Some thoughts looking for the new year.  Things that just might make a difference.

• Markets.  For those in the stock market, this has been a string of good years, capped by a great 2017.  Better still the great majority of market prognosticators are predicting more of the same.  However, markets need new money to go higher.  The only group not already in  is the public at large.  Since the 2008 debacle the public has largely been on the sidelines.  If the bright forecasts and coupled with greed encourage a mass move into the markets their will be no one else down the road to buy at ever higher prices. Historically, the markets are richly valued.   At higher prices logically they  will be more vulnerable to unforeseen shocks.  Super low-interest rates courtesy of the Central Banks have underpinned this long rise.  Now the Fed and it’s counterparts are reducing their portfolios i.e selling.  In the US unemployment rate at 4.1% is really low. To grow, economies need to add workers and this might push up wages and the rate of inflation.  We know workforce participation is low meaning there might be a reserve of workers that could enticed back to work by higher wages but even if they do reenter, they probably don’t have the needed skills and might prove to be costly and inefficient. These factors point to higher interest rates.  Earnings will have to expand in the face of this drag.  Also ultra low interest rates tend to lead to asset bubbles.  China given its enormous use of credit to expand its economy could be the biggest bubble around.  Unrest and/or a trade war could provide the “pop”.  In fact a trade war anywhere could cause major problems. Besides, higher interest rates don’t favor asset bubbles. These are just some things we can see.  Can a very highly priced markets survive the unforeseen?
• Politics. With the economy in the best shape since the “Great Recession”, it’s amazing the party in power is held is such a low regard.  The president is mired under 40% approval while Democrats are favored by double digits in the generic Congressional polls.  Republicans pass a tax bill putting more money this year in most people’s pockets and according the latest polls, most people dislike it.  What gives?  President Trump is the face of the party whether Republicans like it or not and a majority of people never cared for him.  Since the election, this disapproval has widened and hardened. into active dislike.  Where Reagan’s natural likability greatly helped him over various rough patches, the opposite is true of Trump.  Tip O’Neal the Democratic House Speaker, could be pictured favorably trading Irish stories with Reagan over drinks while such a Trump-Pelosi cordiality is now almost inconceivable.  Right or wrong, Trump is held responsible for the nation’s widening divide.  Given this background, the Mid-Term elections are less than favorable for the Republicans.  The only thing they have going for them is a far greater number of Democrats in the Senate up for re-election.  Maybe the economy will be so good it’ll rescue them, but what if the the markets and the economy go in the other direction?  Can Trump and the Republicans exist after a super Democratic wave?  Still remembering Hillary, Democratic  lack of purpose other than opposing Trump,  the Republicans could still snatch defeat from the jaws of victory.
• World.  Trump departed from a long-held conventional wisdom by recognizing Jerusalem as Israel’s capital, so there is hope for policy thinking outside the same old boxes.  However, the destruction of the Islamic State hasn’t made the world safe from terrorism.  So long as there is Moslem extremism. with a background of Sunni-Shia conflict, there is little reason for optimism.  Maybe this why the Iraqi government has invited a continued US presence in the country.  We should only agree if our logistics are run out of Kurdistan rather than Baghdad or Turkey.   American personnel would be a lot safer than in the Iraqi capital and we have to recognize Turkey under Erdogan isn’t our friend.  Once established in Erbil we would be in the position envisioned in our post SSSHHH! A MIDDLE EAST POLICY ON THE QT.  With the present turmoil, think how much greater Iran’s dilemma  if they were looking across the border at a de facto US base in Kurdistan.  One of the affected cities is  Kermanshah, the largest Kurdish speaking city in Iran.  Killing Kurds to maintain Supreme Leader Khamenei  control in the area would have a whole new meaning with millions of US allied Kurds just across the border.  We wouldn’t even need to say a word to cause great anxiety in Tehran.  In the same light, dealing with North Korea and China in a different way could change the conversation.  Instead of thinking of them separately, think of them as one unit.  During the cold war we would never have dealt with Poland or Czechoslovakia as separate entities on nuclear weapon matters.  A nuclear attack from either would result in retaliation on their then master the Soviet Union.  No ifs, ands or buts. In reality, North Korea is just as under China’s thumb as Poland was under the USSR’s.  Treating them separately leaves us  focused on North Korea while leaving China free to expand in the South China sea.  China might be much more cooperative if they knew a North Korean missile hitting the US or its allies would result in retaliation on Peijing or Shanghai.  Would they really let little Kim make war or peace decisions for them?  Dealing with China and North Korea as one unit would pay great dividends.  Let’s make 2018 a year of fresh approaches.