Taps Coogan – January 2nd, 2020

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With 2021 officially underway, here are a few ruminations on what the new year may hold:

1.) Rearmament: We started sharing a lot of defense industry stories in 2020. By our reckoning, the world has plunged into the second or third major rearmament cycle since the 1930s. US prodding finally succeeded in getting some Allies to remember that they aren’t protectorates. The US started to reorient the military away from ill-advised escapades in the Middle-East and towards even more expensive ‘Great Power’ conflict. Speaking of ‘Great Power’ conflict, China’s nervous neighbors are soaking up weapons at a truly staggering pace.

No country in the Western world can afford to win an arms race with China. Any strategy to confront China that doesn’t hinge on making the US and the developed world economically competitive again is a losing one.

Regardless of the incoming administration’s priorities and regardless of the economic prudence of rearmament, it will continue. That cat’s out of the bag.

2.) China: China overplayed their hand badly in 2020 vis-a-vis Covid, Hong Kong, and human rights. There is no excuse for naivety about the CCP anymore. There never really was.

The EU’s recent investment deal with China, the very nature of which presumes that China will adhere to the spirit of its obligations under any deal, portends that the ‘multi-lateral’ approach to China will end up being a return to the failed policies of the past.

3.) The economy: Short of a meteor strike or something worse, the economy is likely to continue to stage a recovery in 2021.

4.) Markets: Markets are in what will undoubtedly go down in history as one of the great bubbles of the last 100 years. The question for 2021 is whether the bubble survives the year. Markets are going strong for now.

5.) The deficit will probably be modestly smaller in Fiscal Year 2021 than it was in Fiscal Year 2020. The deficit will still be way, way too large. The coalescing consensus that Congress should morally license the return of pork and corrupt bailouts by plying voters with multi-thousand dollar checks is the most concerning development I’ve ever seen in fiscal policy.

6.) The Fed: The Fed has gone all-in on stimulus. That won’t change until PCE inflation has been trending above 2% for many quarters, perhaps years. That seems unlikely to happen in 2021. Nonetheless, it will probably happen sooner than forecast.

All in all, at the risk of sounding optimistic, I’m more worried about 2022 than 2021.

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