Extend your political antennas

On Wednesday, I glanced at headlines that said that Eurozone growth in 4Q2016 could be as high as 2.0% (q/q), according to JP Morgan. French industrial production has gone up unexpectedly in November. In the UK, there is no sign of Brexit stress on the economic front. In China, inflation is accelerating in a sign that monetary policy is too loose and that stimulus is working.

Perhaps, the world has far too much economic stimulus going on and that it needs to be reined in. But, policymakers, citing political risk, might be or are reluctant to roll them back. In this milieu, inflation risks would clearly be on the rise everywhere and real yields would remain at zero or negative, even if nominal yields rise. That is bad for bonds and temporarily good for equities as the equity bubble gets bigger.

At the margin, this should also be good news for oil and for gold.

At the same time, make no mistake. Political risks are clearly on the rise.

(1) The latest ‘unverified allegation’ reported in detail in Wall Street Journal that Trump advisors worked with Russian agents is a very clear sign that, even outside of politics, official America or bureaucratic America or the ‘Deep State’ is clearly divided on the Trump presidency. Make that ‘bitterly divided’. A section of the American deep state – Security and Judiciary – have wanted a change from the established so-called ‘liberal’ order. But, the intelligence community seems to be bent on thwarting them. American political risk is high and rising.
(2) In China, there is no need to belabour the point. Xie’s attack on opposition, on social media, on the NGO sector, on neighbouring countries (South Korea and Singapore are two recent targets) are not letting up. Beijing warns Singapore over its letter to Hong Kong to return the military vehicles (http://www.scmp.com/week-asia/geopolitics/article/2060557/military-vehicles-seizure-be-sorted-under-hong-kong-law AND https://www.ft.com/content/9f424c24-d711-11e6-944b-e7eb37a6aa8e). On top of that, Singapore PM’s sister has taken a shot at the Chinese President. Singapore casinos could be targeted by Chinese authorities, ostensibly over capital flight concerns! Interesting times.

(3) In Indonesia,  the President is said to have ‘rebuked’ the military chief (http://www.scmp.com/news/asia/southeast-asia/article/2060576/indonesias-president-moves-rein-out-control-military-chief) for unilaterally suspending military ties with Australia and we know about the ongoing trial of the former Jakarta Governor.

(4) Philippines President has announced an increase in private pensions. How would it be funded? “Since 1980, contribution rates have only been increased three times, while pensions have risen 22 times.” (http://asia.nikkei.com/Politics-Economy/Policy-Politics/Duterte-approves-costly-pension-hike)

(5) Sri Lankans are protesting against China led investment zone at Hambantota (http://asia.nikkei.com/Politics-Economy/International-Relations/Sri-Lanka-launches-China-led-investment-zone-amid-protests)

Loose monetary policy; risk of a more activist fiscal policy (esp. in the USA) and dysfunctional global politics and domestic politics in many countries, rising bond yields and strong equity markets – simply cannot continue to co-exist. One or two will break out into something more turbulent and destabilising.

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