The Year is Still Young, Yet Already Full of Surprise

February 17, 2016

The first eighth of 2016 was eventful.  The surprises are not limited to China and other developing economies, either.

Financial markets have been very volatile.  Although near the middle of its high-low range thus far, the price of oil is down around 16% on balance, and gold is more than $100 above its end-2015 level.  In trade-weighted terms, the Japan’s yen has advanced over 5%, the euro is up about 3%.  but the dollar and sterling have dropped by around 2% and 4.5%, respectively.  Ten-year sovereign debt yields have slumped 48 bais points in the U.K., 43 basis points in the U.S., 35 bps in Germany, and 21 bps in Japan.

Investors learned that the U.S., Japan and Euroland each recorded much weaker growth in the final quarter of 2015 than generally realized at the time.  U.S. GDP went up just 0.7% at an annualized rate, while Japan’s economy contracted 1.2% on such a basis.  Growth in the eurozone was just 0.3% not annualized, or roughly 1.1% if annualized.

Japan’s nearly three year-long stimulus program, known as Abenomics, now suffers severe credibility issues.  Prime Minister Abe’s Economics Minister, Amari, resigned in scandal.  Two immediate intermediary goals of the Bank of Japan’s introduction of a negative interest rate were to lift Japan’s stock market and to depress the yen.  That hasn’t happened.

The welcoming migrant policy of Germany has cost Chancellor Angela Merkel a huge loss of political capital, which the ruling coalition can ill-afford as Germany heads into a string of state elections.  Merkel had until recently been the one really popular leader in a region generally characterized by weak leadership.  At the European Central Bank, next month’s meeting of the Governing Council figures to be especially contentious over how much more stimulus to provide.

Britain’s event of the year figures to be a referendum asking voters whether the U.K. should stay in the European Union or leave.  The likely date will be June 23rd, and the outcome is uncertain.  Brexit would be an enormous blow to European cohesion and to the British economy.  It now looks like the Bank of England will hold off starting rate normalization until very late in the year or even further into the future.

The U.S. presidential election campaign has seen serious challenges from outsiders erupt on both the political left and right.  Justice Scalia’s poorly documented death introduces an issue that could balloon into a full-fledged constitutional crisis. Candidate Ted Cruz calls the November vote a referendum on the Supreme Court.  As tensions fester into the coming spring, summer, and early autumn, some are bound to see November’s election in even larger terms as perhaps a referendum on whether the constitution can still promote the general welfare.

The world is full of problems that need addressing sooner rather than later.  The internal political problems in these and other countries pose substantial impediments to 2016 being a year a significant progress.  There’s been less risk aversion this week than earlier this month and in January.  The landscape in which business, labor and investors must operate does not look conducive to an enduring turn for the better in economic and financial market performance.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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