As we kickoff trading in 2017 with the price of silver spiking, here is a look at what will have the biggest impact on the year ahead.
Succinct Summation of the Potential Bullish and Bearish Events of 2017:
Here is what Peter Boockvar wrote today as we head into 2017:
Positives
1) Corporate tax relief meant to encourage capital investment in US production. Lower individual and small business flow thru tax rates.
2) Regulatory relief for a whole host of industries, particularly in healthcare (bye bye Obamacare?) and banking. Biggest beneficiary may be small business who’ve experienced death by a thousand regulatory cuts over the past 8 years.
3) Lowering taxes on repatriated cash will more efficiently put this capital to use (but about half is in just a handful of tech companies).
4) While the benefits of Trumponomics won’t likely be realized until 2018, the optimism it has engendered recently reflected in both corporate and consumer diffusion indices spills over into actual gains in business activity that brings GDP growth closer to 3% from 2%.
5) The Federal Reserve might pick up the pace of rate hikes from once per year so we can more quickly exit this monetary fantasyland we’ve been in for about a decade that has resulted in many more negative unintended costs that far outweigh the benefits…
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6) Skilled labor and those at the bottom of the pay scale (and hopefully many in between) will see wages go higher. There is a dearth of non-working skilled labor and 20 states will see minimum wages go up in 2017.
7) For European asset prices and maybe others, the ECB will most likely follow thru with another 12 months of QE.
8) German Chancellor Angela Merkel wins again when the election occurs sometime in the 2nd half of 2017.
9) Francois Fillon wins the French Presidential election in May and thus brings an economic revolution with him.
10) Article 50 is finally triggered in the UK and the process goes smoothly and the pound rebounds and eases growing inflation pressures.
11) China continues to manage its economic slowdown in an orderly manner with a slow depreciation in its currency vs the US dollar and credit growth slows from its out of control pace without causing too much economic dislocation.
12) The tight Japanese labor market finally leads to an acceleration in wage growth and Kuroda and the BoJ give up their 2% inflation obsession that would completely offset the wage gains.
Negatives
1) Because of massive debts and the onset of large budget deficits again, Trumponomics needs to ‘pay’ for the cuts in taxes. Border adjustment taxes will impact a wide swath of industry, particularly retail, and what if the US dollar doesn’t rally further to lessen the impact? Higher inflation and squeezed profit margins will result.
2) What if the US dollar does continue higher? What impact will that have on multinational corporate decision making on where to place that next factory and/or job?
3) We are a credit dependent economy with a very overleveraged corporate sector so what happens to growth if interest expenses on newly accumulated debt is no longer tax deductible?
4) No one should be so naïve to think that US growth and the price of assets won’t be impacted by higher interest rates, whether Fed induced on the short end or market driven on the long end. We’ve pulled forward economic activity (auto’s in particular) and returns in a variety of markets (bonds, stocks, and commercial real estate most notably). Financial conditions will tighten further in 2017 and I include this quote from my friend David Rosenberg, “There have been 13 Fed rate hike cycles in the post WWII era, and 10 of these landed the economy in recession and the three that were aborted – the mid 1960’s, the mid 1980’s and the mid 1990’s – were only aborted because the economy either slowed precipitously or there was a financial accident that forced the central bank to the sidelines. There has never been a Fed hiking cycle that ended benevolently.”
5) The Fed is woefully behind the rate hiking 8 ball and risks losing control of the yield curve. After all, they spent almost $3.5 Trillion (both on Treasuries and mortgages) and layered on Operation Twist in order to keep longer term market rates subdued.
6) The rise in rates comes just as US stock market valuations have been only more expensive in 1929 and 2000 on a variety of metrics. Yes, I hear ya that valuations don’t matter until they do but a rising rate environment is when they do. This country has a long history of 3%+ GDP growth and 15x P/E multiples. A 2017 EPS estimate of $130 per share times 15 = 1950 for the S&P 500. This is not a prediction (year end price targets are worthless information) but just a reflection of the potential power of multiple compression. I’m sure all you’ve been hearing is the market will be up between 5-10% in 2017.
7) The US non financial debt to GDP ratio is 250%. It’s 225% for the entire global stock of debt relative to GDP, both levels never before seen. US corporate net debt to EBITDA ratios are higher than they were in 2000 and 2007. Thus, we are more sensitive than ever to changes in interest rates.
8) Wage pressures will build as employees for a 2nd year increase their share of the profit pie which will weigh on profit margins if not offset by productivity growth and/or price increases. Minimum wage increases will no doubt influence the hiring intentions of small business, especially for young people. Is a 17 yr old with zero work experience worth $15 an hour? Also, what if rents, medical care and commodity prices continue higher as well? We will most likely have 2%+ headline inflation prints in coming months. One can be sure the Fed will be slow in responding.
9) US real GDP growth is still running at only about 2% because productivity remains punk. What if lower corporate taxes don’t improve capital investment because there is still too much excess capacity (utilization is still only 75%)? What if we do get that higher product inflation that is border tax adjustment driven without a coincident rise in wages?
10) The ECB and BoJ will continue to damage the business model of their banking systems due to negative interest rates and suppression of market rates that has flattened yield curves.
11) For asset prices, not only is the Fed raising rates but we are in the last stage of ECB, BoJ and BoE QE programs.
12) Germany decides to go in a different political direction and Merkel unexpectedly loses.
13) Marine Le Pen wins the French Presidential election.
14) The 5 Star Movement in Italy gains more political clout and maybe the PM spot.
15) Brexit is nothing but messy and freezes up corporate decision making. The weak pound makes inflation a real problem in the UK and Mark Carney not only ends QE but is forced into raising rates.
16) China’s credit bubble is massive and how can they avoid pain when this inevitably slows and possibly reverses? The drop in their currency becomes disorderly and Trump starts bashing the Chinese via tariffs and tweets.
***To listen to the fascinating KWN audio interview with Stephen Leeb, where he discusses the outlook for 2017, the gold and silver markets, what is really happening with China, and much more, and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***ALSO JUST RELEASED: A Terrifying Warning That The West Is Now Approaching The ‘Brick Wall’ CLICK HERE.
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