The 2017 macro-economic framework shared in December (and reproduced below) is intact. It would be exaggerating to talk about an alignment of stars, but at least there is less of a stellar mess in the skies than in recent memory: The US is enjoying a regain in momentum (strong US payroll data last week, consumer confidence index released on Friday at a cyclical peak), Europe is growing steadily in nominal terms (inflation rate at its highest since 2013), China should remain surprise-free ahead of the Party Congress, and Japan is, well, true to itself.
Consequently, the strong stock market performance of the last quarter of 2016 has not faded in the early days of this new year. The MSCI World Index is up since the beginning of the year, as are the S&P 500 and Eurostoxx 600 (all slightly above +1%). With expectations running high, it is easy to anticipate a correction on the back of some overshooting, but that is like predicting some rain after a sunny period. Fundamentally, the markets are in a decent shape.
My principal concern these days is not related to European politics (see “A Bet On Europe”, Dec 2016), the strength of the US dollar, China’s weakening currency, oil prices or geopolitical tension. Rather, it relates to the creeping phenomenon of immediacy.
In the seventies, the well-known Stanford ‘Marshmallow Experiment’ demonstrated that delayed gratification through self-control is a source of balance in life (good New Yorker article available here). With Amazon, a pure-play on immediacy, thousands of marshmallows are surrounding every consumer day and night. The Maslow pyramid is being transcended by Amazon: all needs must now be met in record time. Furthermore, the growing ability to satisfy needs in a quasi-immediate fashion is driving up consumption beyond actual needs. This creates an economic issue as scarce resources get misallocated.
At the corporate level, the micro-economic implications related to immediacy are very tangible. In a new paper from the US National Bureau of Economic Research entitled ‘Investment-led growth: An empirical investigation’, the authors establish that corporate investments have been declining relative to measures of profitability and valuation since the early 2000's. Based on a comprehensive analysis, they attribute this trend to a decline in competition and to an increase in shareholders-driven short-termism. They demonstrate that, based on a historical trend, non-financial firms have been spending a disproportionate amount of free cash flows buying back their shares instead of investing in the future. This arguably represents another example of a search for immediate gratification. With corporate capex supposed to be a key driver of global economic growth in 2017, there are reasons to be concerned.
Turning to the political arena, immediacy could also prove damaging to the economy (and world peace). Which brings us to US presidential tweets. Tweets are another play on immediacy. Words come fast, uncontextualized and unmediated. Writing becomes speech. Tweets respond to the polaroid urge to capture the moment at the expense of a considered approach. Independently from the underlying policies which shall not be part of these notes, Mr. Trump’s tweets create stress and uncertainty. They go against the principle whereby leadership should represent a source of steadiness. To use an image, the closer to the top of a pendulum one sits, the smaller the expected amplitude of the swings. What does happen when the top of the pendulum starts to shake? The pendulum stops moving.
Mr. Trump’s tweets therefore threaten to weaken economic actors' decision making processes. Their potential impact on the US economy, and thus on the rest of the world, may be under-estimated. And the ability by the Fed to compensate for that novel source of volatility has yet to be tested. Considering the nature of the challenge, we might be lucky to get more than one hike in 2017.