AT THE INTERSECTION OF ECONOMICS · INDIA: THE QUIET SUPERPOWER WE ALL FORGET TO WATCH / 20 _The...

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Transcript of AT THE INTERSECTION OF ECONOMICS · INDIA: THE QUIET SUPERPOWER WE ALL FORGET TO WATCH / 20 _The...

Page 1: AT THE INTERSECTION OF ECONOMICS · INDIA: THE QUIET SUPERPOWER WE ALL FORGET TO WATCH / 20 _The largest democracy in the world – 1.3 billion people – where economic growth was
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AT THE INTERSECTION OF ECONOMICS & POLITICS

Francis KellyHead of Government & Public Affairs-AmericasDeutsche Bank

Josh FeinmanChief Global EconomistDWS

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Geopolitics Have Slammed Into The Markets A Driving Force In Ways We Have Not Seen In Decades.

Here Are The Leading Issues And Trends That Are Likely To Impact All Of Us In 2019 And Beyond.

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THE GROWTH OF POPULISM GLOBALLY:

_ One of the more perplexing questions of the decade: How far will populism go? When will it end?

_ The answers may lie in demographics and technology – both of which are increasingly seen as a threat to the average worker. Demographic downturns in Europe, the United States, China, Russia, etc. have clearly led to heightened demographic shifts – and social insecurity.

_ The rise of the driverless cars and truck, the use of drones for commercial use, robotics and artificial intelligence

_ The potential risks are enormous and until leaders begin to talk about these huge societal and cultural shifts in a constructive manner, most social scientists believe the populist movements will continue to grow and gain momentum.

How does it end? Is this the result of technology and demographics?

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DEMOGRAPHICS ARE ALSO A DRIVER OF CHANGE AND POPULIST ENERGY

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Source: United Nations; DB Research

For the first time ever, there are now more people in the world older than 65 than younger than 5.

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I. THE UNITED STATES: THE PUZZLING CONTRADICTIONS OF ECONOMIC GROWTH, INSECURITY AND SOCIAL UPHEAVAL

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WASHINGTON: WHAT IS GOING TO HAPPEN THIS YEAR LEGISLATIVELY? OR IS GOING TO BE POLITICAL SPARRING 24/7?

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_ A split House and Senate is always a challenge. But with the intensely politically charged environment along with serious philosophical splits between the two parties means little will get done in 2019-2020.

_ Nevertheless, watch for the House to move on a number of issues that will re-define the policy debates going into the 2020 elections. These include:

_ Healthcare reform: The debate has shifted already from repealing Obamacare to “Medicare for all.” But what does that actually mean?

_ Climate change: From the Paris Climate Accord to the “Green New Deal.” Are we really going to have a “10 year national mobilization” to decarbonize, create a functioning high speed train system, provide healthcare, housing and economic security “for all”? And what about the cows?

_ Tax Reform: The House is likely to move to both repeal the 2017 tax bill and offer tax hikes for the rich and also to repeal the SALT provisions.

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THE GROWING THREAT NO ONE SPEAKS ABOUT:

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Source: Congressional Budget Office

US Government Debt to GDP to double over next 30 years

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A STRONG US FEDERAL RESERVE: A TEAM THAT WORKS WELLWITH OTHER CENTRAL BANKERS FOR CAREFUL COORDINATION

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_ Federal Reserve Chair Jerome (Jay) Powell is a strong, deliberative and independent leader – will not bend to political pressure.

_ Powell is a highly experienced Washington insider (born and raised) with excellent political instincts to go with superb market and monetary experience.

_ Teaming up with him is Randall (Randy) Quarles, Vice Chair for Supervision and Regulation. Quarles strengths are deep in both regulation and monetary policy – an understand the intersection of both.

_ Both have substantial and lengthy international central banking experience and relationships.

_ And now Richard Clarida is on board as the new Vice Chair for Monetary Policy.

_ Marvin Goodfriend and Michelle Bowman are close to being confirmed.

Chairman Jay Powell

Vice Chair Quarles Vice Chair Clarida

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THE SOCIAL FABRIC OF AMERICA: ARE WE LOSING HOPE IN THE AMERICAN DREAM?

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Source: CNBC; Gallup, Pew Research, Statista

_US Unemployment rate: 4 percent_Number of Americans with college degrees: 33 percent (4 percent in 1940)_Number of millionaires in US: 12 million plus_Number of Americans considered middle class: 52 percent (down from 55)_Number of Americans who say they could not come up with $2,000 cash if faced with an

emergency: 33 percent_Number of deaths from drug overdoses in US: 70,000 (2017)_Life expectancy of Americans: 78.6 (down from 78.7 in 2017)_Number of Americans who attend church weekly: 38 percent (down from 42 percent in

2017; all time high was 49 percent in 1955)

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HOW BAD IS THE DRUG OVERDOSE PROBLEM?

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WHO…WHAT… WHEN…HOW…

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II. THE GEOPOLITICAL LANDSCAPE: THE OLD WORLD ORDER IS GONE. WHAT IS THE NEW WORLD “ORDER”?

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THE NEW CHINA: RISE OF A GLOBAL POLITICAL AND MILITARY SUPER-POWER

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_ The last Chinese Communist Party Congress altered the essential vision and strategy of China. In essence, China will now more holistically engage around the world beyond trade.

_ In other words, expanded political and military engagement globally to go along with the economic power and reach. A true superpower has emerged.

“String of Pearls”:

Locations where China either has or is

currently negotiating to establish military

bases.

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ALL TO SUPPORT CHINA’S EXTRAORDINARY GLOBAL ECONOMIC PLAN, THE BELT AND ROAD INITIATIVE

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BUT CHINA IS FINDING PUSH-BACK ON FINANCIAL TERMS…

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Source: Stratfor; Washington Post

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AND CHINA IS STRUGGLING WITH SUBSTANTIAL DEBT…

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WATCH THE SOUTH CHINA SEA

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Sources: Stratfor, Reuters

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GLOBAL TRADE TENSIONS: WHAT TO WATCH AND HOW DO THEY END?

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Trying to keep up trade policy decisions globally has many market participants confused. Here is a quick break-down:_ USMCA (NAFTA 2.0): It’s done and will likely be confirmed by Congress in Q4 2019. Net positive for all

three countries (Canada, Mexico, US)_ Japan: President Trump is pursuing a bilateral free trade agreement._ UK: President Trump wants a bilateral once Brexit is done; UK will pursue a deal with Japan and others._ EU: What will President Trump do with the auto tariffs? This one is complicated, tied up with Iran policy,

Russia and China._ China: Do not expect this to be settled soon. Now moving from tariffs to sanctions (i.e. People’s

Liberation Army, Chinese banks, senior government officials, etc.). What needs to get ironed-out?

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INDIA: THE QUIET SUPERPOWER WE ALL FORGET TO WATCH

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_ The largest democracy in the world – 1.3 billion people – where economic growth was 7.3 percent in 2017.

_ 2nd largest standing army in the world (1.4 million troops)

_ History, culture and global reach is extraordinary and the basis for continued growth.

_ China vs. India: The Next Superpower Struggle?

_ Challenges of Pakistan and growing religious differences.

_ Watch the election that is now scheduled to take place from April 11th to May 19th (takes seven phases).

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THE FUTURE OF THE MIDDLE EAST: WHAT NEXT?

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Source: Bloomberg, CIA Factbook; Scowcroft Group

_ Saudi Arabia is well into the Vision 2030: an ambitious plan to transform the country from the world’s greatest petroleum state into the world’s leading tech and investment state. However, MBS’s controversial leadership now threatens to undermine international investment.

_ Before the Khashoggi murder, the biggest challenge was internal demographics and workforce transition (70 percent of population is under the age of 30) and ongoing competition in global oil market.

_ How long before there is a backlash to the significant internal political, economic and social changes he has allowed?

Deputy Crown Prince Mohammed

bin Salman

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WHAT NEXT FOR THE MIDDLE EAST? (CONT.)

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Source: The Economist

_ In Iran, the Rial has plummeted to new lows, losing approximately 70 percent of its value this year alone.

_ Street protests are increasing across the country in defiance of the religious and military leadership. Complaints range from the price of eggs to corruption of building inspectors which has led to building collapses.

_ But sanction pressure may actually bolster support for hardliners rather than undermine it.

_ The Revolutionary Guard has ramped up the political pressure against President Rhouhani; more than 300 functionaries were recently arrested and tried – in one day – with sentences ranging from death to 20 years in prison.

_ Iran increasingly is looking to China for assistance. China is Iran’s #1 trading partner and buyer of Iranian oil.

_ US waivers may not last that long. What exactly can Tehran do to escapethe pressure?

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WHAT NEXT FOR THE MIDDLE EAST? (CONT.)

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Source: Stratfor, AP

_ In Turkey, the Lira has plunged as much as 40 percent this year; inflation is at 20 percent and growing.

_ Turkey cannot afford to leave NATO yet Erdogen seems to want to test the relationship.

_ However, Erdogan has used Khashoggi to de-escalate tensions with the US, and his role in Syria gives him a trump card with EU.

_ Turkish finances will be critical thing to watch – now that Turkey is in recession and elections are looming.

_ Tensions with Greece are re-emerging: How hard will President Erdogen push for supremacy of the natural gas fields off Cyprus? Will Turkey become a regional energy power? Or has Greece outmaneuvered Turkey?

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RUSSIA: WHAT REAL THREAT DOES PUTIN ACTUALLY POSE? ENOUGH FOR NEW, CRUSHING SANCTIONS FROM US?

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Sources: Bloomberg; World Bank: Washington Post; IISS

_ Western sanctions are taking a sizeable and painful bite out of Russia’s economy.

_ Russia shrinks by 700 people per day. Demographers believe by 2050 the overall population could shrink from 149 million to 115 million.

_ And more sanctions are potentially on the way among them bans on Russian Sovereign Debt.

_ Watch for the growing stand-off in the Sea of Azov. 25 percent of Ukrainian GDP comes from steel exported from here through the Black Sea to the rest of the world. Russia is beginning to choke off the route.

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THE FUTURE OF THE EU: BREXIT, CHANGES IN GERMANY, IMPACT OF ITALY ALL POINT TO NEW DYNAMICS FOR EUROPE

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Source: Deutsche Bank Research

The big question at this point in time is how is this going to end? Here are several scenarios:_ Hard Brexit – probability quoted at “60-40” by Trade Secretary

Liam Fox (August). Anticipated 4% GDP loss in the UK (over 5 years) versus no Brexit.

_ Soft Brexit – along the lines of Prime Minister May’s ChequersWhite Paper.

_ Second Referendum or Elections – If necessary Parliamentary approval for any deal cannot be won, pressure will rise to push the Brexit question back to the people.

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THE FUTURE OF THE EU (CONT.)

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Source: Bloomberg, IMF

2019 brings so many questions about the future of the European Union, including:_ The End of the Merkel Era – Who replaces her in Germany in

2020 as well as in the broader EU as a leader? Is there actually one person or are the new emerging political parties forcing strange new, coalitions to exist?

_ And with this, is there a risk of German Economic Slowdown? And what will be the impact on the rest of the EU?

_ And what about Italy? Will the European Commission ramp up their opposition to Rome’s plans?

_ Look at the French/Italian tensions._ Also watch Italy’s joining the Belt & Road plan.

_ What will Moscow do – if anything – to try to counter China’s growing influence in Europe?

EU grows at respectable rate but has slowed

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LATIN AMERICA: THE IMPACT OF THE NEW BRAZIL AND THE SINKING VENEZUELA ON THE SOUTHERN HEMISPHERE

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Source: The Economist; Atlantic Monthly

_ The average Venezuelan has lost approximately 30 pounds/13 kilos in the last year.

_ More than 2.3 million Venezuelans have fled the country (total population is 32 million).

_ Colombia, Brazil, Mexico, Chile are becoming overrun with refugees who have little or no chance to settle.

_ With inflation now plus 1 million percent and President Maduro’srecent currency devaluation, how much longer can the country continue at this rate?

_ Questions are also growing as to overall economic and political impact on the region. Case in point: will the refugee crisis create a new political crisis in Colombia? Did this help lead to the recent populist election in Brazil?

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CONTACT:

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FRANCIS J. KELLYManaging Director & Global CoordinatorGovernment & Public AffairsDeutsche Bank801 17th Street, N.W.Suite 300Washington, DC 20006DC Office: 202-626-7022Email: [email protected]

This material is provided to you for informational purposes only and absent written consent from DWS or Deutsche Bank, may not be transmitted in whole or in part in any format to any other party. This material was prepared by Corporate Communications and Public Affairs within Deutsche Bank AG or DWS or one of its affiliates (collectively “Deutsche Bank”). No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the materials. This material is based upon information that Deutsche Bank considers reliable as of the date hereof. Assumptions, estimates and opinions contained in this document constitute our judgment as of the date of the document and are subject to change without notice. DWS and Deutsche Bank is not responsible for updating any of the information contained herein. This material is intended for your personal use and DWs or Deutsche Bank Is not soliciting the purchase or sale of any security or transaction, or participation in any particular trading strategy.

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