ECONOMIC & MARKET
COMMENTARY
DECEMBER 2016
Transition Turning to Torpedoing
A cordial post-election meeting between President Obama and President-Elect Trump held
hopes of an orderly transition. That’s now turned into hostility, time-bombs, and outright
sabotage and blocking of the incoming Administration’s agenda.
Moreover, the Obama family intends to remain in DC. At 55, Obama will be one of the
youngest former Presidents in history (and Trump the oldest at inauguration). He has three
objectives: Preserve his agenda from repeal, coordinate maximum obstruction of the Trump
Administration, and ensure the success of the likely Michelle 2018 Senate campaign.
Electoral Process
The US election process is unlike any other. An election was held on November 8th, not to elect
a President but to select which party’s nominees are sent by each state to vote in the
Electoral College. They did not vote until December 19th.
While it is generally taken for granted that electors pledged to the Republican Party will vote
for the Republican nominee selected at the Republican primaries, it is possible (and envisaged
in the Constitution) that they could vote their conscience instead.
The Electoral College system also forces a Presidential ticket to appeal to smaller
states, preventing rule by just the major coastal cities – for the same reason that the
Australian Parliament grants the same number of Senators to Tasmania as it does to NSW.
In 71 cases, electors concluded that their President or VP nominee was unfit to fulfil the duties
of their intended office over the coming four years, because they had since died. Another 108
“faithless electors” had other reasons to dishonour their pledge – protest votes,
contempt for their pledged candidates, horse-trading in a College where there was no majority,
or (in one case) outright incompetence1.
Some States allow this, others dismiss and replace faithless electors, some make it outright
illegal (but with a penalty little greater than a traffic ticket).
This meant a long delay, and a mini-campaign of its own as Democrats attempted to sway
the Electoral College. A media circus predictably came to nothing, with Clinton losing more
electors than Trump! But this, and a three-state recount, took up 6 weeks.
After the votes are publicly cast, and the winner nominated by the Electoral College, it is a
further month until the President is inaugurated – in this case, January 21st 2017. It will
be a solid 10 weeks of delegitimising the election, and the Presidency.
Transition
This leaves around 10 weeks where there is both a President-Elect and a “lame
duck” President.
Unlike in Australia, there is no “caretaker convention” – the outgoing President
(whether defeated, or not recontesting) retains all of his powers. Indeed, not having to
face Congress and an election again can be quite liberating.
The lengthy transition is partly a relic of past days – for example, Abraham Lincoln had to
put the affairs of his thriving law firm in order and then travel for some weeks to DC. But it
1
One genius found the 2004 ticket of Kerry - Edwards too confusing (with both men named John), casting both
President and Vice President ballots for John Edwards (and mis-spelling “Edwards”).
DECEMBER 2016
Economic & Market Commentary
also ensures an incoming President has time to appoint a Cabinet, be fully briefed, have his
transition team receive information from the Departments, and hit the ground running.
Traditionally, an outgoing President has respected the incoming Administration’s mandate, and
for the public good has cooperated with the transition team. Traditionally, Presidents have
largely retired from public life.
Not this time. It appears that President Obama has decided to treat the incoming team
with the same disrespect they showed for his platform during the election. With the
US seeing First Family as a genuine path to the Presidency (not a concept that has taken off in
Australia, with Tim Mathieson and Margie Abbott yet to announce Senate campaigns),
Michelle Obama looks sure to seek high office, with Barack Obama an active combatant.
Foreign Policy
The US has dramatically overturned decades of support for Israel. First, they waved
through a UN resolution that they have always vetoed – effectively, any settlement
outside the 1967 borders (including many suburbs of Jerusalem, and including Jews who were
born there in the last 50 years) have been declared illegal under international law.
This cannot be reversed – if Trump (who, like Clinton, ran on a strongly pro-Israel stance)
sponsored a repeal motion, it would be vetoed by Russia and/or China.
Further, Secretary of State John Kerry gave a speech that effectively called for the repeal of
the Jewish state in favour of a secular democracy, a radical shift.
Meanwhile, Russia has been sanctioned and 35 diplomats expelled in an attempt to
sabotage a repair of relations with a country he previously called an “ally.” Yes, Russians quite
probably hacked John Podesta’s email – most “phishing” emails originate there. It is less
certain that small-time phishing scammers looking to steal $1000 from bank accounts are
government-aligned. It is less likely still that Russia would have been sanctioned if a
Republican campaign worker was silly enough to click on a “change your password” link and
found 33,000 embarrassing emails on Wikileaks.
It is longstanding Trump policy that the US would exit its disastrous Syrian
intervention, and Russian support is key to successfully executing this. It would be
humiliating for the US and the admission of a major error in siding with anti-Assad forces –
Obama is doing everything possible to prevent it. But 5 years (and 500,000 lives) later,
regime change has not been achieved and probably cannot be. This policy came well
before the fortuitous leak that (trivially) set back the Clinton campaign.
Energy Policy
Obama’s platform has long included more expensive energy – carbon pricing, de facto
banning of coal by regulation, opposition to pipelines, and ratification of Kyoto and Paris
agreements.
Again, regardless of the merits all of these things are opposed by the incoming Administration
- more importantly he has been unable to persuade Congress during his own two terms.
A number of regulations have been set up to obstruct energy development and
export. Many are set up to be permanent and not subject to reversal – by either future
Executive Order, or by the full Congress.
Healthcare
Obamacare will certainly not be easy to repeal, despite claims about it being “gone” on the
first day. Trump did indicate that it’s not his intent to leave people uninsured, so he looks to be
intending an evolution towards…something.
This promise looks to be a self-inflicted time-bomb; reducing costs, reducing the numbers of
uninsured, keeping the safety-net. It is not the only time Trump has promised mutually
contradictory objectives, but this is one the media (that other time-bomb) will be
watching. This comes as Trump inherits a sharply rising deficit.
CPG Research & Advisory
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DECEMBER 2016
Economic & Market Commentary
The Trump Rally
There are 28 million matches for “Trump Boom” and both the stockmarket and bond yields act
as though the election ushered in a new era of high-growth policies:
The Fed has tried to keep a low profile, after years of sniping through Trump’s candidacy.
When Trump accuses the Fed of being partisan, and planning to engineer a recession by
dramatically tightening immediately after Obama’s term, does he believe this? It’s possible
that this is true; it’s possible that Trump is a deranged paranoiac – it’s likely that he’s thinking
like a deal-maker about human behaviour. The natural instinct, whether a toddler or a Fed
Governor, is to respond to an accusation with “Am Not!!” So most likely he is trying to
manipulate the Fed into erring on the side of keeping rates lower for longer.
The Fed avoided raising rates in September, but then spent the quarter discussing the
improving outlook, firming data, and the strengthening case for higher interest rates. But
here’s what they actually believe:
The Fed believes the economy will NEVER materially recover. Nor, after around a
year to examine Trump’s agenda and then a month to build it into their forecasts, do
they believe there has been ANY change to outlook whatsoever.
We are not racing to change our economic or interest rate forecasts since the
election.
CPG Research & Advisory
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DECEMBER 2016
Leading Markets
Markets continued to gain following the US
elections. The NASDAQ rose +1.12%, the
Dow Jones +3.34%, and the S&P500
+1.82%.
The MSCI World ex-AUS gained +2.78% but
the
MSCI
Emerging
Markets
Index
finished -0.06% lower (both in local
currency).
The UK’s FTSE100 finished +5.29% higher on
Q3 GDP showing no Brexit impact.
The US bond market sold off again in
December. US 10-year bonds finished the
month at 2.45% (+8bp).
Other Highlights
The US Federal Reserve raised the federal
funds rate by 25bp to 0.50%-0.75% at its
December
meeting.
Policymakers
cited
strengthening labour market conditions,
expectations of higher inflation over the
medium term as well as a moderate
expansion in economic activity.
US unemployment fell to 4.6% in November
(-0.3%), the lowest rate since August 2007
on a falling participation rate.
The US government’s $137bn deficit of
November 2016 was +112% on a year
earlier. Outlays rose 25% to $337 billion on
several one-off amounts, while receipts fell
2% to $200 billion.
The US ISM Non-Manufacturing PMI index
rose to its highest level since October 2015.
The index rose to 57.2 (+2.4) in November,
exceeding market expectations.
US Non-Farm Payrolls increased +178,000 in
November, higher than October’s downwardly
revised
+142,000
and
above
market
expectations.
Professional
and
business
services and healthcare outperformed.
Russian president Putin flagged a major
expansion of Russian nuclear abilities, echoed
by President-elect Trump.
After reaching a settlement with Deutsche
Bank, the US Justice Department sued
Barclays over alleged fraud in the sale of
mortgage-backed securities to 2008.
Japan achieved a Y153bn trade surplus in
November vs Y-387bn a year earlier.
Japanese imports fell less than expected,
down
-8.8%
YoY
while
exports
decreased -0.4% YoY. Japanese consumer
confidence fell -0.7 points to 42.3 in October.
Italian Prime Minister Matteo Renzi resigned
after the crushing defeat of his proposed
constitutional reforms at referendum. Italian
equities fell before recovering.
CPG Research & Advisory
Economic & Market Commentary
Selloffs in Italian equities reversed, however
persistent weakness in the banking sector
remains due to heavy non-performing loan
portfolios.
Even without the extra powers, the Italian
government approved an emergency bailout
to rescue Monte dei Paschi bank, with junior
debt to be bailed in. They allocated EUR29bn
to bank rescues in total.
Domestic
The ASX200 closed +4.38% higher, on higher
iron ore and Wall St’s post-election gains.
The Reserve Bank of Australia (RBA) left its
official cash rate unchanged at 1.5% due to
low inflation.
The NAB Business confidence index rose to
+5 in November of 2016 (up 1). Retail sales
gained +0.5%.
+39,100 jobs were added in November, as
unemployment ticked up +0.1% to 5.7% on a
+0.2% rebound in participation.
The Q3 current account improved 29%
to -$12bn after stronger metals prices drove
a 37% narrowing of the trade balance.
Q3 GDP was an outlier at -0.5%, but even
adjusting for an election effect the underlying
result was very weak.
The mid-year MYEFO review showed further
government revenue weakness. While a
budget balance by 2021 is still estimated, this
is heavily reliant on measures not yet passed
by the Senate.
Indian energy giant Adani gained approval for
the controversial Carmichael coal mine in
central Queensland.
Residential property prices in Australia rose
+1.5% in Q3 2016 (from +2% in Q2),
missing expectations. They fell in Perth and
Darwin and both cities are lower on the year.
Construction fell a further -5.7% in Q3, to be
down -24.3% on the year.
Australian 10-year bond yields finished +9bp
higher at 2.76% on global leads.
Commodities and Currency
WTI oil jumped to $53.72/bbl (+9.7%) on
OPEC agreements to reduce output.
Gold was lower again at US$1150 (-1.96%).
Iron Ore continued to gain, finishing at
$75.30 (+7.91%).
Base Metals lost some gains from November:
Nickel (-8.75%), Zinc (-5.88%), Copper
(-3.79%), Tin (-1.29%), and Aluminium
(-0.52%).
The AUD sank further to US72.36 cents
(-2.38%).
4
DECEMBER 2016
Economic & Market Commentary
KEY FINANCIAL MARKET DATA – AS AT 31ST DECEMBER 2016 (UNLESS SPECIFIED)
CPG Research & Advisory
5
DECEMBER 2016
1
Growth
Growth
3
Growth
4
Growth
5
Growth
2
Economic & Market Commentary
Assets
Assets
Assets
Assets
Assets
0% - 20%
21% - 40%
41% - 60%
61% - 80%
80%+
For any queries, please contact:
Name
Title
Phone
Email
Andrew Vallner
Managing Director
(02) 8246 8805
[email protected]
Michael Chandra
Advisor – Fixed Interest
(02) 8246 8812
[email protected]
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investment objectives, financial situation or particular needs of any particular investor. Before making an investment
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CPG Research & Advisory
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