Review & outlook
January 25
Dear Sir or Madam
Forward or down? That is the key question regarding the possible path of the global economy in the year that has just begun.
Geopolitically, global conditions are still continuously deteriorating. Many European countries are in a state of political chaos, and in Germany the economy is still becoming ever weaker. Creating a further impediment for the future of the global economy, China, the world’s second-largest economic power, has also been afflicted by a range of economic problems for some time now.
In mid-January, Donald Trump will be sworn in as US president for the second time. For many, his election victory was a hitherto-unimaginable scenario. The plans for the US economy announced by Trump ahead of the election raise a number of questions. Trump announced that he wants to introduce massive cuts to corporate taxes in an effort to stimulate the economy.
On the other hand, he promised massive cuts to government spending in order to ease the federal deficit. These measures will push up the deficit even more sharply, however, as the government itself, in particular, contributes almost 25 percent of gross domestic product. Trump is also announcing tariffs on all imports. All these measures are highly inflationary.
In line with most global central banks, the US Federal Reserve cut the central bank interest rate by one percentage point last year. Surprisingly, however, longer-term rates have since risen sharply. The most likely reason probably lies in the fact that the massive debt pile and the prospect of even larger federal deficits are gnawing away at the credit standing of the US and prompting investors to now demand a higher rate of interest in return for the increasing debt risk.
Government debt in the US climbed from USD 34 trillion to USD 37 trillion (USD 37,000,000,000,000!) last year and the debt ceiling that has been set will be reached within the next few weeks. Congress will undoubtedly have to raise this ceiling so as to prevent the state from having to file for insolvency.
Despite this worrying outlook, the US dollar has risen sharply in value in recent months. One explanation lies in the fact that interest rates in the US are currently much more attractive than they are in European countries. However, for Trump to be able to achieve his ambitious economic goals, he needs the US dollar to have a much lower valuation and interest rates to be dramatically lower.
In an initial response, the US celebrated Trump’s election victory with a major price rally on the equity markets and the gold price fell by eight percent within a very short space of time. Since then, however, disenchantment has set in and the euphoria has faltered somewhat. The gold price has since moved steadily in the direction of its all-time high again due especially to the fact that global central banks continue to make massive purchases.
In view of the uncertainties outlined, we will remain cautious in our investment policy over the coming weeks and months. We have confidence in our broadly diversified investments in sound companies and are also holding to our overweight investments in precious metals.
We would like to thank you for your trust and wish you a good start to the new year.
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