liquidity and put upward pressure on interest rates. 3. The Trump administration’s trade disputes with China, Europe, Mexico, Canada, and others will almost certainly escalate, leading to slower growth and higher inflation. 4. Other U.S. policies will continue to add stagflationary pressure, prompting the Fed to raise interest rates higher still. The administration is restricting inward/outward investment and technology transfers, which will disrupt supply chains. It is restricting the immigrants who are needed to maintain growth as the U.S. population ages. It is discouraging investments in the green economy. And it has no infrastructure policy to address supply-side bottlenecks. 5. Growth in the rest of the world will likely slow down – more so as other countries will see fit to retaliate against U.S. protectionism. China must slow its growth to deal with overcapacity and excessive leverage. Otherwise a hard landing will be triggered. And already- fragile emerging markets will continue to feel the pinch from protectionism and tightening monetary conditions in the U.S. 6. Europe, too, will experience slower growth, owing to monetary-policy tightening and trade frictions. Moreover, populist policies in countries such as Italy may lead to an unsustainable debt dynamic within the eurozone. The still-unresolved “doom loop” between governments and banks holding public debt will amplify the existential problems of an incomplete monetary union with inadequate risk-sharing. Under these conditions, another global downturn could
RECESSION AND
prompt Italy and other countries to exit the eurozone altogether. 7. U.S. and global equity markets are frothy. Price-to-earnings ratios in the U.S. are 50% above the historic average, private- equity valuations have become excessive, and government bonds are too expensive, given their low yields and negative term premia. And high-yield credit is also becoming increasingly expensive now that the U.S. corporate-leverage rate has reached historic highs. The policymakers who must confront the next downturn will have their hands tied while overall debt levels are higher than during the previous crisis. Moreover, the leverage in many emerging markets and some advanced economies is clearly excessive. Commercial and residential real estate is far too expensive in many parts of the world. The emerging-market correction in equities, commodities, and fixed-income holdings will continue as global storm clouds gather. And as forward-looking investors start anticipating a growth slowdown in 2020, markets will reprice risky assets by 2019. 8. Once a correction occurs, the risk of illiquidity and fire sales/undershooting will
24
November 2018
Made with FlippingBook Annual report