The long post-GFC economic purgatory is set to finally end as the global economy readies for take-off.
Donald Trump may think it's due to him, but global manufacturing data and leading indicator charts had been shooting up, even in Europe, which has been in a long funk, before he moved into the White House.
As for the impact of America's 45th President, markets are giving some credit to "the Trump effect." Good Trump – tax-cutter, deregulator, fiscal booster (he's promised to rebuild America's creaking infrastructure) and deal-making businessman would be positive for growth and paychecks. Everyone's hoping that Bad Trump – confrontational, divisive, nativist and protectionist – is kept in check.
Financial markets people live data day in, day out. Ours is a rational world and so we are prone to thinking that people take a best-interests approach. But that's not always true. Not everyone is homo economicus, infinitely making decisions in their best economic interests.
Some neurolinguistics and brain function experts have argued that many Trump voters are particularly motivated by self-definition and identity. If best-interests and rationality are absent under a Trump administration, rocky times are ahead.
Meanwhile, like others who live in the world of economics and markets, central banks are configuring for stronger growth trends. The US Federal Reserve has already flagged three rate hikes for 2017, a vote of economic confidence.
Tighter monetary policy
It's also hinting at the prospect of letting the bonds on its balance sheet roll off when they mature, rather than reinvesting the proceeds. Effectively this tightens monetary policy, irrespective of official interest rate moves.
The Bank of Japan has been acknowledging the harmful side-effects of negative interest rates on savers as well as lenders and has been reducing purchases of long-dated bonds in an effort to create a more normal yield curve – one where interest rates on 10 and 30-year bonds are higher than on three and five-year bonds.
Inflation, or at least inflationary expectations, which has been the dog that didn't bark, is finally waking from a long sleep. This doesn't mean the kind of terrible inflation of the 1970s is ahead; rather the bottom of the low-inflation cycle has been reached. Whereas unusually low inflationary expectations had become anchored among businesses and consumers for much of the post-GFC era, they are now less sure.
All this uncertainty is adding to risks. Risk can get portrayed as an unsavoury four-letter world, but for active investors, it's terrific. Calculated risk creates opportunity for reward.
Bond investors who looked ahead bought inflation-compensating assets when they were at compelling valuations. Those investments have gone up in value as inflation expectations have risen and they are poised to rise further in value as uncertainty takes hold.
Inflation doesn't have to go up for such investments to gain value. Just the fact that people are less certain about future inflation boots the value of inflation-compensating assets.
Investors are also eying corporate bonds as they would be expected to benefit from a stronger economic pulse. Corporate balance sheets, especially in the US, are in good shape, and while interest coverage is off its peaks, it remains healthy, which reassures corporate bond investors.
Share buy-backs
There's been a lot of commentary on corporate America's $US1.7 trillion cash holdings. Rather than investing to grow their businesses and create jobs, American companies have emphasised share-buybacks, higher dividends, special dividends and more recently mergers and acquisitions. That may be good for shareholders in the short run, but not so great for the country or shareholders in the longer run.
Investing for the future drives prosperity and lifts confidence. Encouragingly, there have lately been sightings of corporate animal spirts. The US small business outlook recently registered the strongest rise in almost 40 years and surveys of future capital expenditure intentions have shot up.
Everyone is hoping that spirited intentions get translated to actual commitments. Historically, intention-surveys have proved to be accurate predictors of future spending and so there are reasons for optimism.
While Australian growth receded in the third quarter of last year, recent data suggests a recovery in the final quarter and the first half of 2017. The housing construction cycle appears poised to be stronger for longer and the strength of public infrastructure spending is a tonic. Of course, neither can last forever, but is helping to offset the drag from the weakness of the mining sector.
Like other developed countries, the inflation trough appears to have been reached and so no further interest rate cuts are anticipated. On the other hand, rate rises are some way off.
Like smokers warnings, the relatively optimistic global picture needs caveats.
The Trump phenomena caught most by surprise. More could be in store over this year as France, Germany and the Netherlands gear up for elections in which populists and nativists are expected to poll strongly. The global economic system has managed to weather any number of jolts, but there has to be some limit to its shock-absorbing capacity.
Katrina King is director for research and strategy at funds manager QIC
