russia will continue to stockpile gold in a bid to diversify against the dollar.

In addition to watching the yellow metal, as I’ve urged over the past few years, routinely extracting cash from bank accounts remains a smart defensive play for 2017.  People have asked me where to keep it. The answers depend on individual financial situations, but paying down debt, buying necessary hard assets and staying liquid with the rest in physical reach (there’s a reason for the term, keeping it ‘under the mattress’ is practical.

6) Power Shift from West to East through China and Japan

As it has done since cheap money became US economic and financial policy in the wake of the financial crisis, China continues to forge a US-independent path. It did so through inclusion of the Renminbi in the IMF’s SDR basket in October 2016. It also established a stronger relationship and side agreements with Russia, the BRICS community and increasingly with Europe and the United Kingdom post the Brexit vote. That was no accident, but part of a strategy to be distanced from the risk the US and its central and private banking system poses.  The New Development Bank (formerly referred to as the BRICS bank) headquartered in Shanghai, China, offers alternatives to old institutions like the IMF, and allows for a rise of eastern and emerging nations to succeed in a collective format.

The trajectory of this power shift from the US dollar and US policies will escalate. If Trump and his team go the isolationist, or bilateral trade agreement routes, it will only push China to increases its economic, military and diplomatic presence globally. While Trump (and the outgoing Obama administration) accuse China of currency devaluation, the People’s Bank of China (PBOC) has actually been selling US treasuries to bolster its currency - hit by capital outflows, not manipulation.  China sold $22 billion of US treasuries in July. Its US government debt holdings are at their lowest level in more than three years, and these sales, especially in the face of Trump’s scorn, will continue.

These accusations and geo-bullying will also push former adversaries, China and Japan closer together. The two nations are already negotiating some historic agreements.  We could be approaching a new era in which Sino-Japanese relations allow for diplomatic normalization and more economic partnerships, which would be mutually beneficial.

Over 2016, Japan entered greater cooperation with India and Russia.  The agreements it arranged will bolster Japan’s potential for 2017. The Yen should appreciate as a result. Even in the case of further economic turmoil in the US and around the world, the Yen will benefit, as it did during the financial crisis, from being a safe haven currency.

7) More Anti-EU sentiment and economic hardship in Europe

In 2015, Mario Draghi, European Central Bank (ECB) head decided to extend Euro-QE into March 2017. At the start of last year, I said that, “The euro will continue to drop in value against the dollar” and “negative interest rates will prevail.” That happened. And despite no evidence of any economic benefit (and purely to help ailing banks) Draghi extended Euro-QE to December 2017, with a promise to do more if necessary.

Meanwhile, mega banks in Europe continue to buckle, economies continue to stagger and the uprising of populations increasingly apprehensive of the entire EU apparatus will be felt in votes this year. Already, much of Eastern Europe (with notable exceptions of Austria and Romania) has elected anti-EU politicians. With major elections approaching - in the Netherlands in March,  France in May and Germany likely in October, the only way for the sitting elite to retain power is to make the markets seem frothy. That means more QE manifestations from Draghi, a weaker euro, more bubbles in major European stock markets and greater presence from conservative, protectionist politicians.

In Europe, weaker countries are struggling more than ever. In Greece, more than one out of every three people now lives in poverty and 25% of Greeks are unemployed and receive no benefits. Even stronger countries like Norway and Switzerland will be at economic risk as they begin to negotiate trade agreements with the central EU.

8) Upside for Russia

Any way you look at it, Russia will be a key economic beneficiary for 2017. The ruble appreciated about 21% vs. the dollar in 2016, outperforming all other emerging market currencies for the year. This trend will continue. Russia’s MICEX stock market index rallied 24% for 2016. Russian bonds will maintain that path amid high interest rates (around 10%) and a positive geo-political outlook relative to the US.

Russia will enjoy warmer relationships with the US under the Trump administration and find and ally in Rex Tillerson as Secretary of State. It has strategically engaged in trade agreements with China to diversity against US ones.  Simultaneously it has furthered relations with many Eastern European countries that have been disillusioned with the EU.  As more pro-Russia officials are being voted into power, the positive impact on Russia’s economy will carry on.

These alignments could provide Russia more impetus militarily. Having stepped in to assuage the situation in Syria while the US remained relatively silent, it can also capitalize on its Middle East relationships.  Russia supplies nearly one-third of the EU’s natural gas, but it has also begun clean energy initiatives through the BRICS development bank and other platforms, a strategic diversification. That’s why the ruble will outperform the euro and the pound sterling.

9) Angst in the United Kingdom

Before being picked as Trump’s Commerce Secretary, billionaire, Wilbur Ross called Brexit a “God-given opportunity" for UK rivals.  As commerce secretary, he can act upon that characterization - through negotiations of new US-UK trade agreements that favor the US. That would increase UK reliance on more optimal EU negotiations, by no means a given. The UK can also hope that China and the BRICS will offer better opportunities, which increases the West to East power shift.

The sterling fell 14% in 2016, due to Brexit and anxiety over what form it will eventually take.  Despite a year-end dead-cat bounce, uncertainty can only mount once negotiations truly begin.  As the Financial Times noted, the number of times the words “uncertain” and “uncertainty” appeared in the Bank of England’s Monetary Policy Committee meeting minutes in 2016 rose 78 per cent vs. 2015.  That doesn’t bode well for the sterling. But in the event of a Bank of England rate cut (to compensate for the Fed hike), there would be another temporary boost to the UK stock and bond market.

10) The Trump Effect Will Accentuate Unrest

Trump is assembling the richest cabinet in the world to conduct the business of the United States, from a political position.  The problem with that is several fold.

First, there is a woeful lack of public office experience amongst his administration. His supporters may think that means the Washington swamp has been drained to make room for less bureaucratic decisions.  But, the swamp has only been clogged. Instead of political elite, it continues business elite, equally ill-suited to put the needs of the everyday American before the needs of their private colleagues and portfolios. 

Second, running the US is not like running a business. Other countries are free to do their business apart from the US.  If Trump’s doctrine slaps tariffs on imports for instance, it burdens US companies that would need to pay more for required products or materials, putting a strain on the US economy. Playing hard ball with other nations spurs them to engage more closely with each other. That would make the dollar less attractive. This will likely happen during the second half of the year, once it becomes clear the Fed isn’t on a rate hike rampage and Trump isn’t as adept at the economy as he is prevalent on Twitter.

Third, an overly aggressive Trump administration, combined with its ample conflicts of interest could render Trump’s and his cohorts’ businesses the target of more terrorism, and could unleash more violence and chaos globally.

Fourth, his doctrine is deregulatory, particularly for the banking sector. Consider that the biggest US banks remain bigger than before the financial crisis. Deregulating them by striking elements of the already tepid Dodd-Frank Act could fall hard on everyone.

When the system crashes, it doesn’t care about Republican or Democrat politics. The last time deregulation and protectionist businessmen filled the US presidential cabinet was in the 1920s. That led to the Crash of 1929 and Great Depression. 

Today, the only thing keeping a lid on financial calamity is epic amounts of artisanal money. Deregulating an inherently corrupt and coddled banking industry, already floating on said capital assistance, would inevitably cause another crisis during Trump’s first term.

 

In closing, I share with you my yoga instructor’s New Year’s motto:

Don’t half-ass anything.

That means whatever you do - imbue it with passion, courage, attention and conviction.