Sometimes looking back provides perspective in moving forward. As December begins we know the year-end is the global market’s attempt to position themselves for the coming year. The rise of populist voices has certainly sent tremors through financial markets. The most interesting aspect is how short-lived the disruptions have been. Brexit, no problem; coup in Turkey, no problem; Chinese economy sputtering, no problem; Donald Trump becoming the U.S. President, no problem; and this week’s Italian referendum, no problem.
The world’s central banks believe that the massive accumulation of bonds in a global condition of continued QE will be no problem. That is something we will continue to examine in 2017. The FOMC is certainly constrained by its continued asset purchases. The question at the FOMC should be: Why don’t we raise rates by 100 basis points if the TRUMP administration is going to pursue a robust fiscal stimulus? The FOMC model maintains the U.S. is at full employment and a retreat from austerity in the time of full employment OUGHT to be met with a rapid rise in interest rates or at the least beginning the aggressive reduction of the balance sheet. The year ahead will be rife with volatility as politics and debt overhang prove the motors of turbulence.