New Beginnings to the Same Old Story

sunrise over the sea
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Publisher’s Note: You’ll notice that this week’s Daily Reckoning weekend edition has taken on a distinctly different look. At Port Phillip Publishing, we’re always looking for ways to make our content more accessible to readers. For this reason, from hereon in, the weekend edition will be served to you in a digestible, ‘bite-size’ format.

Every Saturday, we’ll wrap up the week’s most important developments in global markets and finance. And don’t worry; if you don’t get the time to read The Daily Reckoning every day, we’ve got you covered as well. Each Saturday, we’ll be taking a look at what our new line-up of editors, led by Vern Gowdie and Jason Stevenson, had to say on all the latest market developments.

As always, the weekend edition will retain the unique, irreverent outlook on markets and finance that you’ve come to expect from The Daily Reckoning. We think you’ll enjoy the new weekend offering. And now, without further ado…

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Doom and gloom? What doom and gloom?

2017 has gotten off not with a whimper, but with a bona fide bang.

The ASX has ridden a wave of optimism, hitting a 30-month high after surging past 5700 points. This came on the back of positive data from China, with manufacturing activity rising to a three-year high.

Oil is significantly up this week, too, as the OPEC production cut agreement begins to take effect. West Texas Intermediate, trading at US$29.13 a barrel on Monday, is up a whopping 54%, and is now trading at US$53.73 a barrel.

Meanwhile, there was further good news for homeowners. New figures from CoreLogic revealed that Aussie house prices rose by 10.9% in 2016. Despite ongoing fears over a housing bubble, national house prices rose by the largest margin in six years.

Yet, as you probably know, market positivity of any kind, on the back of less than stellar fundamentals, often stems from irrational exuberance. Despite the upbeat start to proceedings, storm clouds are gathering. More below…

Aussie Dollar Crash 2017

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With Donald Trump taking office in just over two weeks, and with the Chinese currency continuing to tumble against the greenback, there are growing fears that Mr Trump will use the falling yuan to kick-start a trade war with China.

A looming trade war between Australia’s most important trading partners would be disastrous for the Aussie economy. Despite putting downward pressure on the Aussie dollar, a trade war would also likely see tariffs rise to 45% in the US — with Chinese retaliation to follow. That, in no uncertain terms, would be catastrophic. Less coming in, less going out. Less capital all around to feed the China-dependent economies like, ahem, Australia.

We didn’t start the fire

When Billy Joel penned his 80s hit song We Didn’t Start the Fire, he was making a point we’d all be wise to remember from time to time. You’ll remember it well:

We didn’t start the fire; it was always burning since the world’s been turning… We didn’t start the fire, but when we are gone, it will still burn on, and on, and on, and on…

As we come to the end of the first week of 2017, these lyrics have a brooding sense of familiarity about them. Whether we’re talking about investors piling into overpriced assets, or the rise of trade protectionism across the globe, the fire never really fades, it just flickers brighter and dimmer. Which is why you should be wary about pinning your hopes on this new-year optimism lasting for much longer.

After all, the ills affecting the global economy haven’t disappeared. Dangerously overpriced asset bubbles, driven by credit-fuelled debt, remain. In all likelihood, the situation will worsen before it improves. And there’s not much any of us can do about it.

For as long as the globe turns, there will be opportunities to grasp, markets to inflate, bubbles to pop…and debts to devastate the unwitting masses. Everyone’s in on the joke, bidding up property and stock markets, yet we’ll all end up laughing at our own expense.

This seemed to be the underlying theme in The Daily Reckoning this week. While the global economy is unmistakably rotten at the core, what else can you do but play along? The world’s always burned, and will continue to do so after the next crash. And, heck, you may as well make some money out of it while you can, right?

On Wednesday, in his first piece as editor of The Daily Reckoning, Jason Stevenson outlined why he believes financial markets are set for another turbulent year in 2017. But, as Jason notes, that doesn’t mean you can’t make any money in the markets — far from it. Despite not ruling out a short-term correction, he doesn’t expect a major crash anytime soon.

If you’re waiting for the next crash — standing on the sidelines with your cash — you won’t make much money, if it all. That’s why Jason’s urging you to embrace volatility. How? Find out by clicking here.

Yet, while there will be money-making opportunities at play in 2017, how might you go about discovering them? On Tuesday, Greg Canavan, who’s taking the helm at Money Morning, departed with some, well, ‘counterintuitive’ advice for finding such potential opportunities.

In a world that increasingly makes less sense, your best course of action might be to look for investment opportunities that don’t make any sense. Because, as Greg explains, markets aren’t meant to make sense. Rather, they only make sense in hindsight.

Navigating the markets might require that you change the way you think. That includes embracing the fact that you actually know nothing.

One thing we can be sure of is that tensions between the US and emerging powers will continue to heighten in 2017. On Thursday, geopolitical strategist Jim Rickards was critical in his assessment of the Obama administration’s foreign policy in 2016.

As Jim explains, there are three global powers today: the US, China and Russia. As the world’s sole superpower, US foreign policy seeks to protect that status. To do this, the US must ensure two things: first, that no other power rises up to challenge it; and second, to guarantee that the other two powers don’t collaborate against it.

One way to do this is to side with one of China or Russia to mitigate the rise of the other. Which side will the Trump administration snuggle up to? To read Rickards’ surprising conclusion, click here.

In any case, the US is likely to face bigger problems at home in the short term. As Jim outlined in Friday’s Daily Reckoning, the combination of a strong dollar, imported deflation and higher interest rates in an already weakening economy could tip the US into recession. And, potentially, to the dreaded ‘S’ word… What’s that? To find out, and for more on the US economy looking ahead to the rest of the year, click here.

Regards,

Mat Spasic,

For The Daily Reckoning

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