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These Are The Latest Political Risks Global Investors Are Worried About (forbes)

България, балканите и света  

By Kenneth Rapoza 

 

Trump's detente with Russia?

Dead.

As is his plan to repeal and replace Obamacare, thanks to the Republicans who never supported him in the first place.

Tax reform?

Not happening this year. Forget a 15% C-corp rate. Steve Forbes is predicting that without it, the Republicans loose the House and maybe the Senate in the mid-term elections next year. Perfect fodder for Never Trumpers to finally blame Trump for ruining the party and convince voters never to vote for an anti-establishment or an "outsider" again. Should the Republicans lose the House, Democrats will move to impeach on whatever issue they can drum up. A special investigation into Russian collusion with the president is one way to do it. Should the Republicans lose both houses, there is a real risk of Trump being forced to resign or being impeached and indicted by the Senate. Mike Pence would take over as president. Despite having a son in the military, Pence is more gung-ho about Washington's failed regime change policy than was Trump. We get a George W. Bush presidency, without Dick Cheney, and -- hopefully -- without the terrorist attacks in New York and disruptive bankruptcies like the Lehman Brothers disaster in 2008.

Speaking of regime change, North Korea is on hair trigger alert and it seems the South Koreans are not too happy about the U.S. saber rattling in their own country. Saudi Arabia is picking fights with other Muslim nations, namely Yemen, Qatar and Shia rival Iran*. Venezuela is going the way of Cuba and the U.S. is likely to sanction its oil industry somehow, potentially bad news for PDVSA bond holders.

But wait, there's more. Political risk is back in Europe and markets are taking notice despite relatively strong corporate earnings and great demographics that have helped propel U.S. equities higher.

Europe's migrant crisis still threatens the union, don't be fooled.

Poland's president Andrzej Duda recently vetoed new ‘Rule of Law’ legislation following E.U. pressure and public protests, but this may be a bigger warning shot from Brussels against Poland, the EUs biggest Baltic member, for not going along with its migrant policy. Barclays analyst Tomasz Wieladek in London believes that a greater confrontation with the EU is likely to occur because of Middle East refugees over the next 12 months. The European Commission has already started infringement procedures against them, along with Hungary and the Czech Republic for failing to accept refugees, something that is within the rules of European Union membership.

The Polish migrant issue is no different than the Brexit vote, a vote that was initially triggered by British disdain for the open borders policy that let in millions of Muslim migrants. (Germany has since inked a deal with the Turkish government to take the bulk of the migrants instead.) One recent poll suggests that a slight majority of Poles (51.2%) would risk an exit from the EU rather than accept Middle Eastern migrants. Given the government’s refusal to accept refugees, this will likely push the EU-Poland confrontation further into unchartered territory with spillover effects on other central European Union member states who will take their cue from the more powerful Warsaw.

With Turkey no longer seen getting any fig leaves from Europe, and unlikely ever to become an EU member, there is a real risk of Recep Erdogan canceling his country's agreement to house Europe's refugees in exchange for funding. He can open the borders and those poor migrants will hightail it to the welfare states of northern Europe overnight.

This very real possibility has liberal German parties like the Free Democrats (FDP) warning against Angela Merkel's acceptance of migrants, a policy she herself has failed to follow.  And now, her Christian Democrats (CDU) are seen failing at forming a super-coalition with the once bleeding heart Christian Social Union and that means the September election in Germany could easily see a CDU-FDP coalition instead. Trump-like restrictions on migrants are coming to Europe. Quick, call MSNBC!

There is one potential problem with a CDU-FDP coalition: it will set the bar higher in terms of required reforms to reach agreements on fiscal risk-sharing with southern Europe, BarCap warned in a note to clients dated July 28.

Meanwhile in Japan, Prime Minister Shinzo Abe’s approval rating has reached a critical low, raising the risk of an end to the economic policies associated with ‘Abenomics’.

"The probability of his stepping down is low, but there is an increasing likelihood that he will not be able to stay in power past September 2019," says Wieladek. If he goes, ‘Abenomics’ goes with it, and that means the likely death of Bank of Japan's unconventional monetary policies like super QE and yield control. In this scenario, it is also plausible that BoJ Governor Haruhiko Kuroda, whose current term ends in 2019, will be replaced by a BoJ insider who may be less inclined to continue these zero rate policies.

Japan has been a favorite pick of hedge funds this year.

From a global perspective, there is little to suggest that the IMF’s recent assessment that the global economy is moving onto a ‘firmer footing’ is wrong. Monthly PMI data from the U.S. to China is holding strong. Service sector PMIs to be published from a number of countries this week could paint a similar picture of steady growth and push markets higher despite those risks above.

If so, stronger PMIs keep the central banks in Europe, U.S. and Japan on track to stick with their stated goal of retreating from QE. Any transition to quantitative tightening will be gradual.

"There are indications of ‘bubble-type’ conditions in some markets," warns Neil MacKinnon, an economist with VTB Capital in London. "There is plenty of commentary in some financial blogs about the illiquidity of ETFs, the potential for dotcom2, the Sotheby share price ‘crisis’ indicator that we have highlighted and the prospect of an imminent market crash. The Bank for International Settlements have warned about the impact of the debt overhang, as well as highlighting the impact of central bank policies in perpetuating a financial cycle that has not properly resolved the frequency of booms and busts," he says.

And here at home, even as a do-nothing Congress helps Trump slip deeper in the polls, corporate leverage is higher than the prior 2008 peak. Trump's drama-induced White House will be no match for corporate America suddenly stepping on the breaks. But who is to say that is going to happen anytime soon? Most indicators are still bullish, and barring an escalation of the North Korea missile crisis, or a war between Sunni and Shia nations in the Middle East, low unemployment and low inflation has made up for rather stagnant income in the vast middle in the U.S. Meanwhile, Europe has dodged two elections that could have easily seen the end of the euro as a currency.

Until corporate earnings stumble, talks of rate hikes won't scare investors. Nor will threats of Poland, Hungary and the Czech Republic leaving the European Union, something not currently on the table. Plus, neither of them are in the euro zone.

A big bang is needed. Whether that comes from a new housing crash in the U.S. or record student loan defaults is anybody's guess at this point. If 2008 is any guide, most investors won't know what hit them until the day that it does.

 
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