Beware Trump’s protectionism, says Nobel laureate Joseph Stiglitz
The US stock market rally is unlikely to continue for long and investors ought to be wary of the protectionist policies of president Donald Trump, the Nobel prize-winning economist Joseph Stiglitz said yesterday.
Impending interest rate hikes should also be taken into account, he said.
“I would be very surprised to see an extended rally,” Mr Stiglitz, who is a Columbia University professor and the former World Bank chief economist, told the Arab Strategy Forum in Dubai.
“It [the stock rally] often has irrational exuberance and in this particular case, they [investors] have overestimated some things and underestimated some things. Most importantly, they have underestimated the consequence of an increase in the interest rate that is going to occur.”
The US federal reserve will increase rates once it sees positive signs, such as the US economy nearing full employment, he said.
The unemployment rate in November was unchanged at a 17-year low of 4.1 per cent.
Economists expect the Fed to raise interest rates from 1.25 per cent to 1.5 per cent this week.
“When the interest rate starts to increase that will dampen the economy and will, in particular, serve to dampen the stock market,” he said.
The US benchmark S&P 500 index hit several records this year, prompting some fund managers and analysts to voice concerns of overvaluation in some blue-chips.
The S&P rally is among the longest spells of gains in its history. The index has returned more than 20 per cent in 2017, and barring any surprises before the end of the year, this will become the seventh year out of nine of double-digit returns for investors.
The only other time the S&P 500 has advanced for nine straight years on the basis of total returns was in the 1990s, when stocks were positive every year from 1991 to 1999.
Mr Stiglitz said that investors are overlooking some negative points and are perhaps overenthusiastic about some perceived positives in the US economy, including the tax bill.
They have underestimated the consequence of Mr Trump’s protectionism, he said, and “overestimated the extent of deregulation benefits they are going to get”.
“They have overestimated the benefits of tax change because it is such a badly designed tax change,” he said.
The new tax bill, he said, is not conducive to economic growth.
It will increase “massive inequality”, as corporations and billionaires will see their taxes fall while more than half the middle class will see taxes rise.
On the rise of digital currencies, especially bitcoin, Mr Stiglitz reiterated his view that it has no “social useful value”.
“The question is why do people want bitcoin? Fundamentally, people want bitcoin ... because they want to engage in illicit activities, where they can’t be detected,” he said.
Bitcoin is useless unless it is converted into a currency to buy goods and services and at the time there has to be transparency, he said. Governments should be able to ask where the individual got the money to buy bitcoin. Ultimately the US and other governments can shut it down and they have the mechanisms for that, he said.
“To me the probability of all this ending in tears is very high.
“Some of you may make money but, on average, you are going to lose,” he said.
Fundamentally, people want bitcoin ... because they want to engage in illicit activities, where they can’t be detected JOSEPH STIGLITZ Economist