Many have wondered what the consequences of quantitative easing buying bonds with printed money and zero interest-rate policies would ultimately be. The answer was often presumed to be some sort of economic meltdown or hyperinflation. But now we know that the answer isn't economic at all. It's political. It's Donald Trump.
The assumption markets are now making is that President Trump's policies will be good for American industry. For the rest of the world, they will be a mixed blessing. They could be bullish for many commodity prices, for example. Take copper. The metal is a barometer of economic activity and should benefit from a stronger US economy and Trump's promised construction boom.
Yet the rally in copper over the past year may be running ahead of events. As things stand, the longer-term outlook for the economy seems pedestrian. The level of speculative interest in copper sits at an all-time high. So in the short term at least, the bulls appear to be getting ahead of themselves.
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Still, much of this was true back in 2003 and a boom in demand followed nevertheless. There is a chance that the bulls may turn out to be right once again, notwithstanding a likely setback in the first few months of the year, since Trump's construction boom will take time to get up to speed.
Meanwhile, oil prices rose back above $50 per barrel in 2016. That happened because speculators bought into the rally en masse, not because demand had strengthened. Yes, the long-term outlook for oil is surely bullish, as new discoveries will struggle to keep up with demand. However, in the near term Trump will pump, so I wouldn't be so sure that US crude output will tail off.
The data points towards higher production, and the easing of environmental regulations by the new administration will only keep those extra supplies coming. So as things stand, there is a supply glut on the way. During the super-spike in 2008, where oil touched $148 per barrel, inventories fell to just 13 days' worth of demand. Today, those inventories are above 25 days' worth, which is close to a 40-year high. It will take one hell of a boom to burn that off but a boom may be on the way.
In order to enable Trump's big spending plans and construction boom, something's got to give, and that will be the dollar. Trump cares about many things, but the dollar's strength is a low priority. That should be bullish for gold, which posted a somewhat lacklustre 8.5% rise in dollar terms last year.
I believe 2017 will see gold benefit from a weaker dollar and from rising inflation. The problem for UK investors is that if gold or other assets surge in dollar terms, this doesn't have to be reflected in sterling terms. Last year was great for sterling investors. Gold returned 29.5% in sterling terms. Similarly, the S&P 500 returned 12% in dollars but 33.6% in sterling. The sinking pound made anything look good. The challenge from here will be to hang on to those gains, since the trend has turned and there is a good chance that the pound will rise.
The coming year will be one where currency matters. There will be plenty of investment opportunities, but ensure that you understand the importance of sterling's weakness in recent years in driving your returns. A strong pound will be less forgiving. One will need to identify ways to combat that. For example, in the case of gold, ignore the metal itself and focus on higher-octane relations, such as gold mining stocks, which should outperform gold on the upside.
Charlie Morris is investment director of the Fleet Street Letter and head of multi-asset at Newscape Capital Group.
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