When the global chief economist at Goldman Sachs, Jan Hatzius, spoke to a conference in Sydney on Thursday he took a rational economic approach to the pronouncements of US President Donald Trump.
That might prove to be a mistake. Trump has a track record of acting irrationally and in complete disagreement with accepted liberal economic orthodoxy.
Investors looking for guidance on how to position their portfolios might want to be careful. As Prime Minister Malcolm Turnbull has discovered, nothing is certain until Trump actually does something.
Markets have rallied on the rational expectation that the irrational and unpredictable Trump would be counselled and cajoled into rational action by his team of advisers, many of whom have the respect of Wall Street.
But that approach is being questioned as Trump the man busts through the expectations associated with Trump the president.
The Hatzius approach is in keeping with sound logic. He has used the lessons of history and his years of experience as one of the leading economists on Wall Street to make forecasts about the future.
His key forecasts for 2017 are: US gross domestic product rises by 2.25 per cent, which is above trend; the US Federal Reserve lifts interest rates three times; and the economy remains at full employment with expectations of a 2 per cent growth in unit labour costs.
Hatzius says China is exhibiting an acceleration in economic activity and should end the year with GDP growth between 5 per cent and 6 per cent.
He sees strong arguments in favour of tax reform, including the fact that US statutory corporate income tax rates are now the highest in the 24-member Organisation for Economic Co-operation and Development. He makes another strong point in favour of reform and this is the significant shift in US corporate profits from the US to tax havens.
Hatzius published a chart showing that the percentage of US corporate profits in tax havens has risen from about 2 per cent in 1984 to about 17 per cent in 2014. This activity hit a peak in excess of 20 per cent in 2008.
He says Trump will want these profits brought back within the ambit of the US Internal Revenue Service. That is an ominous cloud hanging over technology companies that have favoured tax havens such as Google, Apple and Facebook.
Hatzius used traditional economic logic when addressing the question of protectionism and Trump's proposed tariffs on goods imported from China (45 per cent) and Mexico (35 per cent).
"If we translate that into average tariff rates on just those two countries, that would take us back to the tariff levels that prevailed at the end of World War II," Hatzius said.
"A more realistic expectation might be something closer to a 3 per cent to 4 per cent increase rather than an 11 per cent increase, but even that would undo the trade liberalisation that has taken place since the Reagan administration.
"We do think it would be a negative, partly through the reduction in the international division of labour and partly though adverse macro effects – higher inflation and tighter Fed policy."
The views expressed by Hatzius are in keeping with the consensus in financial markets as shown through recent financial flows data published by Bank of America Merrill Lynch's Michael Hartnett.
His latest publication, The Flow Show, showed that investors have been positioning themselves for reflation via inflation protected securities called TIPS.
"But the re-positioning feels grudging and flows have yet to show big asset allocation capitulation out of bonds into stocks," he said.
Hartnett said the first week of Trump showed the largest weekly bond fund inflows in four months ($US8.6 billion), tiny equity fund inflows ($US2oo million) and precious metal outflows ($US200 million).
Global investors have also positioned themselves for much higher equity prices in emerging markets.
Last week featured the largest emerging market equity fund inflows in three months ($US1 billion); the largest three-week inflows to Japan equity funds in 16 months ($US8.8 billion), and inflows to materials funds in 11 of the past 12 weeks. Hartnett said this showed a clear bias towards reflation/inflation.
One of the primary lessons from financial market activity in 2016 was that it was wise to avoid the consensus positions. The time to buy resources stocks was in early 2016 amid doom and gloom about China's economic prospects.
The time to get out of small cap stocks was when they reached record highs in late 2016. This was also the time to abandon highly price growth stocks.
One chartist who has been doing the rounds of hedge funds in Australia has been advising clients to avoid the consensus trades in 2017 such as going long the US dollar.
Going short the US dollar and long the Euro and the Australian dollar would be a complete denial of the logic displayed by Hatzius from Goldman Sachs.
But that sort of investment strategy is probably near the top of the list of Trump's preferred outcomes.
One peculiar aspect of the current uncertainty in financial markets is the complete lack of volatility. The VIX index, which measures volatility in markets, is flat-lining, and the VXV index, which measures the volatility of volatility, is also flat-lining.
That says there is lots of uncertainty about the Trump-driven uncertainty.
