Ashok Dhillon
Jan 4, 20199 min
As the year 2018 heads for the history books, it will be remembered as the year of extraordinary political and economic turbulence. One could say that America’s political and economic upheavals were primarily due to the astonishingly disruptive and divisive President Donald J. Trump (which of course affected the rest of the world), but there were also the ongoing destabilizing effects of Britain’s efforts to uncouple itself from the European Union (EU), Russia’s attempts to destabilize the western democracies and Ukraine, the resurgence of the political Right Wing in Europe and most other countries, China’s trade war with the U.S., its aggressive stance in South China Seas, and the hesitant but generally tightening stance of the U.S. Federal Reserve (the Fed), and the European Central Bank.
The tightening cycle that the Federal Reserve initiated was not popular with the financial community, and that’s putting it mildly, as it triggered waves of criticism, but it was even more vociferously opposed by President Trump, who as is his ‘style’, openly and repeatedly attacked his own pick for the Chair of the Federal Reserve, Jerome Powell.
After decades of ultra ‘supportive’ interest rate policies, and the past decade of extraordinary measures such as Quantitative Easing (bond buying), the Fed had achieved its goals, generally, of a return to a steadily strengthening economy, practically full employment, and its target rate-of-inflation of 2%. Now, America’s Central Bank (the Fed) decided it had to act and start its tightening cycle by raising historically low interest rates, and by reducing its bloated balance sheet by selling bonds, to stave off over-heating of the economy and the possibility of excessive inflation.
From an economic point of view the Fed’s actions were reasonable, and dare we say it, responsible. It is the Fed’s job to ‘guide’ the economic well-being of the country in a reasonable and responsible way, which it was doing.
But, the criticisms levelled at the Fed by the financial community, and by Trump, stemmed primarily from two unrelated needs of both; unrelated to economic fundamentals – the greed factor of the financial community, who, having gotten used to the ‘cheap and easy money’ that ultra-low interest rates provided for over a decade, and the asset prices that it boosted (by destroying market based price discovery), were loathed to see an end to an endlessly rising asset market in which it was easy to make money - and as for Trump, it was strictly his political need to show an ever rising stock market as a proxy of the self-proclaimed successes of his radical and disruptive economic policies, which almost all experts and other global leaders condemned, but of which he has been unreasonably proud.
Endlessly feeding the greed of the financial community and catering to the political needs of the President aren’t exactly the job of the Federal Reserve, nor would it be responsible for it to overtly support either indefinitely.
So Jerome Powell, in spite of at times highly personal attacks by both, acted responsibly to continue to raise interest rates through 2018, albeit, cautiously.
Both the financial markets and Trump threw a hissy-fit by the end of the year, as if the Chair of the Fed was some insubordinate subordinate insulting them by daring to act independently. The severe reaction of the stock markets at the end of the year was due to a lot more than just the Fed raising interest rates.
If they, the financial community and Trump were to be honest, a highly improbable development, especially for Trump, there is a lot at play that is causing the stock markets to tank. The sell-off is reflecting the various areas of serious concern in the political-economic instability of the U.S., and the world.
Firstly, it is no secret Trump’s own economic policies have been a monkey wrench in the spokes of a global economy that had finally found some stability, and predictable growth, from the economies-stopping crisis of 2008.
Some of Trump’s most disruptive economic policies and actions have been the imposition of punitive tariffs on imports, the resultant trade wars, large growing deficits accompanied by large tax cuts (fiscally disastrous), the withdrawal of America from multi-country trade agreements and the resulting trade isolation, retaliatory tariffs and switching of trade from America to other countries (as in China’s purchase of soy from Brazil), and the personal threats to the Federal Reserve Chair, which all sent tremors of shock through the financial markets.
There are additional economic threats from the steadily growing political turmoil and gridlock in Washington, the Mueller Report, and the impending additional potential criminal investigations on Trump, his family and his businesses, by the newly seated Democrat majority in the House of Representatives.
Trump had inherited a growing and stable economy from Obama, which was solidly on track to register some impressive economic figures, which have lasted well into the two turbulent years of Trump’s Presidency.
The practically unbroken upward trajectory of America’s GDP growth rate and stock markets, into 2018, were a legacy of Obama’s two term economic policies that Trump inherited, and boosted in the short-term with his large tax-cuts. The practically unbroken downward trajectory of historically low unemployment figures were also a legacy from Obama’s time, which have continued their decent.
But Trump was not satisfied with inheriting a solidly recovering economy with increasingly impressive figures; as is his won’t, Trump had to make some dramatic moves to differentiate himself from all other previous Presidents, particularly Obama, to show his particular brand of business acumen and bold leadership.
Unfortunately, his chosen means was an aggressively antagonistic stance towards America’s largest trading partners, and the disruption of the relatively smooth functioning of established global trade amongst all the major economies.
Through punitive tariffs (the monkey-wrench), he targeted America’s biggest trading partners, Canada, Mexico, China, and the EU. Predictably, the biggest wheels of global trade started coming off as American corporations, and America’s largest trade partners, scrambled to deal with the fallout from the sudden change in rules, the rise in materials cost, and the tit-for-tat backlashes.
The enormous uncertainty created by Trump in the global business and political community, is one of the factors which by the end of 2018 contributed to the steep sell-offs in the global stock markets. Some of the emerging markets have already fallen by over 20%, officially triggering ‘bear markets’, as in China.
One of the most important countries to have taken it on the chin has been China, the World’s second largest economy, with whom Trump and his administration had particularly serious beefs (some quite legitimate), but taken-up in such a fashion that the first most serious pain was inflicted on American business and agriculture, as with American farmers left with unsold produce, and the most recent, Apple’s declining sales of its iPhones in China, that rocked markets.
Apart from the dampening effect of stressed businesses and farmers at home, Trump’s policies have made China, one of the World’s largest economies, additionally vulnerable to its internal and external financial and economic pressures that could have very grave consequences for America, and the global economies. The stock markets reflected the additional vulnerability of China at the end of 2018, and into the start of 2019, by their steep selloffs.
Adding to the above mentioned disruptions and uncertainties, exacerbated by Trump’s daily contributions by twitter, were the far reaching adverse consequences of Britain’s hereunto vain attempts to dislocate itself from the EU.
Even though, now universally acknowledged that the phenomena known as ‘Brexit’ was a bad idea from the start, the British government, headed by Prime Minister Theresa May, has been almost comically stubborn in the pursuit of the split and in the repeated and spectacular failures to achieve it.
Instead, the failed attempts and the possibility of a ‘no deal’ split have added greatly to the uncertainty already dogging the global business and trade outlook in 2019.
If Britain breaks away from the EU in a disorderly fashion, the economic consequences to Britain will be grave indeed for a very long time to come. The economic and political consequences will also ripple across the EU, further endangering what is an already increasingly fragile Union.
If a disorderly exit were to happen this year, Britain’s resultant economic woes will not be helpful to the deteriorating global economic conditions, and would put additional stresses on an already shaky EU, which currently is beset with political and economic uncertainties stemming from the rise of the nationalist, protectionist Right, and the nebulous cohesion of its members.
And then adding fuel to the global geo-political fires is Russia, rising as the proverbial Phoenix from the ashes of the old USSR (The Union of Soviet Socialist Republics), under the clever but sinister (if one is in a true Democracy) machinations of a strategically brilliant ex-KGB agent, Vladimir Putin.
Taking the scattered and looted core of what remained of the old, powerful USSR, Putin turned a shambles of a former giant, struggling from a shattered 'Communist Super-Power' status, towards democracy, and hijacked it along the way with a close knit group of fellow oligarchs into a tightly controlled autocracy with himself, Vladimir Putin, as its undisputed head, possibly for life.
Russia’s economy is small and ranks 11th or 12th largest in the world, depending on if it is the, IMF, World Bank, or the U.N., rankings. Its population size is approximately 144 Million, and yet it ranks lower than Canada in economic size, whose population is a mere 36 Million (approximately).
But, Russia’s growing clout in global affairs is far in excess of its economic size and importance. After the collapse of the former USSR, the current day Russia was an afterthought in international affairs. Under Putin’s dogged and determined machinations, Russia is now once again a major player in global affairs.
In fact, today, Russia’s political influence is so pervasive that the President of the United States, Donald Trump, plays the subordinate to Vladimir Putin.
And, the democratic European countries are feeling threatened by Russia’s manipulations of their politics; while the western military alliance, NATO, is again feeling vulnerable to Russia’s military muscle, which includes the world’s largest nuclear arsenal and purportedly the latest in hyper-sonic undetectable missile technology.
Vladimir Putin is not shy in using both those ‘strengths’ as a threat against the west’s intentions to curb his enthusiasm for world domination, through political machinations. [Note: Determining U.S. and European elections through manipulative propaganda and interference being case-in-point].
Putin’s Russia is changing the global geo-political landscape which is having an impact on the international relations. Apart from seizing Crimea from Ukraine, and daily threatening it, Putin has taken a toehold in Syria, and expanded it to have a solid and pervasive presence in the entire Middle East.
Its rise in the Middle East to become a leading player is altering the decades old preeminent position of the U.S. as the only leading power of consequence. Today, America’s friends and foes are being forced to deal with Russia as the power of consequence. These key relationships include, Israel, Saudi Arabia, Turkey, Iran, and of course Syria. Russia’s heightened role in the Middle East also greatly enhances its position as a major oil producer within the oil producing countries of that oil rich region.
In the Far East, while China holds sway as the upcoming Super Power, Russia’s influence extends particularly to North Korea, and generally to the rest of the Asian countries. But its increasingly strategic economic, political and military ties with China threaten the American hegemony in that vast and increasingly powerful economic region of the world. Trump’s withdrawal of America from its leading role has actively and greatly assisted Russia’s rise in international politics.
And, Trump’s trade war with China is having a dramatic effect on the stock markets of late. The tanking stock markets will put pressure on Trump to seek an early truce in his trade fight with China, weakening the U.S. bargaining position. Plus the steadily growing national fiscal and trade deficits, under Trump, are not going to reassure increasingly nervous markets as the Fed and other Central Banks, such as the ECB (European Central Bank) continue towards a tightening stance. And although they may hesitate in the face of the growing turmoil in their economies, yet they have little room to maneuver after the decade of extraordinary liquidity.
So, on top of the increasing divide in the national politics of the U.S., with its greater threat to President Trump from an invigorated Democrat majority Congress, and the threat from the Fed’s tightening cycle, and the ongoing trade and tariff wars, and the topping of the global economic cycle, there is the threat of a slowing China which has its share of built-in financial and economic risks, from its over leveraged financial institutions and its restive worker population.
Any significant economic slowdown in the west, particularly in the U.S., poses a serious economic threat to China as it is dependent on these markets for its economic well being - as its internal market still cannot compensate the buying power of the west. Any significant economic slowdown or financial crisis in China poses a grave threat to the global economies because of the size and importance of the Chinese economy to the world. Add in all the tensions and instability of the current U.S. and global politics, and one has a recipe for an extremely volatile and turbulent 2019, both politically and economically.
The stock markets have been reflecting that reality.