2. Economic Disorder

The economic year that was will never be again.

The new economic year ahead will be like none we have ever seen before.

Indeed, this time last year, we forecast that panic would hit Wall Street in 2016. And, immediately after the new year was rung in, the Dow Jones suffered one of its worst openings in its history. By mid-January, some $6 trillion of global share value had been wiped from the face of the world’s equity markets.

Then there was Brexit in June. Despite polls showing UK citizens would support staying in the European Union, they voted to leave. That also triggered a sharp, but temporary, market meltdown. Central banks promised to do all they could to stop a market rout. Within days, led by the US Federal Reserve again reneging on its December 2015 tout to raise interest rates four times in 2016 – after raising them just 25 basis points for the first time in nearly 10 years – equity markets bounced back because the supply of cheap money continued to fuel corporate stock buybacks and mergers and acquisitions.

Then came Election Day, preceded by global equity-market forecasts that poll-favored-to win Hillary Clinton would be bullish for equities and bearish for gold, and a Donald Trump victory would be bearish for equities and bullish for gold. But the market forecasts and presidential polls were wrong. Following the Trump victory, all three US indexes, as well as the small-cap Russell 2000, hit record highs. Gold prices plunged 11 percent, falling to February lows.

In addition to stocks posting nearly a month-long win streak as major indexes posted record highs, the dollar index hit 14-year highs. Thus, with the market rally, plus favorable retail, construction jobs and wage data, the CME Group’s FedWatch raised market expectations for a December Federal Reserve interest-rate increase to 95 percent.

Then and now

Essentially, there are three reasons for the Trump rally: Corporate tax breaks, business deregulation and infrastructure stimulus.

While tax breaks and deregulation may drive corporate profits, it will depend upon the true amount of stimulus and overseas tax repatriations for the “trickle-down” theory to increase job growth or wages. In addition, should the Trump administration re-negotiate trade deals and even marginally increase manufacturing jobs in the United States, in addition to reversing negative trends, psychologically and financially it will boost the nation’s spirits and growth potential.

Around the world, from Mexico, Russia and Brazil, to Turkey, Indonesia, China … and Europe, particularly since the Italian referendum was defeated and will increase anti-euro political parties power … currencies hit new lows and/or tumbled to multi-year lows against that strong dollar. Some central banks raised interest rates, sold dollars and bought government bonds to shore up plunging currencies. Others, including China and Malaysia, are passing laws and taking measures to stem the tide of currencies’ outflows.

TREND FORECAST: As US interest rates rise and the dollar gets stronger, emerging-market currencies will weaken. That, in turn, will dramatically increase their debt-repayment burden and increase financial market instability.

In developed nations, cheap money, not corporate earnings, boosted equity markets with record-breaking merger-and-acquisition and stock-buyback activity. As interest rates rise, and the cost of borrowing increases, true price discovery and market fundamentals will drive the markets.

As evidenced, a stronger dollar will continue to push down gold prices. We forecast gold prices will rebound when global financial market volatility and increasing geopolitical unrest escalate. Therefore, gold will remain a long-term safe-haven asset.