Juggling Dynamite

Skype quality not great here, but content of this discussion is worthwhile.

Former U.S. Treasury Secretary Lawrence Summers said investors are being far too sanguine about the risks associated with Donald Trump’s incoming administration.The Harvard professor, a Democrat who was Treasury chief under Bill Clinton, cited the possibility of protectionist measures by the U.S. as well as changes to foreign policy and domestic social policy as issues that are creating “extraordinary uncertainty. Here is a direct video link.

“The vast majority of the companies who have large overseas cash also have substantial amounts of domestic cash,” he said. “The reality is that cash that is brought home will be used to pay dividends, to buy back shares, to engage in mergers and acquisitions, to rearrange the financial chessboard, not to invest in large amounts of new capital. It is a chimera to suppose that there will be large increases in capital investment as a consequence of that repatriation.”

A new report from the OECD is sounding the alarm on ‘dangerous’ conditions in several global property markets:  especially New Zealand, Sweeden, Canada, Australia and the UK.   While bad for ‘investors’ and the highly levered buyers who have been driving prices beyond reasonable levels, the report also notes that lower prices will eventually be better for families looking to form households.  First however, a plunge in prices will destabilize the economies who have become overly dependent on rising property values.  See Fears of a ‘massive’ global property price fall amid ‘dangerous’ conditions and market-slowdown:

Good New Year look ahead piece yesterday from the UK Telegraph’s Ambrose Evans-Pritchard. See: Trump, interest rates and Chinese panic: Why euphoria could turn to credit crunch in 2017.  Here is a taste, but worth reading the whole thing:

Donald Trump’s reflation rally will short-circuit.  Rising borrowing costs will blow fuses across the world before fiscal stimulus arrives, if it in fact arrives. By the end of 2017 it will be clear that nothing has changed for the better.

Powerful deflationary forces retain an invisible grip over the global Bond yields will ratchet up further and then come clattering down again – ultimately driving 10-year US yields below zero before the decade is over…

Once markets accept that Trump is not bluffing – that he really does intend to smash globalism – euphoria will give way to alarm. For now Wall Street remains drunk on wishful thinking. The longer the delusion lasts, the stronger the dollar, and the greater the trouble in Asia and Latin America.

(For those who do not subscribe to the Telegraph and cannot view the story directly, a copy is available here through John Mauldin’s site today.)

2017 is set up to be a breathtaking year to be sure.  Political risks are one thing, but more importantly at this point, capital/financial downside risks have rarely ever been higher.  Happy New Year!