By David Scott | Monday 7 August 2017
Mid last week the odds of Facebook CEO Mark Zuckerberg running for President in 2020 surged to 65% before decline at the end of the week. While Donald Trump is still favourite at 5/2, Paddy Power has just reduced the odds of Facebook co-founder Mark Zuckerberg winning the 2020 US presidential election from 25-1 to 16-1. Trump's deputy Mike Pence is tied second with Senator Elizabeth Warren with odds of 15-2. Other interesting inclusions to the betting odds list are wrestling super star and actor Dwayne Johnson (popularly known as the Rock, 16-1) and Michelle Obama (14-1). Zuckerberg is now ahead of Hillary Clinton whose dismal betting odds are dwindling even more, now going from 25-1 to 50-1.
The paradox which Mervyn King highlighted is that what we want in the long term is exactly the opposite of what we want in the short term. Namely a higher savings rate is what we need but the only thing keeping growth going in the UK is a falling savings rate. At present the UK has a gross savings rate in the low single digits and a necessary investment rate, to keep things going just into double digits. The pound may be too low on a purchasing parity basis, but until our savings rate climbs, it will remain under pressure.
The USA has a different problem. Since 2014 the US dollar risen significantly against its trading partners’ currencies and this rise is starting to undermine the US trade position and its growth rate. Unless Trump does introduce some kind of VAT, which would reprice exports against imports, the chances are quite high that for all the enthusiasm and surge in confidence that greeted his presidential election, the US economy could already be weakening and with it the dollar’s strength. The paradox is that the weaker that the US economy becomes, the more necessary it is for Trump to introduce such a VAT tax change.
Whatever happens to Trump, it doesn’t matter. Globalisation, which was spurred on by GATT’s passing in 1994, which brought 6 billion people into a trading system which was originally used only by those developed economies, is now seen by many as an enemy. After 20 years the average Chinese wage is 50% of its US equivalent and the average Indian wage is 40%. Waiting another ten years for these developing countries to catch up with the West is no longer a political option. Trying to find alternative jobs for those in the developed world has been tricky and with it the productivity globally has fallen to near zero.
It is not only the developing world that represents a threat. New disruptive technologies could decimate jobs in the developed world before alternative occupations have been found. We all know that change never comes as quickly as you expect and when it comes, it changes things far quicker and more significantly than you ever imagined. Without Trump effecting a major change in his taxation which goes to the heart of the USA as a consumer of last resort, investors must anticipate that the US economy weakens as imports pick up and exports trail.
If you want to predict the future of an economy, look at real household income. If real income is stagnant or declining, households cannot afford to take on more debt or pay for additional consumption. Central banks have replaced the income lost to inflation and economic stagnation with debt for the past 17 years. They've managed to do so by lowering interest rates (and thus lowering interest payments), enabling households to borrow more (and thus buy more) with the same monthly debt payments. But this financial manipulation eventually runs out of road and eventually, the rising cost of living soaks up so much of the household income that the household cannot legitimately afford additional debt, even at near-zero interest rates. If household incomes continue stagnating or declining, widespread advances in prosperity are impossible.
Central banks have played another financial game to mask the erosion of real income: inflating speculative asset bubbles to boost the illusion of wealth, a form of financial sorcery called the wealth effect. Households that see their stock and bond funds grow by 50% to 100% in a few years are lead to believe that this phantom "wealth" is permanent and thus can be freely spent in the present. The problem with this financial engineering is that only the top 5% own enough assets to experience the speculative high of asset bubbles. This is a significant reason why the top 5% have pulled away from the bottom 95%. Those with some financial wealth (the top 20%) have enjoyed substantial gains, but the truly outsized gains were reserved for the top 5%, the class that owns the majority of the nation's wealth. The bottom 20% have suffered significantly and are now making their feelings known at the ballot box.
After nine years of this artificial levitation on the part of financial assets, high-end real estate, art, the things that rich people buy, what we have today is a global financial system that’s just about as leveraged, and in many cases more leveraged, than 2008. I don’t think the financial system is sounder. I don’t think the fixes that have been put into place have actually created a sound financial system. The Central Bank experimental medicine of money printing may have saved the patient in the short term, but it is addictive; withdrawal is ugly; and because long-term side effects are devastating, it can be prescribed only for short-term use.
Providing more debt and more credit after a bust that was caused by too much credit is like suggesting whiskey after a hangover. When investors convince themselves central bankers have their backs, they feel encouraged to bid up prices for everything, accepting more risk with less return. Excesses and bubbles are not a mere side effect. I don’t believe confidence is justified in policy makers and central bankers and the fact that confidence has not been lost up to now is obvious. But if and when confidence is lost, I think it could be lost in a very abrupt fashion causing, conceivably, a ruckus in stock markets and bond markets.
You may not care about monetary policy, but it will have an impact on whether you can retire comfortably and it is difficult to overstate how profoundly monetary policy influences our lives. If you care about your quality of life, the possibility of retirement, and the future of your children, you should care about monetary policy.
The entire concept of modern global central banking of awarding highly centralised control of the money supply and economy to an unelected, out of touch elite, is going to be questioned very soon as the disruption is already happening. One can only be an investor in functioning markets. There have been no functioning markets since at least 2008, and probably much longer. That’s when central banks started purchasing financial assets, for real, which means that is also the point when price discovery died and without price discovery no market can function.
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