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Crystal ball time; will I get it wrong...again!

First let me be very honest, by crystal ball has been remarkably out of wack.

  1. I got Greece wrong -- I don't know what the ECB had on Greek leaders but it was enough to get them to back down from leaving the Euro/ECB.  The consequences for the country and its citizen has been dire!  
    1. Unemployment is still very high, 
    2. retiree are still suffering from massive cuts to their pensions.  
    3. The system has broken down
    4. Thankfully young Greeks with some language skills have been able to leave the country
  2. Brexit:  Although I though there was some very good reasons for Britain to leave Europe the reason's my compatriots decided to leave were for jingoistic reasons
    1. Sterling has so far done rather well
    2. The economy has not collapsed -- its even growing again
  3. The Euro:  She strength of the Euro; now around 119 to the greenback is unsettling insofar that it shows a greater confidence in Europe, than in America -- who's currency has been rather weak -- against everything except the Canadian dollar.  I didn't see that coming
  4. European banks:  I really though that the European banks were near the precipice -- maybe the really were which is why the ECB bought back all the stupid loans they did to Greece, Portugal, Spain at PAR...removing the need for European banks to take provisions against these loans (that they could not afford).
What I did get right:
  1. Certain banks did suffer from near economic collapse, bank shares have, in some cases, lost nearly 50% of their value over the past 4 years (SocGen and DB)
  2. Italian banks remain Europe's weak link -- rumours are that the best Italian banks are sitting on NPL of 10% of book (the S&L crisis in the US banks' average NPL was less than 5%), and some such as MPS had around 25% of all loans being NPL  This could be important because of the ECB's debt forgiveness limits (for Italy 120% of its entire Euro 20 billion debt forgiveness has been absorbed the the failure of one bank (MPS)
What's next?

First off I think that the central bank (with the FEDS as their leader) have now figured out that wage inflation is a non event, the only reason not to tighten and to remove liquidity is if the economy tanks -- the Q2/2017 number for the US came out this morning, and GDP growth is around 3% (on an annualized rate).  This give Janet and her friends the perfect reason to normalize interest rates -- I would expect one or two tightening pushes before the end of the year (assuming the the US Congress can figure out a way to approve the debt ceiling and budget).  Following the Houston hurricane damages GS puts the risk of a Federal government shut down at 20% down from 40% before that hurricane.

Implication is that US dollar weakness will reverse and the USD will gain ground against the Euro -- I suspect additional weakness in the CAD.

I cannot see how Trump can repair the rift he has created with Congress (both chambers) the real test will be the debt ceiling (in a few days now - the US government runs out of margin around the 12/15 of September).  However, I just don't see the GOP allowing FEMA to shut down (the same for police force overtime etc etc.)

I expect the Chinese economy to keep on shrinking its investment growth (Monday the Chinese government announced the merger of two Chinese power companies -- as a way to reduce overcapacity).  The government wants a smooth transition (as much as possible) and will do everything in its power not to have a collapse.  Therefore I expect Chinese GDP growth to continue to grow into lower single digit 4/5% instead of 6/7%.  

LatAm remains on its own course, removing Brazil from the equation (which I grant is not realistic) GDP growth in the whole continent will be in the 3/4% per annum -- which is low considering population growth in the region.  Mexico, stands closer to a figure of 2/3% real growth.  

However, all these marginal economies (sorry guys) are totally dependent on US growth.  The S&P 500 sits around 2450 is still pricing "near perfection" that Trump's agenda -- cutting taxes on the rich and corporation to 15% is possible -- considering the failure to reform Medicare/Medicaid and the ACA (aka cutting medical access to all and sundry) as the only viable way of cutting entitlement expenses (which account for 88% of the Federal government's expenses).  There's not much room to cut things -- the only other way is to lie about future GDP growth.   legislatively, Trump's agenda is DOA and little will occur over the next 12 months -- since the market is priced for perfection, there will be a long overdue correction (minimum 10% maybe even a 15% market correction).

Finally, one if my favorite is the overvalued Canadian housing market -- forget Vancouver and Toronto (who are BTW feeling the pinch now) all other major Canadian metropolitan centres (with the possible exception of Halifax) are facing very high prices (when measured against prevalent wages).  I expect a correction in the Canadian housing market -- at the very least a 10-15% down trend for 12/24 months.   

Again, events to conspire to prove me wrong, we assume no massive externalities here, no war with North Korea, Venezuela or Iran (Yep Trump is for military intervention in all three places), so these things could ruin everybody's party.  If Italy sense that Brexit is not so bad, they may decide to follow.  Who knows

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