On Some Predictions

On Some Predictions

I am not somebody who makes endo/beginning of year predictions, and I am not about to stsrt now.  But I have just read a guest post by Jeffrey Frankel on Econbrowser where he brags about making six accurate predictions for 2018 while not reporting on some others he made that did not work out so well.  I happened to largely agree with them when I saw him making them, with some questions on two, while myself quitely making some that failed to come true.  I shall comment.

Frankel’s six predictions were: 1) market volatility would increase (presumably across many markets), one I expected and that clearly has come true; 2) the stock market would fall, which I had mixed feelings on, thinking that indeed the bull market of 2017 was over but given my expectation of high volartilty unsure how it would end and indeed the markets did hit new all time highs a few months ago, only to plunge more recently to end the year lower. 3) that Trump would switch from criticizing the Fed for not raising interest rates fast enough to for it raising them too fast, with my only caveat there being that I think he was already in 2017 makking noises about wanting the Fed not to raise interest rates too fast; 4) that minerals prices would fall, with my view on this being basically the same as my view on the stock markets, expecting greater volatility without being sure of where they would be at this point and with them indeed not too long ago being well above starting year levels if now lower; 5) tax cuts wouls raise deficits, for sure, and 6) those deficits would raise both the dollar and the current account deficit, darned tooting.

So where did things not go as I expected, or to be more precise, where I hoped, having fears that what happened might well happen?  The most important was his decision to withdraw from the JCPOA, the Iran nuclea deal.  I feared that he might ddo that, but as of a year ago he had continued to verify that Iran was obeying the agreement, and most importantly he has in place a trio of advisers supporting sticking with the agreement, notable SeeState Tillerson, NatSec Adviser McMaster, and SecDef Mattis.  As it was, he  removed those first two not too long before he withdrew from the agreement, replacing them with Iran hawks, Pompeo at State and Bolton as Nat Sec adviser, with Mattis clearly sidelined and now out as of tomorrow, with this decision a facto in his resignation.

What has surprised me more than that Trump made this withdrawal, which I certainly viewed as a serious possibility, has been that his reimposition of economic sanctions has had as big of an impact as it has.  Aside from the rump of Israel, KSA, Bahrain, UAE, Egypt, and one or  two other minor powers, no other narion has supported Trump’s withdrawal from the agreement, in particular none of the other signatories to the agreement: UK, France, Germany, EU, Russia, and China, with the UNSC also a party to it.  But despite this near-solid political opposition, many private corporations, especially those based in Europe, have repsonded to the threat of not having access to  US markets and have withdrawn from doing business with Iran, with France’s Total a poster boy for this.  Also, many nstions not part of the agreement have reduced, if not fully elminated, importing oil from Iran.  I did not expect this level of obedience to Trump’s reimposition of economic sanctions, given all that political lack of agreement, but indeed  he has gotten away with it and may yet convince the SWIFT system to cut off Iran.  The impact on the already not too-well-performing Iranian economy has by all reports been pretty substantial.

That said, Iran has responded by making no changes in policies.  Some of this is good, most importantly continuing to adhere to the JCPOA with the strong political, if not economic, support of the other signatories (some, especially Russia and to a lesser degree China, have not cut back economic support or have even increased it some).  OTOH, Iran has continued to engage in missile tests and some other activities that are not supported by other nations and which do not particularly add to peace in the region, although I understand that their obvious response is not to cave at all too demands being made by Trump.  Indeed, again, I am glad they have not responded by themselves withdrawing from the agreement and restarting substantial uranium enrichment activities.

I note as sort of an aside that I do not think despite their rhetoric that what has bothered the Israelis so much has been the threat of Iran getting nuclear weapons, which I think they know has been not likely to happen any time soon if at all.  Rather their more immediate concern has been trying to keep Hezbollah weak, whom they were unable to fully defeat in 2006.  So they see the economic sanctions as helping them by making it harder for Iran to arm Hezbollah, although I gather that Iran has not particularly altered its activity on that front.

Something else that has surpised me somewhat has been how little Trump has suffered politically for this move in the US.  Indeed, if anything it seems to have been a hit, with him getting praised for having “fulfilled a campaign promise,” even if this has led to widespread condemnation and ridicule around the world.  But I guess this shows how isolated the US public is from the rest of the world, especially thos in the Fox News/Trump news bubble.  Some of his other bad decisions seem to have been similarly motivated: to satisfy unwise campaign promises.  I kind of suspect a motive for this is all the reporting about his constant lying.  Maybe he lies 15 times per day, but, wow, look at him keep this campagin promises!

The other area where I feel I have not made good predictions, although in fact I made none and I think I accurately understood that it was unwise to make any given the unpredictability of Trump, has been with regard to his trade wars.  Really, I am not sure  what I expected, but I know that I thought that if he actually would come to an agreement with Canada and Mexico on a new NAFTA, which I did not expect, I did not expect that it would involve him keeping in place the steel and aluminum tariffs against them with them going along with that.  Of course, it may well be that his NAFTA 2.0 may fail to get ratified by the incoming Congress, but I did not expect this.  I suspect that his adherence to those tariffs really is tied to his obsession with helping the coal industry as well as more generally the industrial Midwest, even as the steel tariffs have hurt the Midwest auto industry.  But metallurgical coal output and employment is up, even if electric power demand for coal has continues to decline.  This is probably the political motive behind this particulae outcome.  But, again, I really do not know what he is up to with trade or where he is going, esepcially given that he clearly believes strongly in a lot of rank nonsense such as that bilateral trade balances indicate one nation winning at the expense od the other.

In the meantime, Happy Gegorian New Year to one and all.

Barkley Rosser