RBC Capital Markets hosted an exclusive client conference delivering a unique forum that offered a power-packed lineup of some of the world’s brightest minds who discussed a wide range of timely topics. John Stackhouse, RBC Senior Vice President of the Office of the CEO offers a few takeaways from the conference.
It’s been a generation since the world enjoyed political certainty with the fall of communism and economic uncertainty with the rise of the Internet.
Today, the tables are turned, as major economies enjoy more certainty than they’ve had in years while most of their governments are in the midst of something quite different.
With markets setting new records this year, before the recent correction, the geopolitical tremors of 2018 are shaping up to be the most concerning risks to growth. Can the discordant trends continue?
RBC Capital Markets hosted the Point of View ’18 conference to explore the year’s most disruptive trends and how they’re reshaping the global outlook. Inflation, cyberattacks and the persistence of populism were big concerns. Yet nearly half the audience, in a live mobile poll, thought trade wars and tariffs pose the biggest risks to growth.
Here are some of the big ideas that emerged:
1. In the U.S., expect more populism
Speakers:
David Frum, former speechwriter for President George W. Bush
Jennifer Granholm, 47th Governor of Michigan, 2003-2011
Key points:
- President Donald Trump is not the single source of disruption. Thanks to economic anxiety, populism is evident across the spectrum.
- Economic recovery is already under threat, with inflation rising and wages stagnant.
- Labour trends are troubling, with the labour participation rate for men continuing to fall and evidence of declines in female participation, too, reversing a decades-long rise.
- If Democrats retake Congress in this fall’s midterm elections, Frum warned of further attacks on the authority of public institutions, which meet as much skepticism from the left – think Bernie Sanders and Britain’s Jeremy Corbyn – as they do from the right.
- Granholm expects the Democrats to take the House, as 70 seats are in play, but is less convinced about their chances in the Senate, where 25 of the 33 seats being contested are already in the party’s hands and another two were won by Trump in a landslide. The party needs to hold pro-Trump West Virginia and North Dakota, and flip Tennessee and Texas.
- A big swing factor in the midterms will be white, college-educated women who voted for Trump but are, in Granholm’s words, “furious.”
- She thinks a Democrat-controlled House would support infrastructure spending, while also pushing for a take-back of some of Trump’s tax reforms. Expect small increases to tax rates for corporations and upper-income individuals in that scenario.
- The Democrats may try to brand themselves as the party of fiscal responsibility, with new fiscal tools such as taxes on large financial transactions, marijuana and carbon, and perhaps a Value-Added Tax, to maintain entitlement spending.
- Regardless of the midterms, Frum expects a new era of fiscal stringency, as the deficit blows past $1 trillion. The ticking time bomb: Baby Boomers not prepared for retirement, adding political pressure to enhance Medicare and Medicaid.
2. In China, expect more imperialism
Speaker:
Dr. Elizabeth Economy, Director for Asia Studies, Council on Foreign Relations
Key points:
- President Xi Jinping has amassed institutional power not seen in decades, although he faces small but intense pockets of discontent — older party officials, labour leaders, urban elites — that may gain confidence if he stumbles.
- The U.S. tariffs have raised concerns about an export slowdown, prompting the government to loosen pressure on state-owned enterprises to reduce their debt loads.
- Beijing is pushing its “Community of Shared Destiny” to build a movement away from U.S.-led alliances, including the pan-Asian Belt and Road Initiative and the Asian Infrastructure Investment Bank.
- China’s economic strategy is intertwined with its geopolitical strategy, which is why it has bought at least 25 foreign ports and is exporting surveillance technology to countries like Ecuador, Peru and Bolivia.
- While U.S. relations are strained, the relationship is seen by both sides as too important to allow for outright military conflict.
- U.S.-China tensions may grow over Asian security issues, especially Taiwan where new leadership is considered hostile to the mainland. The Trump administration is seen to be favourable to arms sales to Taiwan, while Xi is committed to completing reunification by 2049.
3. Economically, prepare for more divergence
Speakers:
Dr. Mohamed El-Erian, Chief Economic Adviser, Allianz
Dmitry Balyasny, CEO and Managing Partner, Balyasny Asset Management
Key points:
- In the first nine months of the year, the S&P outperformed emerging markets by 20 points, which El-Erian expects to continue.
- He sees the U.S. dollar strengthening because of rising rates, declines in international trade and a shift in global direct investment back to the U.S.
- He does not expect a recession for at least 24 months because of economic momentum and trends in household and business spending that “will go at least three years.”
- The return of global inflation will add pressure on other central banks — Europe, Japan and China, mainly — as they move more slowly on normalization.
- Emerging markets will face additional pressure from slowing global trade and higher oil prices.
- Balyasny expects the yield curve to remain flat, as pension funds continue to buy long-dated assets.
- His biggest concern: a bubble forming through high debt, low rates and political uncertainty that will get in the way of concerted pro-growth policies.
4. Financially, prepare for more disruption
Speaker:
Dr. Stanley Fischer, former Vice Chair, US Federal Reserve; former Chair, Bank of Israel
Key points:
- The global economy doesn’t work without a hegemon — a force that dominates and takes responsibility for the international financial and trading systems.
- America’s retreat from hegemonic leadership puts at risk the U.S. dollar’s global dominance, and the soft power that Washington enjoys thanks to its currency.
- China and Russia, among others, are trying to reduce their dollar dependence, and will step up that effort the more Washington uses sanctions instead of international institutions to resolve policy differences.
- China is pushing others to accept the renminbi for trade finance, which could see us return to a Cold War kind of trading order in which parallel and competing systems span the world.
- Although agreement for a new North American trade deal is a positive step, the ongoing use of tariffs by the Trump administration will weaken trade and lead to more political gridlock as vested interests lobby for tariff adjustments in their favour.
5. Globally, expect asymmetrical disruption
Speakers:
John McLaughlin, former Deputy Director, CIA
Sir John Sawers, former Chief, Secret Intelligence Service (MI6)
Kevin Mitnick, Cybersecurity Consultant
Key points:
- While the world may be shifting to a new power duopoly between Washington and Beijing, the transition will create pockets in which others, including individuals, can use asymmetrical force to harm major powers, the U.S. in particular.
- Russia may be the leading disruptor, as it seeks to undermine a U.S.-led international order. With its economy now less than 10% the size of America’s, it must seek other means with which to fend off the economic containment that Washington and its key allies are trying to impose. Example: Moscow’s attacks on Western elections, which are likely to continue.
- North Korea will seek to maintain its strategic advantage through disruptive measures, from continued weapons testing to international cyber-attacks.
- Terrorism remains a simmering and not insignificant challenge for the West and global stability. Despite the reduction of fighting within Syria and Iraq, there are an estimated 30,000 Islamic State fighters still in the field, including some 2,000 Western fighters who came to the region to join the group.
- Black-hat hackers are more powerful than ever, and with the backing of state organizations and technologies like artificial intelligence, could pose a greater threat to Western security systems, including those of large corporations.
- No economic sector is immune to intense hacking, but those with enough financial resources to attract financial terrorists may be most vulnerable.
- Hacks of the future will focus on the Internet of Things, as connected devices — cars, appliances, buildings — become susceptible to malicious disruptors and ransom-seekers.