2017 Financial “Predictions”

I am not into making financial predictions.  The whole basis of Austrian school economics is that humans act.  Unless you can predict the actions of 7 billion people on the planet, then you cannot make predictions with any certainty about economic activity.

Still, there are certain assumptions we can make, and we can also take reasonable guesses on how people will act and react based on certain policies.  So with that said, here are some possible scenarios for 2017.

First, there is the Trump factor.  If we can survive three more weeks of Obama and his propaganda against Russia, then hopefully we will get someone who is at least somewhat honest and may actually have the American people’s interests in mind.

Not only can we not predict what 7 billion people will do, we can’t even predict what this one man will do.  He is a total wildcard.  From a liberty perspective, we should expect the good, the bad, and the ugly.  But at least there is hope that there will be more good than we have seen in a long time.

On economics, Trump is mostly bad.  Still, he is better than what we have had.  If he tries to ram through “stimulus” spending on infrastructure projects, it will just be more Keynesianism.  It will be more wasting of resources, although not as wasteful (or deadly) as war.  These bursts in spending can give a temporary illusion that the economy is getting better, but it is actually causing damage by misallocating resources.

Our biggest hope from Trump on the economic front is that he repeals some regulations.  Obviously repealing Obamacare would be great, but we can’t be sure that is going to happen.  If he could get a repeal of Dodd-Frank, that would be helpful for business.

The second major factor (but perhaps the most important) is the Federal Reserve.  We shouldn’t expect a lot from the Fed, but the damage has already been done.  From 2008 to 2014, the Fed increased the monetary base by a factor of almost five.  Although a good portion of this new money has been held as excess reserves by the banks, it has still done its damage.  It has misallocated resources.  It has impacted interest rates and savings.

The Fed has had a tight monetary policy for over 2 years now.  The federal funds rate has stayed near zero, with only two hikes (December 2015 and December 2016) since being brought to near zero in late 2008.  But this rate is over played and over exaggerated as to its effects.  The federal funds rate is not impacting the monetary base.  It is only impacting the incentives for banks to lend money because the Fed has to pay a higher interest rate on bank reserves in order to raise the federal funds rate.

If anything is having an impact right now, it is the excess reserves held by banks.  After the huge build up since 2008, the excess reserves have been reduced over the last couple of years from $2.8 trillion to about $2 trillion today.  I think this is playing a large role in holding off a recession.

This chart of the excess reserves is perhaps the most important thing to watch in 2017.  This, coupled with the adjusted monetary base, will tell us how much money is floating around out there.

While we have seen 8 years of slow growth under the Obama administration, it is surprising that Obama was able to escape a recession on his watch (not counting the 2008/ 2009 financial crisis that was already happening when he entered office).  With the very mild growth we have had, it is hard to say how much of it is real and how much is illusory.

While we have seen the oil bubble pop, there hasn’t been a lot else that has popped.  Precious metals have been a tough investment for Americans, but some of that is due to the incredibly strong U.S. dollar.

I think we have not seen everything play out from the previous monetary inflation from the Fed.  There are still asset bubbles (particularly stocks) that have not corrected yet.  Therefore, given the Fed’s relatively tight monetary policy now, it is likely we will see a recession during Trump’s four-year term.  For his sake, it is better if it happens sooner rather than later.

Until there is a major economic downturn and a Fed reaction of more monetary inflation, we should expect continued strength in the U.S. dollar.  This will make it tough for gold investors to see big gains.  However, I still recommend holding gold as part of a permanent portfolio.

Regarding stocks, we should expect to see Dow 20,000, and maybe more.  But again, this is a bubble waiting to pop.  Maybe it will last for another year, but I think the downside risk is far greater than the upside at this point.

Regarding bonds, I am contrarian to many libertarians on this.  I know rates have gone up lately.  But if we hit another recession, I expect long-term rates to decline again and to possibly test their all-time lows.  To a libertarian, investing in government bonds seems like a stupid idea.  But if most everyone else thinks it’s a good idea, then it doesn’t matter.  If there is relatively low price inflation and people are seeking safety, then they will see long-term government bonds as a safe investment vehicle.

Overall, you should prepare for a recession more heavily than you should prepare for high price inflation or a booming economy.  The high price inflation may come later when the Fed fires up its digital printing press again.  You shouldn’t expect high consumer price inflation (as measured by the CPI) in 2017.

For now, it is important to diversify and to keep your investments relatively safe, unless you have a business venture that offers greater opportunities.  Now is a good time to rebalance your portfolio and to make any achievable resolutions for a productive 2017.

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