How Trump divided the financial world

I went to one school yesterday to have a speech for the students. They were asking me how the optimal economic politics should look like. I answered that mainly the majority of people should trust it – because the economy is a reflection of our head. When we believe in future development we don’t hesitate to spend, do business and invest. So the society needs a politician who it is willing to follow and occasionally even tighten temporary its belt for their politics. Unfortunately, the world is to certain extent missing such politics right now. Current politicians are dividing the society instead of unifying it so it would follow them. And the current American president managed to take this dividing to the perfection – and that is not saying at all if it is going to be worth it in the end. The problem is that there’s hardly anybody else who is dividing this planet to two camps more today. And exactly that is reflecting on the financial markets already:

One part of the investors is looking up to him like he is god and the other part thinks he is – forgive me – an idiot. But that is shaking the financial markets a lot according to if there are more supporters or opponents on the market at the time. Trump is managing to completely puzzle the base axioms of the last years: For example in that, that the part of democratic voters is still refusing the democratic result of the election or in that that Trump closed the America today from immigrants even from the countries which are having civil war happening in them now. So how we were hearing for years in Europe that we must simply admit the refugees from war, Trump cancelled the same opinion with one signature today. From the point of view of the financial speculators, it is much more important to guess how much he will draw the government budget in the end.

And that is not clear here at all. So far he was only trying to verbally motivate the American car companies to make more in exchange for cancelling the majority of the ecologic limitations for cars which were signed by his predecessor. So the stocks currently turned about and are growing in the expectations of higher expenses. Many stock indexes are on their long-time record today. But that is not very rational – just like how the previous drop wasn’t either. Once again it is not a bet on anything specific. You can see that even better on the forex market.
There are not as many Trump fans on the forex market like there are on the stock market. Forex players are not smitten by the promises for the car companies and on the contrary, they are afraid of the possible protectionism. Economic theory is clearly saying that protectionism is a loss for everybody from the long-term view and has no victor. That’s why the dollar is depreciating against the majority of the world’s currencies today. On the other hand, the stock markets are not perceiving this risk at all. They are looking only at how the subsectors will be doing: let’s say car companies here or oil producers there.

The Trump card is overrated

Do you know what is called an obsession with one topic? It’s a situation when ten out of ten “major” news of financially oriented press agency Reuters providing online data from the financial markets has in its title the word “Trump”.

So it is pretty obvious with what is “officially” being the movement of almost any exchange rate, stock or yield explained even if it had absolutely nothing to do with America or Donald Trump. But let’s look at the current financial events without emotions.

Especially today is being ruled by the drop of the vast majority of the European stock markets (we can’t judge the American ones just yet). Many of them are getting to their weakest values in this year. The reason? We have been talking about it last week already: Trump started his days in the office with comments that are clearly pointing at the intentions to issue protectionism in the foreign trade. Even though some individuals can think about the profits and losses of such attitude whatever they want the financial markets as a whole are clear about the matter: They perceive any protectionism always completely negative.

You surely remember the prognosis that if Trump wins the presidential elections the stocks will sharply drop – which got confirmed in the end for a few hours so the belief that he “surely didn’t mean it seriously with the protectionism and it was only pre-election talks” would prevail afterwards. And as a reaction to that, the drop of the stocks turned into growth. And now almost like retrospectively the scenario which was expected right after the election started only additionally coming true: When the opinion that in the question of protectionism it wasn’t only the pre-election rhetoric started prevailing in the end, the stocks started reacting to that, how it was predicted that they will react right after the elections.

When we look at it with bystander’s eyes we can’t not notice really strange phenomenon: The stocks and the dollar were not long ago relatively sharply rising because of the assumption that Trump will wake economic growth in the USA. Now both are dropping because of the assumption that Trump will establish protectionism and cools down the global economic growth that way. To be honest neither of those assumptions have much support in facts or arguments – the Trump card is overrated.

One human with strong opposition in Congress on top of that can hardly wake up the economy to such dramatic growth just like one human can hardly take the economy radically down – not to mention that the theoretical economics know that the monetary politics of the central bank has much bigger and faster effect on development of GDP than the fiscal politics of the government. So the financial markets are overreacting on both sides – however overreacting has been always typical for them. The golden middle road would most likely better match the real judgment of the situation.

Fico not planning to get wiser

Slovak Prime Minister Robert Fico won’t stop economically getting at Britain because according to him it would supposedly be “wrong” if the European Union emerged weaker out of Brexit and Britain stronger - by which he probably wanted to mainly say that the future agreement “needs to be” unfavorable for Britain.

What a surprise it would be if he suddenly changed his mind after claiming the same for months, despite it being an extremely unfavourable opinion for Slovakia: The economy is showing pretty clearly that the free market is favourable for both sides so to deny British access to European market is for the continent – and so for Slovakia as well – loss-making.

(Logic that the weaker one is the stronger is the other is completely wrong here.)

So it still applies that the rest of EU is not planning to get wiser about this...

What does Trump really want?

The financial market is stepping from one foot to another and waiting. We have several unknowns that the market doesn’t know what to think about. The biggest unknown is the future American president. We are only a couple of days away from his inauguration to the office but the markets still clearly don’t know what he wants to do. His phrasing is general and it is missing specific numbers.

The problem of Trump is that he wants to help the economy by protectionism which unlike the domestic political attempts will induce a negative global reaction which will help nothing. The economy has proved many years ago that protectionism is bad for everybody involved:

The poll of the Reuters agency among 500 economists from all around the world was published. Opposite to the same poll from previous time period both optimistic and pessimistic outlooks moved down. Economists are assuming that the probability of the global recession in this year is 10 %. Here I am far more pessimistic about the probability. The only thing where I have changed my opinion is that I have moved the worsening of the condition of the economy from summer to fall. I don’t see the stimuli for growth nor political nor economic…

Brexit hard & heavy

What the birds were tweeting about came true. British Prime Minister T. May will let the parliament vote about the Britain leaving the single market of European Union. May doesn’t want any restricted version of part membership in EU either. But that doesn’t mean that she wants to burn all the bridges. On the contrary, she wishes to seek a new business partnership not only with EU but also with China or the USA. Especially the United States are according to May the closest British partner.

One is asking a question why is Britain wishing to completely clear the positions on the single market of the old continent. The reason is that the island kingdom wants to fully control the number of people coming from the union and non-union countries. That was one of the main wishes of the British who voted for the BREXIT in the referendum. Variant of so-called hard BREXIT is by that getting sharper contours. European leaders will want to scare everybody who would want to follow Britain on its way out of the union. So the question stands how much will Britain suffer.

We think that in the end not so significantly. The majority of European countries have a balance of trade surplus with Britain. That means that the British islands are an important market for the continental Europe. Only a crazy person or the EU would willingly deprive themselves of the possibility to keep trading with Britain without barriers. Which is not saying that it is not going to happen. The EU has nothing to substitute the British market with. But Britain has a place to turn to – it can bravely compensate the loss of EU in America.

Monetary pressure cooker is tensing up

Too many good news are coming from the Czech economy. If the crown was allowed to move freely, it would significantly appreciate today without a doubt. Since the beginning of the year, we have found out already that first time in more than twenty years we have a surplus of the national budget. The unemployment rate is the lowest since the year 2008. The inflation reached the goal of CNB when it jumped to 2 %. And the retail sector is only blooming according to the numbers published today. Those are all news that would appreciate the currency under normal circumstances.

That is a serious warning for CNB that the inflation pressures will grow. However, CNB has already clearly said that until the inflation will be around 2 % it means nothing to them and they won’t react. That way it was trying to get away from speculations that it is going to end the interventions prematurely. But the speculations are growing. It is estimated that CNB gave away over one hundred billion crowns for the interventions since the beginning of this year only. That is an untenable no matter how much they will claim that they can handle it.

E. g. member of the bank board of Czech national bank (CNB) Vojtěch Benda said that the end of the commitment is likely in the middle of the year 2017 and that CNB prefers one shot and transparent ending of the exchange rate commitment and that the ending of the exchange rate commitment won’t lead to sharp appreciation of the crown. According to him, the negative rates are not a preferable variant. Except: I don’t believe it at all. The demand for the crown is growing. That is being proved by today’s auction of one-year bond in which the demand made 32.3 bn. CZK. NO Czech bond has experienced such demand before.

My opinion is that the end of the interventions is quickly coming closer. CNB is going to rack their brains how to sail out of this mess. Let’s remember the Switzerland and what problems the interventions brought to it. The experience from the Switzerland is saying that the franc appreciated against the euro by 29 % the day the interventions were ended. It was very unstable following two weeks and got back to normal only after 9 months. So let’s imagine it in the Czech Republic: if everything went only hypothetically based on the Swiss example (which is obviously very extreme option), the crown would jump under 20.00 CZK/EUR against the euro in one day. Do you think that CNB wouldn’t interfere? It would interfere much sooner for sure. That’s why I don’t believe in one shot releasing of the exchange rate.

 
I think that the exchange rate will end the year significantly stronger. It is only about how long will the CNB last to intervene. Will the intervened trillion of crowns stop it or will two? Trillion is within the reach, and maybe this jackpot has hit already today – but only a couple of people in CNB know that.

What will be sacrificed?

New data from the American economy are so good that I am honestly scared of them.

 

For example, the number of applications for unemployment benefits published today is the lowest in 43 years. The job market is probably moving around the point of full employment. That should be a somewhat notional goal of economic politics. Now the politicians should try to keep the economy around this point. The unemployment rate is making only 4.6 % in the USA. The lower unemployment rate would push the inflation unhealthy upwards. So the politicians shouldn’t try for the lower unemployment rate anymore.

 

On the contrary, the economy needs to be suppressed a little bit. But it needs to be done very carefully. That’s why the central bank will be measuring on medical scales how many times it is going to raise the interest rates. The financial market is currently not doubting that they are going to be raised at least twice this year in the USA.

The economy is certainly not in such a good condition in Europe. Either way, that is not true in all of the states. While the south of the Europe is suffering and young people basically can’t get a job there, the unemployment rate in Germany is the lowest since the year 1990. That’s why the German economists publically asked ECB today to raise its interest rates. So once again: Part of people is fearing the inflation and part of people is again fearing the bankruptcy of the south of Eurozone. I would bet that ECB lead by Southerner – Italian – will prefer south of Europe in the end and won’t raise the interest rates.

 

The economic outlook might look optimistic. But it can be also seen exactly the opposite way!

Today I am back again at work after three weeks and you won’t know how much I was looking forward to it... Well okay, I won’t be teasing you anymore - and I will recap what did the last days bring to the global economy.

Macroeconomic news was mostly optimistic. For example, the consumer confidence in the United States (which is the most visible representative of global trends) has climbed to the highest level in more than 15 years in December. That was quite surprising. Remember how in November many Americans were crying that D. Trump won the presidential elections and wanted to emigrate in their despair!

It obviously quickly vanished at least in average. The average American consumer was satisfied with the development and even optimistic (!) month later. But again there is not much to marvel at. The growth of the American economy reached 3.5 % in the third quarter. That is the most in two years. The unemployment rate dropped to its nine-year minimum. Stocks rose. Some of the European stock indexes even reached the year’s maximum this morning. So why should be the average American pessimistic?

That is also reflecting in the fact that 500 richest people on the planet got even richer by 237 billion dollars during last year to overall 4.4 trillion dollars. That matches GDP of the Czech Republic for probably 28 years. In other words, the income scissors on the planet got drastically open. 500 richest people of the world could finance the Czech Republic for 100 years (100 national budgets).

However optimistic that might look, it can be seen exactly the opposite way. It can be viewed as a sign of upcoming crisis because this state is definitely not balanced. We could also consider as an important warning coming from the United States the American real estate market starting to stumble. Last numbers are saying that the number of started businesses is dropping. That understandably doesn’t have to mean anything but when a few more drops get added to it, it can make a toxic cocktail.