Great is the confusion under heaven, the situation is excellent. Mao loved catchphrases (reading too many books is harmful, the atomic bomb is a paper tiger, the revolution is not a dinner party, it's always dark before it gets dark, history is the symptom of our disease) and for once we draw on his vast repertoire to describe the current situation.
That there is great confusion in the world, in public opinion, among economists and in the markets is quite evident. There is also confusion in portfolios, which are often geological stratifications of choices made at different times and in moods sometimes of fear and sometimes of hope. It's interesting that the area that appears calmer is China, which a year ago at this time was on everyone's lips and seemed about to plunge us into who knows what global crisis.
So much ado about nothing, so many nights anxiously following the Asian markets, so many positions frantically liquidated at a loss and for what? For a renminbi that stood at 3 on 2016 February 6.61 and is now at 6.81? For a devaluation of 2.94 percent in one year? Heal your nerves, one would have said once. China will remain stable until at least the autumn, we bet. The XNUMXth Party Congress will be called upon to choose the leadership for the XNUMXs and with Xi Jinping aiming to be named Paramount Leader (like Mao and like Deng) we can rest assured that any kind of dust will be carefully swept under the carpet and that the growth objectives will be perfectly achieved or beaten. Everything else is up in the air. Starting from Europe. In the Netherlands there is great excitement around the new party launched by Thierry Baudet, a young and sophisticated intellectual who is addressing the electorate of the center on a libertarian and direct democratic platform, in open contrast to the Brussels Eurocracy. Baudet won't get many votes, but he will clear Geerd Wilders and make the Nexit hypothesis an even less taboo topic.
In France, the Gaullist Fillon, who was the big favorite a month ago, is on the verge of retiring, leaving a great void in the center which could end up abstaining or voting for Le Pen. The first round will therefore see in competition Marine Le Pen (orderly dissolution of the monetary union), the centrist socialist Macron (the euro as it stands does not last another ten years) and the utopian socialist Hamon (more immigrants, basic salary for everyone, a 32-hour working week because the robots will do everything themselves anyway). AND what will Italy do, politics aside, when the ECB announces the end of quantitative easing at the end of this year? Not to mention Trump. He is accused simultaneously of keeping a nervous finger on the nuclear button and of wanting to withdraw into walled borders and leave the world to itself.
To tease the giant hypernationalist China and woo the hypernationalist Russia. To free tens of thousands of ISIS guerrillas around the world once they have lost their territorial base in Syria and Iraq. To leave Libya and the Mediterranean to the Russians. Of wanting to blow up the euro and re-evaluate the future mark up to zeroing the German competitiveness. Also accused of wanting to stimulate an elderly and run-down economic cycle with therapeutic doggedness, thus risking a heart attack. To prepare for inflation and the public deficit to explode, resulting in a global bear market for bonds of all levels and degrees. To erase the 0.8 percent of US GDP growth that comes from immigration.
To rob Silicon Valley of the Yemeni and Sudanese engineers it needs so badly to keep going. To manipulate the dollar downwards by accusing everyone else of manipulating it upwards. Do we want more signs of disorder? There is no agreement on macro data. The American CPI will be 2.5 percent in two months. Here, inflation is taking off, some will say. Calm down, others will say, it's just oil, Obamacare and house prices, which indirectly enter the CPI in America. Everything else is calm, starting with wage inflation. Are we sure? The Atlanta Fed's payroll index, new and better constructed than the indexes it's used to watching the market, is up 4 percent (with zero productivity). In surveys of business owners, the biggest complaints are not about taxes or regulation but about the difficulty of finding generic personnel and the impossibility of finding qualified personnel.
And yet, considering all of the above, the situation could also turn out to be excellent. China and Germany, the world's major exporters that Trump wants to attack, they could even decide once and for all to relaunch their domestic market (Japan is safe from attacks because it is politically friends with Trump, both for ideological affinity and for the common interest in containing China). America could indeed return to 3 percent growth (maybe more in 2018 than this year).
Congress really could pass rational tax reform without blowing up the deficit (nobody, absolutely nobody, really wants to blow it up, starting with Trump). The rise in inflation could be within the limits we all hoped to reach a year ago, when we were talking only about deflation. The bear market in bonds could prove sweet and bearable. The dollar may eventually not move too much, to the great benefit of all. The shoot Trump the 45 percent tariffs on the Chinese (a copy of Reagan's tariffs on the Japanese, well received by the markets at the time) could only be the beginning of an overall negotiation with the Chinese, who behave very badly on a commercial level.
In short, the dispersion of hypotheses on 2017 is enormous and what started as a year of strength could end badly, but also very well. Under these conditions, with an aging cycle and high equity and bond valuations, portfolios need to be constructed not only for performance but also for their structural solidity. The years of making money and betting big are behind us.
The first thing to do is strengthen as much as possible the monetary-bond defensive part, favoring strong debtors, short maturities and diversified currencies (starting from the dollar above 1.10). Do currencies fluctuate? Patience. In the fort you can create a small supply of gold (only on weakness) and raw materials.
The second thing is delimit the party intended to attack and make money. Was it 50 last year? Let's get it down to 30. Was it 30? Let's take it to 15-20. In a mature cycle it is better to gain a little than to lose a lot. And if there really is the euphoric grand finale (which was for houses in 2007-08, but not for shares) good money will be made even with the 30 or 15. The share must be targeted and, where you make money, closed on time. In principle, securities that have value, cyclicals and banks are fine. Some emerging stock exchanges are also good.
