Debt as Brake
Pfäffikon SZ, Switzerland – With the new year 2017 in view, investors are particularly in a good mood. For months, the proclaimed policy of the upcoming presidential Donald Trump was being criticized; sentiment turned after his election in just a few hours. The financial sector, the industrial sector, everyone suddenly sees potential. The key question is whether Trump can deliver.
Disagree
Scholars on the market largely disagree over the course of 2017. It remains guesswork how Trump will approach the business with regard to the world’s largest economy. It must be admitted that Trump has added some interesting heavyweights to his staff. That some Dutch politicians dismissed the staff of Trump as a freak, shows not much respect. The undersigned follows, for example, Wilbur Ross for more than 15 years. My conclusion is that Ross can not be written off as a financial bungler. Trump’s staff, therefore, deserves at least the benefit of the doubt.
Consensus
The consensus is that interest rates (and inflation) will increase significantly in 2017. This month, The Fed (U.S. banks system), for example, indicated that it would raise interest rates three times in 2017, as well as in 2018 and 2019. However, no value can be attached to this kind of commitment. After all, end of 2015, the Fed promised four interest rate increases in 2016; it was only one. Investors seem to have forgotten that the debts under the Obama regime have risen sharply. In eight years, the debt in the U.S. increased from approximately 75% to 120% in relation to the U.S. Domestic Product. At a ratio of 80% arises as it were a brake on growth.
Increasing interest rate
It is questionable whether the Fed may raise interest rates in 2017 three times. Additionally, it is highly uncertain whether Trump can steer all his draconian fiscal and investment plans through the U.S. Congress. A Republican majority gives no guarantee that Trump will be supported. Also, the Fed showed itself remarkably open and realistic; “All the participants [of the Fed’s policymaking committee] recognize there is now considerable uncertainty about how economic policies may change and what effect they may have on the economy,” said Janet Yellen of the Fed last week.
It is not excluded that Trump will be blocked by his own Congress in its drive for action. However, the usually indomitable Trump will make every effort to shape its fiscal and financial ideas. When Trump gets his way, the already precarious debt problems will most likely further derail. In the midst of this dynamic arena, U.S. markets reached new all-time highs which are based on a zero percent interest rate policy. The Fed has the clean task to prevent a total collapse of the stock markets. A significant interest rate increase in 2017, therefore, seems a utopia.
It remains for me to wish you a good weekend.
Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.
