I try to stay away from financial news on the television. All that yelling and hype makes me tired, and I realize later that it was mostly meaningless. I know they must make everything sound like it will change the world to keep viewers tuned in, but I have better ways to spend my time.
Instead, I read a lot, from varying sources, so that I can bring the best information and analysis to you. In addition to Economy & Markets, I also write a weekly publication called the Dent Digest, which is distributed to our subscribers. In it I try to bring together the relevant stories of the week, including both the well-known and the not-so-obvious.
As the year draws to a close, I find myself asking what really changed over the last 12 months. So I perused my Dent Digest issues for the year.
Beyond the personal (kids got older, I turned 50, we became empty-nesters, etc.) and the political (Trump and GOP Congressional control), there were a few overriding economic themes in 2016.
Some things changed, but others stayed the same.
The Brexit vote changed the course of history. After many wars on the Continent, European leaders developed economic cooperation as a way to bind their futures together, hoping to make armed conflict a thing of the past.
Outside of small, but still deadly, conflicts in Eastern Europe, the past 70 years have been among the most peaceful in European history.
But the cooperation led to super-national organizations that could force policies on member nations. That might sound great to the bureaucrats that meet in nice hotels, but everyday citizens aren’t so keen on having people that never visit their cities or provinces telling them how to regulate their businesses.
The pushback on the EU was a long time coming. Britain was always the unruly child in the brood, but the Brits won’t be the last to demand more self-determination. As Europe comes to grips with the trend away from consolidation, it will be harder to maintain economic cohesion, and will tarnish, if not outright ruin, the euro.
Oil rebounded sharply this year, moving from the low $30s to the low $50s. OPEC members flooded the market with supply to drive out American frackers, which sort of worked, but then the frackers honed their efficiency.
As oil prices climb, more American producers are jumping back into the game. The latest OPEC agreement to cut supply might hold prices up for a little while, but to paraphrase the old saying, “The cure for high oil prices is high oil prices.”
With more money to be made, more producers will jump in, adding to supply and limiting the upside run. I don’t see oil prices breaching $60, but a drop back to the $30s is very possible.
Puerto Rico defaulted. Like Brexit, this is a game-changer.
As the Commonwealth’s legislature and the federal courts sort through the financial ashes after the meltdown, they will develop a framework for how other highly indebted public entities (cities, counties, states, school districts) will approach debt restructuring.
I think they will quickly sacrifice private bondholders, even though they have a clearly superior legal claim, in favor of public workers and retirees. This fight will play out in state capitols around the nation, pitting public employees against taxpayers and investors. It will get ugly.
What Didn’t Change
The Fed spent the entire year fretting over raising rates.
A year ago, Janet Yellen & Co. estimated that short-term rates would move from 0.5% (which we reached last December) to 1.75% by now.
Right. I didn’t buy it back then, either.
Without strong economic growth or inflation, there was no reason to push up short-term rates. The longer the Fed waited, and the worse the economy performed, the lower long-term interest rates fell. But as we entered the third quarter, the Fed started talking about higher rates anyway, and then Trump happened. So, rates climbed, more or less putting us right back where we started the year.
The Fed finally pushed up rates by a mere 0.25% this month, but given that growth should disappoint yet again in 2017, I don’t think they’ll raise rates three times in 2017 as they forecast, just like they didn’t push up rates this year.
As I mentioned, part of the Fed’s problem was anemic growth. Fed governors expected the U.S. to be growing by 2.5% to 3% by now. That didn’t happen. GDP increased 0.8% in the first quarter, and 1.4% in the second. We jumped 3.2% in the third quarter, but the annual pace will most likely still come in around 1.9% or so. That’s not enough to excite anyone, and probably won’t change in the next 12 months.
As with previous years, we’ll experience quarters of stronger growth from time to time, only to drop back again in later quarters. Escape velocity won’t happen anytime soon.
As we’ve pointed out for some time, the U.S. might face a long slog of low growth, but we look like a race horse compared to the economies of Europe and Japan, and China is quickly decelerating. Harry has written many times that we’re the best house in a bad neighborhood. We’ll still be the strongest currency in 2017… and 2018…
One area that surprised me was housing. We started the year with a bit of a slump, which could have turned into an ugly rout. But it didn’t. Instead, housing stabilized and even expanded a bit.
I’m still cautious about housing, but it gets support from an underappreciated factor. The sector is much smaller than it was during the boom. Retail construction constituted 5% to 6% of the economy in the mid-2000s, but now sits around 3%. We’re building homes at a rate consistent with previous recessions, not expansions. It’s as if those in the industry remain hesitant, which is probably wise. When the next economic shoe falls, home prices should roll over again.
The biggest things that didn’t change are the ones that drive economies around the world and are difficult to adjust – populations and productivity.
We built our research on how many people are at each stage of life and what they buy. These are qualities that cannot be dialed up or toned down through economic policy.
My kids are out of the house. I need less stuff and I’m reconfiguring my annual budget to prepare for retirement (even though it’s a long way off!). No Fed policy or government program will change those things.
As long as individuals control their own economic destiny, demographics will drive growth.
We’re at the end of the eighth year of the economic winter season, with another six years to go. As we’ve seen for some time, legislators and central bankers will keep trying to move the pieces around the chessboard, but it won’t do much good. I guess that’s one more thing that will never change.
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