It seems fitting that a year as turbulent as 2018 ends at the edge of chaos. The month of December, a period where business and markets are usually buoyed by retail hangovers from the holiday shopping season, has produced nothing less than economic and political pandemonium in the U.S. and shockwaves around the world. An emblem of 2018 is the fact that a couple of drones have managed to shutdown London’s Gatwick airport, which ferries 45 million passengers a year, during the busiest travel season. Meanwhile, the stock market slide, marking the worst December since the Great Depression, has all but eradicated the gains for 2018 pushing the economy a little closer to the hibernation of bear territory in time for what looks to be a bleak winter and a tough transition to 2019. All of this as the threat of yet another government shutdown clouds the mood of Federal employees and darkens the prospects for the U.S. over the political lightning rod of a border wall and increasingly acrimonious political infighting. Feeling festive yet?
Not to be outdone by other years, the abrupt resignation of Secretary of Defense, James “Mad Dog” Mattis, largely considered one of the last adults in the room, has sent shockwaves around the world and on both sides of the U.S. political aisle that even the stalwart and apolitical Pentagon has been rattled by the unpredictability stemming from the White House. At issue was the decision to withdraw U.S. troops from Syria and drawing down forces in Afghanistan, right as key military gains were in sight. This military and geostrategic vacuum, like the ill-fated disbanding of the Baathist army in Iraq after the fall of Saddam Hussein, will surely be filled by an emboldened and replenished enemy. The precipitous retreat, like earlier claims of mission accomplished, is not aided by a lack of purpose among regional allies and NATO on how to respond to the lingering crisis in Syria. While removing U.S. forces from the theater reduces the likelihood of unintended consequences between the U.S. and Russia, it also hands a clear victory to Moscow, Tehran, Damascus and ISIS fighters, who now have free room to maneuver.
From an economic point of view, the reversal of the days of low interest rates and interventionist central bank policies such as troubled asset buy-backs and quantitative easing are over on both sides of the Atlantic. This will spell trouble for a banking sector that has grown accustomed to cheap capital and harder still on businesses that have been chastened by the “cash is king” era from the 2008 recession to forego business expansion and investing. Much of this cash and value hoard is under intense downward pressure as capital intensive businesses attempt to adjust to an asset-light world as evidenced by GM’s ill-timed dismissal of 15,000 employees on time for the holidays. This type of hard right-sizing from manufacturing and other mature sectors marks only the beginning of a long correction as companies, investors and countries prepare for a changing world. These changes include electric powerplants replacing the 100-year-old internal combustion engine, fractional “uberized” consumption replacing household asset build up and an accelerating pace of decarbonization and decentralization in the energy sector.
By the current economic yardstick, even the usually steady prognostications of central bankers like Ben Bernanke, seem bleak, indicating the possibility of a recession and market crash in 2020. If the rout occurring in the close of 2018 is any guide and if the U.S. is the principal source of global political risk and instability, the usual flight to safety and quality that brought foreign capital to U.S. shores may also be in retreat. Where can investors find shelter in this environment? Oil is in free-fall trading below $46 per barrel, due in no small measure to Saudi attempts to reign in supply in contravention to the White House’s demands. The Sino-U.S. trade war has taken a very personal and economically damaging turn with the arrest of Meng Wanzhou, Huawei’s CFO and the daughter of its founder, in Canada at the request of U.S. officials on charges of violating Iran sanctions. Shortly after this detention, 3 Canadians were arrested in China and Apple was handed a substantial legal defeat in a dispute with Qualcomm. Meanwhile a fractious Europe seems likely to jettison the UK in a disorderly Brexit.
For a tightly woven and interdependent global system, there appears to be embers of risk and uncertainty smoldering on all fronts at the same time, most of which requiring global coordination not retrenchment. This makes the close of 2018 and the reverberations it will cast throughout the New Year and the close of the decade a particularly perilous time. What can be done to reverse the trendline that suggests 2019 may be a very unhappy New Year? Where can people and investors find shelter? What will come of political turmoil at the national, regional and global levels? These and other questions will certainly weigh on the minds of people as they prepare for the New Year. Perhaps we should resolve to make ourselves more resilient to weather the storm and our hearts and minds more open to defuse the forces tearing us apart.