ARCHIVE - JULY 2017
Issues, News & Views
THE WORLD ACCORDING TO CHALPREM - JULY 2017 EDITION
2017/07/20 - Herewith Chalprem provides you with our semi-annual economic update.
We continue to hold a constructive view of the United States economy, expecting that modest economic growth will continue. Before we outline the reasons why, let us lay out a few potential risks.
First, there are always risks. Even in our daily lives, we risk… being hitting by a car, being attacked by an animal, being a crime victim, contracting a disease, or suffering an accident of some type. They are called “accidents” for a reason. Accidents happen.
There are also foreseeable risks. The US deficit is far too high, and that poses risks, but the catalyst required to ignite that risk and turn it to chaos are not presently visible. One possible catalyst over the next six months is the debt ceiling, but we'll have to see how that develops.
One possibility is that the biased leftist media, finally feeling the Russia fatigue that has been suffered by ordinary Americans for about six months now, probably knows it is time to move on and latch onto a new fake news anti-Trump meme. They might use the debt ceiling to induce some fake chaos, but we'll see have to see how it plays it out. The fake hysteria could morph into a self-fulfilling real crisis.
Another foreseeable risk is the situation in North Korea. Chalprem believes it is the objective of Kim Jung-un to unite the Koreas with himself as the head of this combined cleptocracy; that to do it he will risk a full-scale war if necessary; and that it will be sooner rather than later. Possibly around the time of the 2018 Winter Olympics in South Korea.
Given North Korea's designs, it is also Chalprem's position that the less-worse alternative for the US, South Korea and Japan is to act pre-emptively, immediately, even if that means risking full-scale war. I war there shall be, it must finish before the onset of winter in order to avoid multiplyng the toll of human life.
A full-scale war would be expected to have significant economic repercussions, though not necessarily bad, depending upon how the war goes. A rapid elimination of the Kim regime and absorption of the North by the South could add to intermediate term market confidence, and strongly support longer term economic growth. But it would trigger no lack of short-term turbulence.
But aside from those black swans, we expect the economy to continue to grow, albeit at a pace somewhat below what we are actually capable of. This represents a bit of a downgrade from January, as we have been disappointed by the Congressional Republicans to get their act together and help the President with his agenda.
At the heart of our still optimistic view is the global availability of plentiful inexpensive energy. Fracking has structurally changed the oil and gas market from a global near-monopoly controlled by OPEC, to an almost perfectly competitive global market. This is not a great thing for producers - stay away from energy stocks – but it is a wonderful thing for energy consumers. And global economic growth.
Which brings us to the second reason for optimism about the US economy: global economic growth. At this time almost every region of the planet is pulling at least part of the economic load as the outlook improves in South America, Europe and Asia including China. An indicator of improvements in China is the price of copper, which had drifted lower in the spring, but has strengthened over the past couple of months.
The third reason we will not see a recession any time soon is that the continued slow growth avoids a buildup of pressure that might cause a reset. Ideally an economy would go ten steps forward and then one step back to consolidate. But our economy hasn't needed to take a break, since it hasn't been able to work up a sweat under Obama's anti-growth policies.
The American economy is like that talented but lazy basketball player who never needs to come off the court because he doesn't work hard enough - but he'd accomplish a lot more if he'd work harder and take an occasional break.
The fourth reason for continued optimism is the Trump Administration - even though Democrats are hell bent on preventing Trump from doing the good things that would make America great again, at least the negative forces that would impose further decline are held at bay.
The regulatory state won't get worse legislatively, and the executive branch is doing what it can to ease the practical burden of regulation. Less austere, hostile and adversarial enforcement of existing legislation is already a plus for the economy.
Gridlock is far from the worst thing for business. As bad as Obama's “hope and change” policies were for economic growth, even good policy changes are still changes, and they make business planning, spending and expanding a more complicated, higher risk proposition.
Still, pro-growth changes in public policy, though possibly somewhat disruptive in the short term, move us to higher sustained levels of growth, output and prosperity without increasing the deficit. What is holding us back is the inability of Republicans to push forward their agenda: full absolute repeal of Obamacare, tax reform and tax cuts, entitlement reform, and an absolute contraction in the scope and scale of government services and spending.
Don't be fooled - government redistributional tax-and-spend is no-upside harmful beyond the short term sugar high. Free markets - households and businesses - are far more efficient at allocating capital then governments. When government uses its coercive powers to confiscate resources from market participants and reallocate the resources elsewhere, the results are usually suboptimal if not damaging. The creation of large bureaucracies is a drain on our economy. Thankfully, we don't expect damaging redistributional fiscal measures from this Congress or Administration.
A fifth reason we will not see a recession any time soon is the low interest rates. Inflation continues at a low level with little pressure in sight. The Fed will have little incentive or need to raise interest rates except at a very slow pace. Expectations of rising rates are overstated. Look for no more than two 25-bip increases in the next twelve months, if even that. We frequently reference the St. Louis Fed M2V chart indicating that inflation pressures are limited.
Real GDP clocked in at 0.7% in the first quarter, but rebounded to 2.9% in the second quarter. We expect GDP to continue in the 2% to 3% range for the rest of the year.
So, in summary, not a lot has changed since our January update. Globally prospects have gotten better, locally prospects are a bit diminished from higher hopes. If congressional Republicans can get their act together and accomplish anything in the way of tax cuts, spending cuts, tax reform, Obamacare repeal that would be additive (and shocking!). For the time being we will take solace in the executive branch's deregulatory policies.
If we could ask for one thing, it would be for Congressional Republicans to grow a spine and do what they were elected to do.
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