Nobody likes change, particularly on the scale that is taking place all around us today. Understandably, we prefer to live in a state of Denial. This is why “Impossible” is my Word of the Year for 2016.
The main feature of the word is that it is a statement, and a very clear statement. People who describe something as being “Impossible” aren’t looking for a discussion. They are wanting to close down the topic and move on. I saw this first between 2006-8 over my warnings about the potential for a subprime crisis. And then the same reaction occurred with increasing frequency from September last year, in response to my warning that:
“In the USA, the establishment candidacies of Hillary Clinton for the Democrats and Jeb Bush for the Republicans are being upstaged by the two populist candidates – Bernie Sanders and Donald Trump….Companies and investors have had little experience of how such debates can impact them in recent decades. They now need to move quickly up the learning curve. Political risk is becoming a major issue, as it was before the 1990s.”
The word “Impossible” then became a more-or-less routine response after my February and March posts, warning that Brexit poll creates UK, euro, interest rate rise risk and Brexit vote will hit UK, Eurozone and global economies. Brexit was simply “Impossible”, I was told, as were major rises in interest rates. Yet benchmark UK and euro 10-year interest rates are already higher today than when I wrote 9 months ago, and will likely rise much further in 2017.
There is no denying the pain created by today’s paradigm shift. Yesterday’s successful strategies are now becoming irrelevant, and will have to be completely rethought. Understandably, companies and investors instead found it much easier to follow the consensus and insist such a shift was “Impossible”.
The past few weeks saw this pattern of Denial reach its peak, as I highlighted in early October when noting that Markets struggle with political risk as populist momentum gains:
“Companies and investors therefore need to prepare very carefully for every possible outcome – even if these seem unlikely today. For example, most investors today assume that the Federal Reserve will always support US stock markets. But if Trump were to win next month, it is likely that this policy would change very quickly.”
Sure enough, Fed policy has indeed now begun to “change very quickly”, as we saw last week. Fed Chair, Janet Yellen, has taken the obvious way out: by declaring “victory” for the stimulus policy, she was then able to abandon it:
The Fed not only raised the short-term rate, but also announced a rapid programme of rises for next year
Given Trump’s known views on stimulus, it would be no surprise to see monthly rate rises taking place later in 2017
Of course, the consensus will respond that such a return to pre-SuperCycle rate moves is “Impossible”. But it is already becoming clear that Yellen’s term as Chair is unlikely to renewed in 2018. Trump has consistently termed her policies “highly political” in refusing to raise interest rates, as he confirmed in a September interview:
“They’re keeping the rates down so that everything else doesn’t go down. We have a very false economy. At some point the rates are going to have to change. The only thing that is strong is the artificial stock market.”
Developments in the benchmark 10-year rate, where the yield has almost doubled since the summer to 2.6%, confirm that the Fed is now well behind the market. Rates for mortgages, auto loans and student loans are already climbing, as the Wall Street Journal has highlighted:
“Experts warn homeowners of sticker shock ahead, as interest rates on adjustable-rate mortgages and home equity lines of credit are expected to creep up”
All those who hid behind the use of the word “Impossible” will now have to reverse course very quickly indeed.
THE “IMPOSSIBLE” IS NOW BECOMING INEVITABLE
Even today, too many people still believe that Trump will abandon his policies now he has been elected. But common sense tells us this really is “Impossible”. He would risk becoming a lame-duck President if he fails to carry out the “contract between myself and the American voter” set out in his 100-day plan.
Trump knows this, as the sign pictured above from his Tweet after his Florida rally at the weekend confirmed:
“Thank you Florida. My Administration will follow two simple rules: BUY AMERICAN and HIRE AMERICAN!”
Major companies are, of course, already going up the learning curve. Thus Dow Chemical CEO, Andrew Liveris, told a recent Trump rally that Dow planned to open a new R&D centre in Michigan, where half of the 200 jobs created would be “repatriated” from outside the USA. Liveris also added, as the Wall Street Journal reported:
“This decision is because of this man and these policies,” Mr. Liveris said from the stage of the 6,000-seat Deltaplex Arena here, adding, “I tingle with pride listening to you.”
The President-elect then announced Mr Liveris’s appointment as chairman of his American Manufacturing Council.
Yesterday’s “Impossible” is now becoming today’s New Normal. But in 2016, “Impossible” was the Word of the Year.