August 14, 2017
Last week we talked about the “Orange Swan” effect of President Trump. Well, there are a few more “swans” in the world that could really screw things up. First is the possibility of Janet Yellen getting monetary policy wrong within the context of other domestic reforms. We were promised health care reform, tax cuts and infrastructure spending as part of the new administration. That largely hasn’t happened, and as a result, the economy is stagnant.
To battle that, some members of the Federal Reserve have turned hawkish to offset stimulus from the Trump administration, even if it isn’t guaranteed (the Fed is acting as if it is). What happens if/when rates rise and they should be lowered? Likely deflation, which could be catastrophic at our current debt levels.
The second swan is the European Central Bank, which has been far more aggressive in its Quantitative Easing (QE) program than the Fed. That means the program features negative interest rates and includes corporate bonds. The swan comes in how this could play out globally.
Our QE effort and subsequent tapering coincides with the Europe and Japan opening their fiscal floodgates. When the situation reverses, I don’t think we’ll return the favor. And when rates are normalizing, not having the Fed as a safety net could be bad. Chinese debt is the third swan. By all accounts, China is unstoppable. It recently slowed to 6.9 percent economic growth, which kills us when we’re hoping for 2-3 percent gains!
But, debt is fueling that growth. Do you want to own a stake in something that seems destined for a government bailout? Who knows if that aid will materialize? Any of these events could the U.S. to a recession, which would likely mean global recession. I hope these swans remain asleep!