In the past week European and global politics, strong US growth data, mixed global macro numbers and eurozone, Chinese and Indian central bank policy have eclipsed Trump-mania.
What is perhaps more remarkable is markets’ reasonably benign, “risk-on” reaction, bar the euro’s sell-off in the wake of today’s ECB policy meeting.
One interpretation is that markets have become complacent to the risks presented by President Trump’s constellation of pseudo-policies, surging nationalism in Europe, the UK’s uncertain economic future and continued capital outflows from China.
I have a somewhat different take, namely that markets are rightly discounting some of the more extreme and perverse scenarios, including:
- Protectionist US policies coupled with higher US yields and a strong dollar collapsing tepid emerging market, and eventually global, economic growth;
- The “no” vote in the Italian referendum leading to the economic collapse of the European Union’s third largest economy;
- Surging European nationalism culminating in the collapse of the eurozone and/or European Union;
- The British government opting to sacrifice growth in exchange for a hard version of Brexit and;
- Capital outflows from China ultimately forcing policy-makers into accepting a Renminbi collapse and shocking a corporate sector with significant dollar-debt.
Read Black Swans and White Doves on my website.