by Ambrose Evans-Pritchard
23 February 2017 • 12:25pm
The Telegraph

Vast liabilities are being switched quietly from private banks and investment funds onto the shoulders of taxpayers across southern Europe. It is a variant of the tragic episode in Greece, but this time on a far larger scale, and with systemic global implications.  There has been no democratic decision by any parliament to take on these fiscal debts, rapidly approaching €1 trillion. They are the unintended side-effect of quantitative easing by the European Central Bank, which has degenerated into a conduit for capital flight from the Club Med bloc to Germany, Luxembourg, and The Netherlands.  This 'socialisation of risk' is happening by stealth, a mechanical effect of the ECB's Target 2 payments system. If a political upset in France or Italy triggers an existential euro crisis over coming months, citizens from both the eurozone's debtor and creditor countries will discover to their horror what has been done to them.  Such a tail-risk is real. As I write this piece, four out of five stories running on the news thread of France's financial daily Les Echos are about euro break-up scenarios. I cannot recall such open debate of this character in the Continental press at any time in the history of the euro project.

As always, the debt markets are the barometer of stress. Yields on two-year German debt fell to an all-time low of minus 0.92pc on Wednesday, a sign that something very strange is happening. "Alarm bells are starting to ring again. Our flow data is picking up serious capital flight into German safe-haven assets. It feels like the build-up to the eurozone crisis in 2011," said Simon Derrick from BNY Mellon.  The Target2 system is designed to adjust accounts automatically between the branches of the ECB's family of central banks, self-correcting with each ebbs and flow. In reality it has become a cloak for chronic one-way capital outflows.  Private investors sell their holdings of Italian or Portuguese sovereign debt to the ECB at a profit, and rotate the proceeds into mutual funds in Germany or Luxembourg. "What it basically shows is that monetary union is slowly disintegrating despite the best efforts of Mario Draghi," said a former ECB governor.

The Banca d'Italia alone now owes a record €364bn to the ECB - 22pc of GDP - and the figure keeps rising. Mediobanca estimates that €220bn has left Italy since the ECB first launched QE. The outflows match the pace of ECB bond purchases almost euro for euro.  Professor Marcello Minenna from Milan's Bocconi University said the implicit shift in private risk to the public sector - largely unreported in the Italian media - exposes the Italian central bank to insolvency if the euro breaks up or if Italy is forced out of monetary union. "Frankly, these sums are becoming unpayable," he said.

The ECB argued for years that these Target2 imbalances were an accounting fiction that did not matter in a monetary union. Not any longer.  Mario Draghi wrote a letter to Italian Euro-MPs in January warning them that the debts would have to be "settled in full" if Italy left the euro and restored the lira.  This is a potent statement. Mr Draghi has written in black and white confirming that Target2 liabilities are deadly serious - as critics said all along - and revealed in a sense that Italy's public debt is significantly higher than officially declared. The Banca d'Italia has offsetting assets but these would be heavily devalued.  Spain's Target2 liabilities are €328bn, almost 30pc of GDP.  Portugal and Greece are both at €72bn. All are either insolvent or dangerously close if these debts are crystallized.

Willem Buiter from Citigroup says central banks within the unfinished structure of the eurozone are not really central banks at all. They are more like currency boards. They can go bust, and several are likely to do so. In short, they are "not a credible counterparty" for the rest of the euro-system.  It is astonishing that the rating agencies still refuse to treat the contingent liabilities of Target2 as real debts even after the Draghi letter, and given the self-evident political risk.  Perhaps they cannot do so since they are regulated by the EU authorities and are from time to time subjected to judicial harassment in countries that do not like their verdicts. Whatever the cause of such forbearance, it may come back to haunt them.

On the other side of the ledger, the German Bundesbank has built up Target2 credits of €796bn. Luxembourg has credits of €187bn, reflecting its role as a financial hub. This is roughly 350pc of the tiny Duchy's GDP, and fourteen times the annual budget.  So what happens if the euro fractures? We can assume that there would be a tidal wave of capital flows long before that moment arrived, pushing the Target2 imbalances towards €1.5 trillion. Mr Buiter says the ECB would have to cut off funding lines to "irreparably insolvent" central banks in order to protect itself.  The chain-reaction would begin with a southern default to the ECB, which in turn would struggle to meet its Target2 obligations to the northern bloc, if it was still a functioning institution at that point. The ECB has no sovereign entity standing behind it. It is an orphan.  The central banks of Germany, Holland, and Luxembourg would lose some of their Target2 credits, yet they would have offsetting liabilities under enforceable legal contracts to banks operating in their financial centres. These liabilities occur because that is how the creditor central banks sterilize Target2 inflows.  In other words, the central bank of Luxembourg would suddenly owe 350pc of GDP to private counter-parties, entailing debt issued under various legal terms and mostly denominated in euros. They could try printing Luxembourgish francs and see how that works.  Moody's, Standard & Poor's, and Fitch all rate Luxembourg a rock-solid AAA sovereign credit, of course, but that only demonstrates the pitfalls of intellectual and ideological capture.   

It did not matter that the EMU edifice is built on sand as long as the project retained its aura of inevitability. It matters now. Bookmakers are offering three-to-one odds that a candidate vowing to restore the French franc will become president in May.  What is striking is not that the Front National's Marine Le Pen has jumped to 28pc in one poll, it is that she has closed the gap to 44:56 in a run-off against former premier François Fillon.  The Elabe polling group say they have never before seen such numbers for Ms Le Pen. Some 44pc of French 'workers' say they will vote for her, showing how deeply she has invaded the industrial bastions of the Socialist Party. The glass ceiling is cracking.  The wild card is that France's divided Left could suppress their bitter differences and team up behind the Socialist candidate Benoît Hamon on an ultra-radical ticket, securing him a runoff fight against Ms Le Pen. The French would then face a choice between the hard-Left and the hard-Right, both committed to a destruction of the current order. That contest would be too close to call.

Anything could happen over coming months in France, just as it could in Italy where the ruling Democratic Party is tearing itself apart. Party leader Matteo Renzi calls the mutiny a "gift to Beppe Grillo", whose euro-sceptic Five Star movement leads Italy's polls at 31pc.  As matters now stand, four Italian parties with half the seats in parliament are flirting with a return to the lira, and they are edging towards a loose alliance.  This is happening just as the markets start to fret about bond tapering by the ECB. The stronger the eurozone economic data, the worse this becomes, for pressure is mounting in Germany for an end to emergency stimulus.

Whether Italy can survive the loss of the ECB shield is an open question. Mediobanca says the Italian treasury must raise or roll over €200bn a year, and Frankfurt is essentially the only buyer.  Greece could be cowed into submission when it faced crisis. The country is small and psychologically vulnerable on the Balkan fringes, cheek by jowl with Turkey. The sums of money were too small to matter much in any case.  It is France and Italy that threaten to subject the euro experiment to its ordeal by fire. If the system breaks, the Target2 liabilities will become all too real and it will not stop there. Trillions of debt contracts will be called into question.  This is a greater threat to the City of London and the banking nexus of the Square Mile than the secondary matter of euro clearing, or any of the largely manageable headaches stemming from Brexit. Would anybody even be talking about Brexit in such circumstances?

by Peter Boockvar
February 22, 2017
 
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” - John Templeton

You likely have heard that quote before from John Templeton, an investing hero of mine. My prior boss, another great investor, often cited it and I felt that it was an important guide in gauging what stage of a bull market we are in. Sentiment is an unusual thing as its driven by emotion that separates itself many times from underlying reality both up and down. Considering the relentless, almost parabolic rally since the election as we approach the 8th year of this bull market that is nearing the longest ever, how can we not ask ourselves whether we are in the “euphoria” stage of this bull run.

Some say we need the participation of the retail investor in order to reach that level. I disagree as after two 50%+ bear markets in 15 years, that is not going to happen. Many have not and will not come back. Thus, we have only other ’emotion’ indicators to rely on and even those are really only helpful in retrospect.

It was on January 12th, 2016 when an analyst at RBS said “Sell everything except high quality bonds…We think investors should be afraid.” He expected a “fairly cataclysmic year ahead.” The market bottomed a month later and the S&P 500 is up 30% since. I saw on TV last night with a headline titled “Best Move: Just Buy Everything?” Last week a writer at Marketwatch wrote “Here’s why you shouldn’t buy a stock ever again” in a fawn over passive, index investing.

We know that the amount of Bulls in the weekly Investors Intelligence survey have only been seen a few times over the past few decades. They currently total 61.2 vs 61.8 last week. Bears are a microscopic 17.5. I’m no technician and only use overbought/oversold metrics as a background message fully understanding that when extreme in one direction, it can get more so but we are really, really stretched. The 14 day RSI in the NDX yesterday closed at 84.7, the highest since January 1992. It was 84.2 in January 2000. The index is up 11 out of 12 days and that down day totaled 1.7 pts. The technology sector within the S&P 500 is up 14 days in a row.

Valuations don’t matter until they do and certainly haven’t mattered for a while but we can’t deny the fact of where stocks are trading relative to other historical peaks.

Much of the ebullience is being driven by hopes over a large cut in the corporate tax rate. To put numbers to this, the Bloomberg US exchange market capitalization has increased by $2.5 Trillion since the day of the election. According to the CBO estimate, the US will take in $320 Billion in fiscal year 2017 in TOTAL corporate income taxes. Thus, if the entire corporate tax was eliminated, we’ve priced that in by 8 times and some of those corporations are privately held. I know that we’ll get regulatory relief and capital spending tax incentives that the market is celebrating but you get my point.

Webster’s defines ‘euphoria’ as “a feeling of great happiness and excitement.” Applying that to the stock market is certainly slippery in that how do we apply and measure it but from what’s been seen since the election in a very aged bull market, I think it is only prudent to ask whether we’ve entered that final phase seen in other historical bull markets. When it matters and from what level, who the heck knows but it’s still important for every investor to have a sense of what stage we are in.

Mortgage applications to buy a home fell 2.8% w/o/w to the lowest level since mid November and thus giving back all of the post election bump higher with higher mortgage rates the likely factor. They still though are up 9.5% y/o/y. Higher home prices and the cost of financing has pushed the first time household into renting even more. Refi’s fell 1% w/o/w and are lower by 40% y/o/y.

Of note in Europe, the IFO German business confidence index rose 1.1 pts to 111, back to where it was in December but that’s still the best level since 2011. Both current conditions and expectations improved. IFO said “After making a cautious start to the year, the German economy is back on track.” If there is a country that eagerly awaits what Trumponomics will look like, it will be the export heavy German businesses.

Lastly, we’ll get the FOMC minutes from the meeting three weeks ago but after hearing from Yellen last week and from other voting members, nothing new will be gleaned. March is a growing possibility for a rate hike we already know.

by John Mauldin
19 February, 2017
Mauldin Economics

Excerpted from Thoughts from the Frontline

The global economy is orders of magnitude more intertwined than it was in the 1920s and ’30s. Let me list a few of its challenges for you, things that we have touched on in previous letters and a few new ones:

1. The developed countries are awash in debt that totals around $150 trillion.
   
2. As mentioned above, emerging-market countries have $10 trillion of US dollar-denominated debt that they would be unable to pay back if the dollar were to rise by 20%. We would experience a global banking crisis whose proportions would dwarf anything we’ve seen to date. Think subprime debt on steroids.
   
3. It is going to take at least a trillion euros to solve the Italian banking crisis, which is an amount of money that the Italians simply do not have. The only way they can get it is for the European Central Bank to buy the bonds that the Bank of Italy would have to issue. That means Germany would have to blink and participate in the financing of that debt.  That rescue would raise Italy’s debt-to-GDP ratio well north of 175%. Think Greece writ large. How in the wide, wide world of central banks and monetization do you think the Italians, whose economy is growing at barely 1%, can ever repay that debt? Seriously? You think I’m exaggerating about €1 trillion? Do the math and then factor in that the NPLs on the Italian balance sheets will be double or triple the current stated size in a crisis.  I was told I was crazy when I said in 2006 that we would lose $400 billion to the subprime crisis. That was about the time when Fed Chair Bernanke was telling us the subprime crisis could be contained. I was an optimist by at least a trillion dollars, give or take. Looking ahead, €1 trillion may be a similarly overoptimistic estimate of what it will take to resolve the Italian banking crisis.
4. Brexit? Do you really think the Brexit negotiations are going to be a walk in a park, given the nationalist tendencies that are emerging in Europe?
   
5. Japan is continuing to massively monetize its debt. The Japanese have no choice. Their currency is going to continue to fall. I know that Abe and Trump were playing nice last week, but when the yen hits 140 or 150 because the dollar is rising and you can buy a Lexus cheaper than you can buy a Hyundai, how does that work for the trade protectionists in the Trump administration?
   
6. President Trump has expressed concern about certain currencies being manipulated and thus being too weak. A crisis in Europe and Britain would result in their currencies dropping, along with the yen, forcing China to allow its currency to drift downward, too, since China is exposed to all of those countries through its own trade. China simply does not have enough dollars to support its currency at the current level if the dollar were to rise by 20%. To try to do so would destroy their balance sheet. But to allow the yuan to fall would sabotage their current push toward becoming a consumer society and would create an enormous amount of instability. They would be forced to double down on their mercantilist strategy. In other words, an escalating trade war!
   
7. One thing that nearly all economists agree on is that if we pass the border adjustment tax as currently proposed, the dollar would (eventually if not quickly) rise by about 20%. In fact, the Republicans actually use that as a selling point to show that the BAT wouldn’t really increase the cost of our imports, never mind the fact that our imports are priced in dollars and not in foreign currencies. (Remember Megan’s point about “price stickiness” above.) To say that the transition would be messy is an understatement.
   
8. Global market valuations of all asset classes are about as high as they have been in a long time. When was the last time we had interest rates so low and equity market valuations so high? Does this seem like a bubble do you? Or at least the beginning conditions for one?
   
9. If the dollar does rise too much, does President Trump instruct the Department of the Treasury to monetize our debt in order to weaken our own currency in response? Isn’t that called a currency war?
   
10. If our currency rises, the advantage that our exporters get from having to pay no income tax on their exports disappears at the border.
    

The Economist

Ray Dalio, founder, Bridgewater Associates, explains why the 1930s hold clues to what lies ahead for the economy

This is not a normal business cycle; monetary policy will be a lot less effective in the future; investment returns will be very low. These have come to be widely held views, but there is little understanding as to why they are true. I have a simple template for looking at how the economic machine works that helps shine some light. It has three parts.

First, there are three main forces that drive all economies: 1) productivity; 2) the short-term debt cycle, or business cycle, running every five to ten years; and 3) the long-term debt cycle, over 50 to 75 years. Most people don’t adequately understand the long-term debt cycle because it comes along so infrequently. But this is the most important force behind what is happening now.

Second, there are three equilibriums that markets gravitate towards: 1) debt growth has to be in line with the income growth that services those debts; 2) economic operating rates and inflation rates can’t be too high or too low for long; and 3) the projected returns of equities have to be above those of bonds, which in turn have to be above those of cash by appropriate risk premiums. Without such risk premiums the transmission mechanisms of capital won’t work and the economy will grind to a halt. In the years ahead, the capital markets’ transmission mechanism will work more poorly than in the past, as interest rates can’t be lowered and risk premiums of other investments are low. Most people have never experienced this before and don’t understand how this will cause low returns, more debt monetisation and a “pushing on a string” situation for monetary policy.

Third, there are two levers that policy-makers can use to bring about these equilibriums: 1) monetary policy, and 2) fiscal policy. With monetary policy becoming relatively impotent, it’s important for these two to be co-ordinated. Yet the current state of political fragmentation around the world makes effective co-ordination hard to imagine.

Although circumstances like these have not existed in our lifetimes, they have taken place numerous times in recorded history. During such periods, central banks need to monetise debt, as they have been doing, and conditions become increasingly risky.

What does this template tell us about the future? By and large, productivity growth is slow, business cycles are near their mid-points and long-term debt cycles are approaching the end of their pushing-on-a-string phases. There is only so much one can squeeze out of a long-term debt cycle before monetary policy becomes ineffective, and most countries are approaching that point. Japan is closest, Europe is a step behind it, the United States is a step or two behind Europe and China a few steps behind America.

For most economies, cyclical influences are close to being in equilibrium and debt growth rates are manageable. In contrast to 2007, when my template signalled that we were in a bubble and a debt crisis was ahead, I don’t now see such an abrupt crisis in the immediate future. Instead, I see the beginnings of a longer-term, gradually intensifying financial squeeze. This will be brought about by both income growth and investment returns being low and insufficient to fund large debt-service, pension and health-care liabilities. Monetary and fiscal policies won’t be of much help.

As time passes, how the money flows between asset classes will get more interesting. At current rates of central-bank debt buying, they will soon hit their own constraints, which they will probably have to abandon to continue monetising. That will mean buying riskier assets, which will push prices of these assets higher and future returns lower.

The bond market is risky now and will get more so. Rarely do investors encounter
a market that is so clearly overvalued and also so close to its clearly defined limits, as there is a limit to how low negative bond yields can go. Bonds will become a very bad deal as ­central banks try to push more money into them, and savers will decide to keep that money elsewhere.

Right now, while a number of riskier assets look like good value compared with bonds and cash, they are not cheap given their risks. They all have low returns with typical volatility, and as people buy them, their reward-to-risk ratio will worsen. This will create a growing risk that savers will seek to escape financial assets and shift to gold and similar non-monetary preserves of wealth, especially as social and political ­tensions intensify.

For those interested in studying analogous periods, I recommend looking at 1935-45, after the 1929-32 stockmarket and economic crashes, and following the great quantitative easings that caused stock prices and economic activity to rebound and led to “pushing on a string” in 1935. That was the last time that the global configuration of fund­amentals was broadly similar to what it is today.

by Fitch Ratings
10 February, 2017
London

The Trump Administration represents a risk to international economic conditions and global sovereign credit fundamentals, Fitch Ratings says. US policy predictability has diminished, with established international communication channels and relationship norms being set aside and raising the prospect of sudden, unanticipated changes in US policies with potential global implications.

The primary risks to sovereign credits include the possibility of disruptive changes to trade relations, diminished international capital flows, limits on migration that affect remittances and confrontational exchanges between policymakers that contribute to heightened or prolonged currency and other financial market volatility. The materialisation of these risks would provide an unfavourable backdrop for economic growth, putting pressure on public finances that may have rating implications for some sovereigns. Increases in the cost or reductions in the availability of external financing, particularly if accompanied by currency depreciation, could also affect ratings.

In assessing the global sovereign credit implications of policies enacted by the new US Administration, Fitch will focus on changes in growth trajectories, public finance positions and balance of payments performances, with particular emphasis on medium-term export prospects and possible pressures on external liquidity and sustainable funding. US positions on some countries may change quickly, at least initially, but any potential rating adjustments will depend on consequent changes to sovereign credit fundamentals, which will almost certainly be slower to materialise.

Elements of President Trump's economic agenda would be positive for growth, including the long-overdue boost to US infrastructure investment, the focus on reducing the regulatory burden and the possibility of tax cuts and reforms, assuming cuts don't lead to proportionate increases in the government deficit and debt. One interpretation of current events is that, after an early flurry of disruptive change to establish a fundamental reorientation of policy direction and intent, the Administration will settle in, embracing a consistent business- and trade-friendly framework that leverages these aspects of its economic programme, with favourable international spill-overs.

In Fitch's view, the present balance of risks points toward a less benign global outcome. The Administration has abandoned the Trans-Pacific Partnership, confirmed a pending renegotiation of the North American Free Trade Agreement, rebuked US companies that invest abroad, while threatening financial penalties for companies that do so, and accused a number of countries of manipulating exchange rates to the US's disadvantage. The full impact of these initiatives will not be known for some time, and will depend on iterative exchanges among multiple parties and unforeseen additional developments. In short, a lot can change, but the aggressive tone of some Administration rhetoric does not portend an easy period of negotiation ahead, nor does it suggest there is much scope for compromise.

Sovereigns most at risk from adverse changes to their credit fundamentals are those with close economic and financial ties with the US that come under scrutiny due to either existing financial imbalances or perceptions of unfair frameworks or practices that govern their bilateral relations. Canada, China, Germany, Japan and Mexico have been identified explicitly by the Administration as having trade arrangements or exchange rate policies that warrant attention, but the list is unlikely to end there. Our revision of the Outlook on Mexico's 'BBB+' sovereign rating to Negative in December partly reflected increased economic uncertainty and asset price volatility following the US election.

The integrative aspects of global supply chains, particularly in manufactured goods, means actions taken by the US that limit trade flows with one country will have cascading effects on others. Regional value chains are especially well developed in East Asia, focused on China, and Central Europe, focused on Germany.

Tighter immigration controls and possible deportations could have meaningful effects on remittance flows, as the US has the world's largest immigrant population. World Bank data confirm that the US and Mexico share the world's top migration corridor and have the largest bilateral remittance flows. Relative to GDP, remittances are even larger for Honduras, El Salvador, Guatemala and Nicaragua, all of which receive most inflows from the US.

Countries hosting US direct investment, at least part of which has financed export industries focused back on the US, are at risk of being singled out for punitive trade measures. The list of these countries is potentially long, since US-based entities account for nearly one-quarter of the stock of global foreign direct investment. Countries with the highest stock of US investment in manufacturing are Canada, the UK, Netherlands, Mexico, Germany, China and Brazil.

By Trevor Hunnicutt
Reuters
February 8, 2017

BlackRock Chief Executive Larry Fink on Wednesday said the U.S. economy is in the midst of a slowdown and financial markets could see a significant setback, because of uncertainty over global trade and the Trump administration's plan to cut taxes.  "I see a lot of dark shadows," he said at an event hosted by Yahoo. "The markets are probably ahead of themselves."

Fink, whose company manages $5.1 trillion in assets, said investors are caught up in the potential for a restructuring of U.S. tax policy, which may not take place until 2018.  But disruptions to trade are a possibility in the meantime, he said.  U.S. President Donald Trump has called for tax cuts as well as a wide set of changes to trade policy, including a renegotiation of the North American Free Trade Agreement with Canada and Mexico.  "We're living in a bipolar world right now," Fink said. "In my conversations with CEOs in Europe and CEOs in the United States they may be very bullish about what may come but most business people are not investing today."

Fink is the latest major figure to call for a dose of caution after Trump's election touched off a rally in U.S. stocks. Bond investors Jeffrey Gundlach and Bill Gross are among those who have said the same in recent weeks.  While noting that the benchmark 10-year Treasury yield could fall below 2 percent or, conversely, rise above 4 percent, Fink said he sees a greater probability of rates falling. He added that he sees the U.S. Federal Reserve raising interest rates in June and possibly again once more in the year.

And he warned that there could be tension between the Fed's dollar-boosting policies and those of Trump as a stronger dollar could make it harder to revive export-dependent manufacturers.

by Nouriel Roubini
The Gaurdian
2 February, 2017
 
When Donald Trump was elected president of the US, stock markets rallied impressively. Investors were initially giddy about Trump’s promises of fiscal stimulus, deregulation of energy, health care and financial services, and steep cuts in corporate, personal, estate, and capital-gains taxes. But will the reality of Trumponomics sustain a continued rise in equity prices?

It is little wonder that corporations and investors have been happy. This traditional Republican embrace of trickle-down supply-side economics will mostly favour corporations and wealthy individuals, while doing almost nothing to create jobs or raise blue-collar workers’ incomes. According to the non-partisan Tax Policy Center, almost half of the benefits from Trump’s proposed tax cuts would go to the top 1% of income earners.

Yet the corporate sector’s animal spirits may soon give way to primal fear: the market rally is already running out of steam, and Trump’s honeymoon with investors might be coming to an end. There are several reasons for this.

For starters, the anticipation of fiscal stimulus may have pushed stock prices up, but it also led to higher long-term interest rates, which hurts capital spending and interest-sensitive sectors such as real estate. Meanwhile, the strengthening dollar will destroy more of the jobs typically held by Trump’s blue-collar base. The president may have “saved” 1,000 jobs in Indiana by bullying and cajoling the air-conditioner manufacturer Carrier; but the US dollar’s appreciation since the election could destroy almost 400,000 manufacturing jobs over time.

Moreover, Trump’s fiscal stimulus package might end up being much larger than the market’s current pricing suggests. As Ronald Reagan and George W Bush showed, Republicans can rarely resist the temptation to cut corporate, income and other taxes, even when they have no way to make up for the lost revenue and no desire to cut spending. If this happens again under Trump, fiscal deficits will push up interest rates and the dollar even further, and hurt the economy in the long term.

A second reason for investors to curb their enthusiasm is the spectre of inflation. With the US economy already close to full employment, Trump’s fiscal stimulus will fuel inflation more than it does growth. Inflation will then force even Janet Yellen’s dovish Federal Reserve to hike up interest rates sooner and faster than it otherwise would have done, which will drive up long-term interest rates and the value of the dollar still more.

Third, this undesirable policy mix of excessively loose fiscal policy and tight monetary policy will tighten financial conditions, hurting blue-collar workers’ incomes and employment prospects. An already protectionist Trump administration will then have to pursue additional protectionist measures to maintain these workers’ support, thereby further hampering economic growth and diminishing corporate profits.

If Trump takes his protectionism too far, he will undoubtedly spark trade wars. America’s trading partners will have little choice but to respond to US import restrictions by imposing their own tariffs on US exports. The ensuing tit-for-tat will hinder global economic growth and damage economies and markets everywhere. It is worth remembering how America’s 1930 Smoot-Hawley Tariff Act triggered global trade wars that exacerbated the Great Depression.

Fourth, Trump’s actions suggest that his administration’s economic interventionism will go beyond traditional protectionism. Trump has already shown his willingness to target firms’ foreign operations with the threat of import levies, public accusations of price gouging and immigration restrictions (which make it harder to attract talent).

The Nobel laureate economist Edmund S Phelps has described Trump’s direct interference in the corporate sector as reminiscent of corporatist Nazi Germany and fascist Italy. Indeed, if Barack Obama had treated the corporate sector in the way that Trump has, he would have been smeared as a communist; but for some reason when Trump does it, corporate America puts its tail between its legs.

Fifth, Trump is questioning US alliances, cosying up to American rivals such as Russia, and antagonizing important global powers such as China. His erratic foreign policies are spooking world leaders, multinational corporations and global markets generally.

Finally, Trump may pursue damage-control methods that only make matters worse. For example, he and his advisers have already made verbal pronouncements intended to weaken the dollar. But talk is cheap, and open-mouth operations have only a temporary effect on the currency.

This means that Trump might take a more radical and heterodox approach. During the campaign, he bashed the Fed for being too dovish, and creating a “false economy”. And yet he may now be tempted to appoint new members to the Fed board who are even more dovish, and less independent, than Yellen in order to boost credit to the private sector.

If that fails, Trump could unilaterally intervene to weaken the dollar, or impose capital controls to limit dollar-strengthening capital inflows. Markets are already becoming wary; full-blown panic is likely if protectionism and reckless, politicised monetary policy precipitate trade, currency, and capital-control wars.

To be sure, expectations of stimulus, lower taxes and deregulation could still boost the economy and the market’s performance in the short term. But, as the vacillation in financial markets since Trump’s inauguration indicates, the president’s inconsistent, erratic, and destructive policies will take their toll on domestic and global economic growth in the long run.