Well, now we know pretty much everything we wanted to know. We know how the ECB will behave in the next 18-20 months (30 billion a month of Qe until September, then almost certainly 10-15 for another three months and finally the first rate hike in mid-2019). We know that the euro, thanks to the persistence of an expansive stance on the part of the ECB, it will remain quiet not far from current values for the next few months, to the great relief of the European stock exchanges and in particular of the German one.
We know who it will be the new governor of the Fed (dove Powell). We know that the stock of the American monetary base will fall very gently and will in any case remain above three trillion at the end of the Quantitative tightening in 2021. We also know not only the contours, but also many details of that American tax reform that the markets have been calling for for a year in the hope to see 2018 earnings grow $8-10 per SP 500 share.
We know that in exchange for the rate for companies lowered to 20 (and not to 25-26 as we had begun to think) there will be a cut in some deductions and deductions to balance the accounts and only a plate of lentils for the people physical, but however, there will be a slightly more rational tax system and 1.5 trillion less in taxes over the next 10 years. We know that the Senate will worsen and dilute the chamber's proposal, but the general structure will remain standing. Above all, we know that the tax reform will really take place, at this point with an 85-90 percent probability, compared to 40-50 percent just a month ago.
As if that were not enough, alongside these almost certainties, we have formed the idea (this to be verified) that we will have growth without inflation for the entire foreseeable horizon, that the Phillips curve is an antique good only for the academy, that wage inflation, thanks to robots and artificial intelligence, will never show up again and that the risk, if we want to call it that, is to have even more growth and even less inflation than we imagine today.
Not only, therefore, we know everything we wanted to know. We also have everything we wanted to achieve and we have formed the inner conviction that, if there are surprises, they will be positive. And let's not forget that, in addition to the arrival of certainties and expectations
positive, we have also seen the drastic reduction, justified or not, of geopolitical concerns in Asia and political ones in Europe and America.
At this point what can we still dream about? What further positive surprises could we imagine? Manna from heaven? It would be deflationary, as it would exacerbate oversupply. Money from heaven? They would risk being inflationary. The best we can hope is that the future is as we imagine it. If not, we will be disappointed. If this is the case, we will still have to downshift and move from the euphoria of a magical moment to the well-being of orderly and lasting growth.
In the first case, the disappointment, we will have a trend reversal on the stock market, not necessarily dramatic but clear and perceptible. In the second case we could instead have a correction due to profit taking, particularly in January, when today's potential corporate sellers, blocked by waiting for lower rates on capital gains, will finally be able to take advantage of the new tax regime. Something more, therefore, than a normal sell the news.
At the end of the correction, which will obviously affect the stocks and sectors that have risen the most over the past two years, the stock markets will be able to resume their growth in line with earnings without drawing further benefits from dreams and fantasies. Today's is perhaps not the best of all possible worlds for those who invest but it is getting close. Central banks intend to keep real rates at zero in America and negative in Europe. Once again, bondholders get a postponement of the so often threatened bear market.
The Fed will be led by a balanced and reasonable man. Europe is four years behind the American cycle and therefore has the possibility of absorbing a possible recession in the United States quite well. It's only fair to celebrate this robust underlying framework, but we must not forget that the story does not stop there. Nothing prevents Republicans from losing their majority in Congress in 12 months. Nothing prevents that, already at the beginning of 2019, a restless America is looming on the horizon, ready to change again and to choose Sanders or Warren as future president.
Nothing prevents the big technology monopolies from being attacked in terms of taxation and antitrust legislation. Nothing prevents China from stumbling again, as he did two years ago. After nine years of expansionary cycle and two years of positive subcycle rewarded by one
spectacular appreciation of financial and real assets we see nothing wrong with taking something home and taking a break from
a few weeks, maybe ready to come back later.
Could it be different for Europe? The American tax reform, in theory, is negative for European companies that see their overseas competitors suddenly more profitable and competitive, but the markets don't think so. The halting of the euro's rise is a relief factor that fully compensates for the modest loss of competitiveness e there is nothing to prevent Europe from also lowering the rates for businesses in the next few years. For European stock exchanges, therefore, we propose a modest easing, accompanied by a partial and temporary rotation from Italy to Germany.
