Interesting Times
‘May you live in interesting times’ is a well-known Chinese proverb that is taken as both a blessing and a curse. Calling today’s times interesting is an understatement and events certainly set the stage for major changes in the months ahead. There are no obvious outcomes. But there are many developments to follow.
An employment report was released Friday that revealed a solid rebound from the Boeing strike and weather depressed rate of hiring of October. Markets took the modest rise in the unemployment rate to 4.2% as enabling the Fed to continue to lower policy rates again in December, although wage inflation ticked up and labor force growth has slowed, as lower illegal immigrant inflows curtailed growth in the supply of labor. Wage inflation has also stopped moderating, which suggests that further progress in reducing inflation will be very difficult. This hurdle will rise further if tariffs and tax cuts are implemented by Trump, as promised. Fed statements run the gamut. It is not obvious they will cut again. They could choose to wait for more data and greater clarity on fiscal policy. And the uncertainty level is high, as we await clarity on which of Trump’s economic proposals will be advanced and how Congress will respond.
There are uncertainties galore in Europe. France’s government fell after a no-confidence vote. So, they have no government, no budget, a large deficit, a weak economy, a highly uncertain path forward and a highly fractured public. Germany is only slightly better. Growth is very weak and they also must deal with budget issues and an election in the near future that is likely to oust the existing government. Reducing budget deficits would tend to weaken growth even more. And there’s still Ukraine. Will Europe be more inclined to seek a peace deal while Russia occupies much of Eastern Ukraine or will they be more supportive? And how will Trump weigh in on Ukraine?
There are also uncertainties galore in the Middle East. The fall of Assad in Syria guarantees wholesale changes are coming. Russia and Iran, Assad’s two primary backers, are clearly major losers. More than 5 million Syrian refugees who fled to Turkey may now return. Hayat Tahrir al-Sham (HTS) is taking over and it is likely to be highly opposed to Russia and Iran, since they supported and enabled Assad to murder several hundred thousand Syrians. HTS might even force Russia to retreat from its naval base in Tartus. Iran’s land bridge to supply Hezbollah in Lebanon has been severed, greatly weakening Iran. HTS is an Islamist terrorist group, but with ties to the YPG, which heads the Syrian Democratic Forces and has ties to the U.S. Will it now turn to the West? Might they seek a relationship with Turkey at the expense of their own Kurdish citizens or might they be willing to live with them? Might they reach out to Saudi Arabia, indirectly aligning with the West? Iran is surely concerned that the toppling of Assad could carry over into Iran and result in revolution there. (We should only be so lucky.) Or, might the Iranians now press even harder to develop a nuclear weapon? The uncertainty level is exceptionally elevated at the moment, although the flow of oil is unlikely to be curtailed, at least in the short term. But it is highly likely that alliances will shift in the Middle East with far-reaching consequences.
In Asia, political drama enveloped South Korea, as the president briefly declared Marshall law, but quickly reversed course and now that government may fall instead. China continues in its efforts to exert control over the South China Sea, much to the consternation of its neighbors.
The last I looked, political conditions were benign in Antarctica, although the ice shelf is melting and there are rumors the penguins are restless.
Much of the uncertainty described above is political, but there are potential disruptive economic consequences. My sense is the uncertainties are above average right now. Yet, the U.S. economy is performing well, growth is solid, corporate profits are rising and estimates have increased, while monetary policy is supportive. Energy prices are somewhat soft, as global supplies of crude are ample. Indeed, market conditions forced OPEC to defer adding to global supplies. So, there is every reason to think the domestic economy will continue to perform well. Still, the uncertainties abound and diversification is the most sensible way to address these uncertainties. More nervous investors can increase their allocations to shorter maturity fixed-income bonds, while more hopeful investors can take advantage of the high level of uncertainty to increase their allocations to the cheaper parts of the equity market or to sectors that are well positioned to perform well.
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