Whose data is it anyway?

To the extent that economics is concerned with the study of how resources are allocated, a system of property rights impacts on the way these resources can be used. For example, if a person owns a piece of land they can choose (within limits) what to do with it e.g. build a house or let it lie fallow. Other people have no right to determine how the land can be used. In a modern market economy, transactions between individuals involve the transfer of property rights and form the basis of the price determination process we see at work every day. These rights are backed up by a legal system designed to enforce the entitlement to a given bundle of goods (or services) and to record their transfer from one person to another.

However, in the digital age the distinction of property rights has become much more blurred. I was reminded of this recently by an article in The Economist which quoted Nikhil Pahwa, an Indian digital-rights activist, as saying “When they say, ‘Big data is the new oil,’ I answer, ‘But my data is not your resource.’” The context of his quote is India’s biometric ID scheme, Aadhaar, whose database is apparently rather leaky with the result that many people’s personal details find their way into the public domain. But it could equally be applied to the likes of Facebook, which owns the world’s largest personal dataset. At issue is whose data is it? 

Technically, of course, it belongs to the individual who posted it. But Facebook’s terms of service state quite explicitly that “you grant us a non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any IP content that you post on or in connection with Facebook.” In other words,  although you own the content Facebook has carte blanche to do what they want with it. From the company’s perspective this is great because it has a huge database upon which it can let loose its AI algorithms to generate ever more sophisticated consumer profiles. One of the great concerns expressed by network campaigners is that such huge databases act as a barrier to entry to smaller companies attempting to break into a particular market, because the lack of access to data means that their consumer profiling will always be inferior.

And this takes us right back to Pahwa’s point: Is it right that the data which we own, and which we give away for free, should be used by a profit maximising organisation to enrich shareholders? In their defence, big data companies argue that they do not charge for their services – Google clicks do not cost the user, so in that sense we are getting something for nothing. Except that is not quite true because we pay for it by giving up some data about ourselves, which may be trivial in isolation but when combined with the billions of pieces from other users, goes to make up a huge mosaic which Google can use to target its adverts more effectively. 

In an interesting paper by Imanol Arrieta and co-authors, the argument is made that data providers should be paid for the information they yield in order that they are compensated for their contribution to the world of AI – information which might in due course be used to displace workers replaced by machines. As data hoarding by Big Data companies increasingly raises public interest concerns, it is likely to provoke the interest of regulators keen to cut down the monopoly power of Google, Facebook et al. It would not be the first time that regulators have taken an interest in tech-related issues: Twenty years ago, the US government opened antitrust proceedings against Microsoft, accusing it of establishing a monopoly position and engaging in anti-competitive practices. And if data really is the new oil, as many commentators contend, recall how in the early twentieth century the US government forced the breakup of Standard Oil, accusing it of being an illegal monopoly.

Big Data companies are already potentially feeling the heat from the US Federal Communications Commission, which voted in December to dismantle its existing net neutrality rules. These rules prevent broadband suppliers from treating different groups of consumers differently, and the likes of Google, Facebook et al are concerned that changes to the rules could impact upon their business models if they are discriminated against by internet service providers (ISPs). As an aside, there are many who argue that net neutrality impinges on the property rights of ISPs, but that is a subject for another day. 

In order to alleviate regulators concerns, it might be prudent for the Big Data outfits to take some pre-emptive actions which show that they are taking mounting social concerns more seriously. For example, there is a case for suggesting that at least part of the data they collect could be shared across a range of platforms thus creating an open-source database (after suitable efforts have been made to anonymise it). After all, it is a public resource – it is “our” information. Of course, this might mean an end to much of the apparently “free” content currently available online. However, both the tech industry and society as a whole are going to have to do some hard thinking about how to balance privacy issues against the cost of online services. If this does not happen, it is likely that government will take the decisions for us, which may not be to anyone’s liking.

Public-private partnerships: An assessment

Modern economies depend on infrastructure that we generally take for granted. Indeed, we often only notice it when it fails. But the capital investment to build the roads, rail and hospitals upon which we depend does not come cheap, nor indeed does the funding required to run them on a day-to-day basis. Increasingly, therefore, governments have turned to the private sector to provide the required funding.

Such schemes generally involve a private investor assuming financial, technical and operational risk in return for a guaranteed fixed return from the public sector which acts as the final consumer of the service provided. This risk transfer puts the onus on the private sector to deliver a project as efficiently as possible in order to maximise the difference between the initial outlay and the revenue stream provided by the government. As a consequence, the public sector is off the hook for any cost overruns associated with big capital investment projects. A further advantage for the government is that much of the finance for such projects is treated as an off-balance sheet item in the public accounts which obviously flatters the public sector debt position, and provides an incentive for governments to put projects out to private sector tender.

In addition to capital investment, numerous day-to-day functions (e.g. the cleaning of public buildings, rubbish collection, IT and even law enforcement in the US) are increasingly contracted out to the private sector. The idea is that opening up the bidding process to competitive tendering puts downward pressure on costs so that we get the same services as before, only at lower cost. But the practice is rather different. A recent report by the UK National Audit Office found “no evidence of operational efficiency” in the hospital sector and that “the cost of services, like cleaning, in London hospitals is higher under PFI (Private Finance Initiative) contracts.” The NAO also found evidence that in an attempt to meet pre-specified levels of service “the contractually agreed standards under PFI have resulted in higher maintenance spending in PFI hospitals.”

Another problem, which was thrown into stark relief this week following the announcement that Carillion Plc – a major UK government contractor – has gone into liquidation, is the extent to which risk is really transferred away from the public sector. Although the company has ceased to trade, the economy still depends on many of the services which it provided. If no other buyer is found and the government does not step in, services such as the running of schools and prisons, the maintenance of railway infrastructure and the construction of major hospital projects, will cease. This is unthinkable. After all, Carillion ran all the catering, cleaning, laundry and car parking at the James Cook Hospital in Middlesbrough (NE England). A collapse of ancillary services will mean the closure of the hospital, which the government simply cannot allow to happen. So it could be forced to step in.

The UK railway industry has proven to be particularly troublesome with regard to private sector participation. The system is designed such that operators bid for a licence to run a rail franchise for a fixed period and it is their responsibility to balance costs and revenues to ensure it can make a profit over the lifetime of the contract. There have been numerous instances of problems in the bidding process, including dubious bids and companies suffering financial difficulties. The latest such occurrence took place in late 2017, when the government allowed the private sector operator of the main London-Edinburgh route simply to walk away from its contract without any penalties after it overbid for the franchise, with the result that it cannot now make sufficient profit from the deal. Virgin Trains will not now pay a reported £2 billion, which is the sum outstanding over the remainder of the franchise which runs until 2023.

It has been widely suggested that this was allowed to happen for political reasons. A company that walks away from its obligations is unable to bid for a tender for the next three years. With a number of other franchises coming up for renewal over that period Virgin would be ineligible to participate, which would be bad for them and reduce the government’s choice of partners nominally capable of running such a franchise. Whatever the truth of the matter, the government’s action creates moral hazard by undermining the basis of private sector participation if taxpayers are acting as the ultimate backstop.

There are thus serious questions as to whether public-private partnerships (PPPs) deliver value for money, particularly when the government can raise finance at a lower cost than the private sector – the UK government can borrow at rates just over 1% whereas the private sector weighted average cost of capital (WACC) is above 4% (chart). Moreover, PPPs generally deliver a rate of return between 10% and 15%, implying that PPPs are very lucrative for the private sector. This might be acceptable if private investors were bearing all the risk, but where the government is forced to act as a backstop this is clearly not a good deal for taxpayers. Consequently, serious consideration has to be given as to whether PPPs are meeting the needs of taxpayers. This does not necessarily mean that they should be abandoned altogether, but they need to be used more judiciously to meet public investment needs.

The rusting of the iron lady

Twelve months ago to the day, Theresa May stood up in Lancaster House in London and outlined the nature of the future relationship she was seeking with the EU. As I wrote at the time “anyone looking for any great insight as to how the UK will be able to achieve the objectives she set out will have been disappointed. Mrs May in effect gave a wish list of what she wants for the UK, but the nature of the deal itself will depend on the compromise which can be achieved with the EU. And on that front, we will have to await the EU’s opening play to assess how realistic her goals are.“ 

One failed election campaign later, which has severely weakened the prime minister’s political clout, the UK remains deadlocked in negotiations with an EU27 which has maintained an impressively coherent stance, despite attempts by the UK to sow division. The UK has also fallen into line with EU27 demands on its three main negotiation points (the rights of EU citizens, the Irish border question and the Brexit bill). Twelve months ago, the UK government was also awaiting the Supreme Court ruling on whether parliament would be allowed a vote on the triggering of Article 50. In the event, it was – despite the government’s initial position that this was not necessary. The EU Withdrawal Bill, which is now in the process of going through parliament, has also been watered down with parliament to be given a vote on the final terms of the EU deal in yet another concession to MPs.

Indeed, looking back over the past year it is clear that the government has been forced to give way on a number of areas. Theresa May initially believed that the government could simply transcribe all EU law onto the UK statue book, and strike out those parts of the legislation it did not like, before agreeing an exit deal with the EU without any parliamentary oversight. She also told us in September 2016 that she would not give a “running commentary” on Brexit negotiations. But thanks to a rearguard action by many MPs, parliament now has a chance to scrutinise the Brexit deal whilst the House of Commons Library has published on the state of negotiations after each round of Brexit talks. This, of course, is precisely what should happen. After all, one of the key Brexit selling points was that the UK parliament should oversee UK laws (though strangely enough, the likes of the Daily Mail always kicked up huge objections any time the government’s authoritarian Brexit approach was challenged). 

With numerous pro-Leave campaigners expressing regrets about how issues have been handled since the referendum, most notably the surprise suggestion by Nigel Farage that he would not necessarily be opposed to a second plebiscite, it does make you wonder how events will unfold over the next twelve months. As I noted last week, a second referendum is unlikely anytime soon. However, it is likely that a compromise agreement will be reached which postpones the final exit decision until end-2020, thus giving industry – including the so-far neglected financial services sector – more time to prepare for an uncertain future. 

The government itself is in a precarious position, and survives in office only with the support of a confidence and supply agreement with the Democratic Unionists. In more normal times, it is hard to imagine Theresa May holding onto her position since she has proved, as The Economist wrote last week, to be anything but a safe pair of hands whilst “her biggest problem is more fundamental: she doesn’t have any ideas.” But she maintains the support of the Conservative party because she is the least divisive candidate in a party which is split down the middle on Brexit and which is paranoid that a change of leader would open the door to the opposition Labour party. The gossip regarding May’s survival chances continues to swirl and I have no idea whether she will still be in office in a year’s time. But over the next twelve months, we can look forward to the crossing of more red lines as the process of aligning the “will of the people” with the needs of the economy continues.

Making sense of macroeconomics

The reputation of macroeconomics took a battering in the wake of the global financial crisis after failing to predict the great recession. Although much of the criticism by outsiders is misplaced, there are some grains of truth and many academic economists would agree that there are many areas where economics needs to improve.

This collection of papers from the Oxford Review of Economic Policy looks at the state of macroeconomics today and provides a range of opinions from leading macroeconomists. More importantly, it shines the spotlight on those areas where economics can be seen to have failed and offers some suggestions about how to take us forward (the papers are not particularly technical and as such are relatively accessible. Credit should also go to the publishers, Oxford University Press, for taking this volume from out behind the paywall).

David Vines and Samuel Wills make the point that macroeconomics has been here before – in the early 1930s and again in the 1970s, and both times the discipline evolved to try and make sense of changed circumstances. But in order to identify what has to change, we need to know where we are and what is wrong. At the centre of the debate stand New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models, which form the workhorse model for policy analysis. 

The general consensus is that they are not fit for purpose – a point I have made before (here and here). Such models are based on microfounded representative-agents – a theoretical approach which postulates that there is a typical household or firm whose behaviour is representative of the economy as a whole. I have always rather struggled with this approach because it assumes that all agents respond in the same way – something we know is not true in the case of households given differing time preferences, depending on age and educational attainment. An additional assumption that underpins such models is that expectations are formed rationally – something we know is not always true.

Thus the consensus appears to be that these two assumptions need to be relaxed if macroeconomics is going to be more relevant for future policy work. You might say that it is about time. Indeed it is a sad indictment that it took the failure of DSGE models during the financial crisis to convince proponents that their models were flawed when it was so obvious to many people all along.

In order to understand this failure, Simon Wren-Lewis offers an explanation as to why this form of thinking became so predominant to the exclusion of other types of model. He argues that the adoption of rational expectations was “a natural extension of the idea of rationality that was ubiquitous in microeconomic theory” and that “a new generation of economists found the idea of microfounding macroeconomics very attractive. As macroeconomists, they would prefer not to be seen by their microeconomic colleagues as pursuing a discipline with seemingly little connection to their own … Whatever the precise reasons, microfounded macroeconomic models became the norm in the better academic journals.” Indeed, Wren-Lewis has long argued that since academics could only get their work published in top journals if they went down this route, this promoted an “academic capture” process which led to the propagation of a flawed methodology.

Wren-Lewis also makes the point that much of so-called cutting edge analysis is no longer constrained to be as consistent with the data as was once the case. He notes that in the 1970s, when he began working on macro models “consistency with the data was the key criteria for equations to be admissible as part of a model. If the model didn’t match past data, we had no business using it to give policy advice.” There is, of course, a well-recognised trade-off between data coherency and theoretical consistency, and I have always believed that the trick is to find the optimal point between the two in the form of a structural economic model. It does not mean that the models I use are particularly great – they certainly would not make it into the academic journals – but they do allow me to provide a simplified theoretical justification for the structure of the model, in the knowledge that it is reasonably consistent with the data.

Ultimately one of the questions macroeconomists have to answer more clearly – particularly to outsiders – is what are we trying to achieve? Although much of the external criticism zooms in on the failure of economists to forecast the future, what we are really trying to do is better understand how the economy currently works and how it might be expected to respond to shocks (such as the financial crisis). Olivier Blanchard  believes that “we need different types of macroeconomic models for different purposes” which allows a continued role for structural models, particularly for forecasting purposes. Whilst I agree with this, I have still not shaken off the conviction, best expressed by Ray Fair back in 1994 (here p28), that the structural model approach “is the best way of trying to learn how the macroeconomy works.” Structural models are far from perfect, but in my experience they are the least worst option at our disposal.

Double or quits?

We are less than two weeks into the new year but a number of very odd things have already taken place. Arch-protectionist Donald Trump is prepared to rub shoulders with the global elite in Davos whilst Steve Bannon, who promised to “go nuclear” on those opposed to Trump’s populist nationalist agenda following his White House departure, has been fired by Breitbart News. Perhaps most surprisingly of all, Nigel Farage has suggested that a second referendum on the UK’s EU membership might be necessary to resolve the Brexit question once and for all.

This comes against the backdrop of a renewed campaign against Brexit. As Farage put it, “My mind is actually changing on all this. What is for certain is that the Cleggs, the Blairs, the Adonises will never, ever, ever give up. They will go on whinging and whining and moaning all the way through this process. So maybe, just maybe, I’m reaching the point of thinking that we should have a second referendum on EU membership … I think that if we had a second referendum on EU membership we would kill it off for a generation.”

This follows the comments by Andrew Adonis, former chair of the National Infrastructure Commission, who resigned at the end of December, arguing that “good government has essentially broken down in the face of Brexit” and will now devote more time to the issue of a second referendum. Former prime minister Tony Blair took a slightly different tack with his Institute for Global Change highlighting the economic costs that are so far visible. He also made the valid point that 2017 was too early to rethink the Brexit strategy but by 2019 it will be too late. “Realistically, 2018 will be the last chance to secure a say on whether the new relationship proposed with Europe is better than the existing one.” Whatever people might think of Blair – and he is widely reviled for his role in involving the UK in unpopular conflicts in the Middle East – he remains a formidable centrist politician and it is hard to disagree with much of the IGC’s analysis (if only Blair had applied a similar level of rigour to the weapons of mass destruction question in 2003 he would have a claim as one of the greatest peacetime prime ministers).

On the question of a second referendum, my guess is that it is most unlikely. Despite calls for a second vote to give a verdict on the terms of the final EU deal, it is unlikely to happen because: (i) neither the Conservative nor Labour  parties support the idea and (ii) it is too soon to reopen the divisions created by the 2016 referendum. Add to this the fact that Theresa May and her government have invested so much time and credibility in delivering Brexit, it becomes inconceivable to think that it will be open to calling a second plebiscite.

Nonetheless, it is astonishing to hear Farage make his suggestion. In his view “the percentage that would vote to leave next time would be very much bigger than it was last time round. And we may just finish the whole thing off.” That is a very bold statement and like many of Farage’s predictions, probably not true. Although the economy has held up better than anticipated, consumers are being squeezed by the Brexit-induced decline in real wages. Moreover, with the question of NHS funding and staff shortages currently so prominent, Blair points out that “applications from EU nurses to work in the UK have fallen by 89% since the referendum” and “nearly 1 in 5 NHS doctors from the European Economic Area have made concrete plans to leave the UK.” I have also pointed to survey evidence that suggests a rising trend in people believing that voting for Brexit may have been the wrong decision (here). Any attempt to re-run the referendum would likely result in a very tight race and it is far from clear how it would pan out.

But let us suppose that in order to clear the air the government does accede to this suggestion. What should it do? First and foremost, it should introduce a minimum participation threshold. A simple in-out referendum which results in a narrow win for one side is not sufficient. In order for change to come into effect, it would have to be ratified by at least 40% of all eligible voters in the same way as the Scottish devolution referendum of 1979. Assuming the electorate is the same size as in June 2016, the Leavers would have to gain 6.8% more votes (almost 1.9 million). But even if this were to happen, the Remain voters would still argue that the 40% threshold represents a minority of the eligible electorate. Thus, an additional constraint might be that in the event Leave gains less than 50% of all eligible votes, it must secure a victory margin of at least 10 percentage points. If you want a really funky solution, perhaps we could weight votes according to age. Although this undermines the principle of one person-one vote, on the basis that younger voters have more to lose there is an argument that their votes should count for more[1].

I stress that this is all hypothetical. But if the government were to take up Farage’s suggestion it would be easy enough to put in place a system which makes it very difficult for the leavers to win. There would be howls of protest from Brexiteers that the rules of the game have changed. But if the decision is to be binding (and let us recall that the 2016 referendum was purely advisory) we would have to be damn sure that the case is watertight. Only then will we Remainers shut up.

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[1] On the basis of a voting system which raises the voting weight the further below the age of 90 you are, a back-of-the-envelope calculation suggests that Remain would have won the June 2016 referendum by a margin of 52.8% to 47.2%.

MiFID II: End of the road or just a bend?

For those working in European financial services the MiFID II (Markets in Financial Instruments Directive) legislation, which came into effect on 3 January, potentially marks one of the biggest shifts in the business since Big Bang in 1986. The latter marked the liberalisation of financial services by deregulating many of the practices which had previously characterised the City of London (notably the abolition of fixed commission charges and the demarcation between market makers and the brokers selling stocks). For a time in the late-1980s, the City felt a bit like the wild west as companies with deep pockets rushed to expand into new business areas against a backdrop of relatively lax regulation. More than three decades later, if MiFID does not represent a 180 degree turn it is certainly a long way around the dial.

The objective of MiFID II is to strengthen the degree of investor protection by improving the functioning of financial markets. This in turn implies increasing the degree of market transparency and resilience. The law puts a much greater onus on counterparties to accurately report trades and the prices at which they take place (the transparency part). Enhanced reporting structures are also required to ensure that the products which are sold by financial institutions are appropriate for the client, thus reducing the likelihood of a bust (the resiliency aspect). It is thus far harder these days to flog inappropriate products to unsuspecting clients in order to make a fast buck. About time, of course. We have heard too many stories of misselling over recent decades to avoid the conclusion that some parts of the industry cannot be trusted to regulate themselves and that they will have to be forced into it by the power of the law.

The scope of the products to which all these regulations apply is also being expanded as MiFIR (Markets in Financial Instruments Regulation) comes into force. Not surprisingly, the costs of implementing the procedures required to comply with the new regulations are enormous. And nobody knows how the regime will work in practice. The whole process is based upon the application of “best execution” – the duty to get the best price in the shortest possible time. But this is open to a great deal of interpretation. There is also a risk of regulatory arbitrage across the EU if the MiFID II rules are implemented differently across legislative regimes. Moreover, whilst it is impossible for business conducted in the EU on behalf of EU-based clients to avoid the scope of the law, there is no reason why business conducted in the EU on behalf of extra-EU clients need be subject to the same rules. Accordingly, this could drive some activity out of the EU towards more light-touch regulatory areas.

From a research perspective, the biggest issue is that the costs of research now have to be unbundled and can no longer be hidden within trading commissions. The law now says that financial institutions managing money on behalf of clients are no longer allowed to receive unsolicited research from those providing investment advice. Thus, asset managers now have to enter into a contract with a sell-side institution to ensure that they are compliant with the law, in order that those whose funds they are managing can see how much they are being charged for research advice. We have known for some time that this issue would hit us eventually and many firms have been thinking about its implications for at least two years. What is particularly interesting is the process of price discovery that has since taken place.

Initially, firms providing financial research aimed high but as asset managers baulked at the charges, so they have been dramatically reduced. Much of the anecdotal evidence suggests that research costs will not be covered by the fees paid by the buy side which is going to change the face of financial sector research. An article in the FT last week asked us to “spare a thought, friends, for Julian Bonusworthy. North of 40, he works for a respectable if second-tier global bank with towering offices in London. He is an equity analyst, advising fund manager clients what to buy and sell. His base salary is £350,000 and in a good year he takes a big performance award at year-end. His twins are in private school, the Land Rover is paid for and his £4m house is not.” He may be an imaginary character but research analysts earning that kind of money are about to become a much rarer breed[1].

The largest company by market cap in the FTSE100 is HSBC. According to Bloomberg, it is covered by 33 analysts of which 12 have a buy recommendation; 5 a sell and 16 a hold. One thing is for sure: the buy side of the industry simply does not have the budget to pay 33 analysts to cover this single stock, and they certainly do not need to shell out huge amounts to be told to hold. Therefore a lot of winnowing is about to take place. Firms which can offer a wide range of client services will continue to find a market for single stock research and offer it at competitive prices. Those continuing to offer good investment ideas should also be able to continue making a living. But for many people in financial services life is about to get a lot harder. Big Bang may have heralded the start of the financial research industry; MiFID II might sound its death knell.

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[1] As for economists who, I can assure you, earn much less the MiFID legislation defines investment research as “financial analysis or other forms of general recommendation relating to transactions in financial instruments.” Technically, that means we are largely exempt since much of our analysis does not relate to transactions in financial instruments.

Some thoughts on the 2018 outlook

One of the anniversaries you may have missed was the bicentenary of the first publication of the novel Frankenstein, which first saw the light of day on January 1 1818 when the author, Mary Shelley, was just 20 years old. As you are no doubt aware, the eponymous title referred to the scientist who created the monster which in popular culture now bears his name. A couple more economically relevant anniversaries will also fall in 2018. Assuming that the US economy does not go into reverse, May 2018 will mark the second longest US economic expansion on record, exceeding the 106 month upswing between February 1961 and December 1969. Perhaps of greater symbolic significance, September will mark the tenth anniversary of the Lehman’s bankruptcy – an event which proved to be a Frankenstein moment for the global economy.

From an economic perspective, global GDP growth this year is predicted to post its strongest rate since 2011 with the IMF forecasting a rate of 3.7%. Indeed, there are increasing signs that the global economy is beginning to match the optimism which has long been a feature of financial markets, with Europe likely to be one of the brighter spots after years of underperformance. But markets appear to be in the late stages of a cycle which will soon enter its tenth year, with concerns about the overvaluation of equities whilst in the credit world spreads remain narrow and covenant-lite issuance is on the rise.

As I noted in my previous post, it was possible to rationalise market movements in 2017 on the basis of accelerating global growth, low inflation and a lax monetary stance on the part of global central banks. But one of the features of the current market cycle is that many investors describe themselves as “reluctant bulls.” This suggests that they may decide to jump off the bandwagon in the event of an event which triggers a change in sentiment. This is not to say that I believe markets will necessarily crash, but it might pay to reduce the degree of risk exposure – perhaps by switching the top 10% of risky assets in the portfolio for something less risky. One curiosity of market moves of late is that the surge in US equities is increasingly reliant on a narrow base of stocks. Indeed, the so-called ‘FANG’ stocks (Facebook, Amazon, Netflix and Alphabet) accounted for roughly 17% of the rise in the S&P500 in 2017: If we add Apple, this figure rises to 25%. A market which is so dependent on tech stocks is clearly vulnerable to a shift in sentiment.

Monetary policy is likely to play a more important role in market thinking in 2018. Whilst the market shrugged off US rate hikes during 2017, it will probably have to contend with another 50-75 bps of monetary tightening this year. In addition, the Fed will continue to run down its balance sheet. Admittedly, an expected reduction of $300 million relative to an overall balance sheet of $4.5 trillion does not represent a huge amount of liquidity withdrawal, but to the extent that more air is being taken out of the monetary balloon than at any time in the past decade, it might point to a market which rallies at a slower pace than we witnessed in 2017. I expect that global stock markets will end the year higher than they began and I’ll stick my neck out by predicting a rise of 5-10% in the major US and European indices.

One of the interesting developments to watch in 2018 will be the course of bitcoin prices. There are numerous unknowns regarding the nature of the first digital currency to capture public imagination, notably who holds it. Despite the establishment of a bitcoin futures contract last month, this is unlikely to increase the depth and liquidity of the market so long as institutional investors remain on the sidelines. I still believe bitcoin is a bubble waiting to burst – it is after all currently trading 23% below its mid-December high (chart) – but predicting the future course of events is a mug’s game, as anyone who tried predicting its course last year discovered. I will, however, be that willing mug and predict that the price will end the year lower than where it started.

Politics in the Anglo Saxon world will continue to feel the aftershocks of the great 2016 populist revolt. US mid-term elections will be held in November where attention will focus on whether the Democrats can win back control of the House. Last month’s Alabama Senate election, in which Democrat Doug Jones pulled off a stunning win over his Republican opponent, Roy Moore, is an indication that there are limits to the electorate‘s tolerance of the nastier elements of Republican politics. Moreover, the parties of first-term presidents have in recent years tended to lose seats in the mid-terms, suggesting that there is a chance that the Democrats can mount a political comeback. Whilst I would not put money on it, it does raise a risk that 2018 might be the year in which political gridlock returns to Washington.

On this side of the Atlantic, the Brexit soap opera will continue to play out. In twelve months’ time the UK will be staring Brexit in the face, so it is imperative that progress is made with regard to setting out the terms of the subsequent relationship between the UK and EU. Nothing that we saw in 2017 gives me much hope that the UK government is up to the task. Such progress as we have seen has been dependent on the goodwill of the EU, such as accepting the Irish border fudge as a sign of genuine progress (it isn’t). There is also evidence to suggest that questions are being raised amongst voters regarding the Brexit process and whilst this will not mean that the UK government changes its position, it may be forced to soften it. Undoubtedly, this is a theme to which I will return.

Other things I have been asked about of late include whether I believe the Italian elections due in March are a big deal (no); whether there will be a war on the Korean peninsula (doubtful) and whether Donald Trump will be impeached (no). Unfortunately my clairvoyant abilities do not extend to giving definitive answers to these questions, so let us just say that I would assign a probability of less than 50% to any of them. Of course, the big question of 2018 is who will win the World Cup? I can respond with much more certainty than to any of the issues above: Not Italy.