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Major Geopolitical Risks Are Right Here at Home

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When we consider geopolitical risk, we tend to focus on things that are “out there.” We might think of military tensions between the US and North Korea, or war in the Middle East, or Brexit. But more and more, analysts are looking to the US as a significant source of geopolitical risk.

Markets surged after the election of Donald Trump. Investors optimistic about the prospect of significant economic reforms fueled what has become known as the “Trump bump.” But that optimism has cooled in the wake of the Republican failure to repeal or even reform Obamacare. Now analysts wonder if Trump has the political clout to push his broader economic agenda of tax cuts, infrastructure spending and regulatory reform through. On top of that, there is increasing worry about whether Congress will be able to come up with a plan to increase the debt ceiling in time to avert a government shutdown.

BlackRock portfolio manager Russ Koesterich told the Financial Times of London that all of this has made the US one of the primary sources of geopolitical concern in the world.

We’re in this strange unfamiliar situation: for the most of the last five or six years the geopolitical risk was outside the US, and now it’s within the US. If Washington stumbles or if there’s an issue with the debt ceiling that would produce some risk-off and a rally for gold.”

Trump boosted concern about a debt ceiling standoff last week when he threatened to let the government shut down if Congress doesn’t come through with funding to build a wall along the US-Mexican border. Congress must put together a funding deal, and the president must sign it, by a Sept. 30 deadline. If Congress doesn’t get a deal done, or if the president vetoes it, the government will go into shutdown mode. Treasury Secretary Steven Mnuchin has warned the US could go into default by October if Congress doesn’t act.

According to an article at The Street, economists at Goldman Sachs think there’s only a 50-50 chance Congress will get a spending deal done in time.

There are several arguments against a shutdown, particularly that Congress simply kicks the can with a temporary extension, delaying the real debate until later this year. However, with little chance that Congress will fund the border wall, a fractured Republican majority in Congress and a decision that ultimately rests with the president, the outcome is hard to predict.”

Meanwhile, significant questions surround Trump’s ambitious economic agenda. Tax reform is next up to the plate. The Obamacare debacle revealed serious cracks in the Republican party. Despite optimistic talk coming from GOP leadership, it’s difficult to believe Congress will be able to put together a substantive reform package.

Koesterich said the way this geopolitical uncertainty in the US plays out will have a major impact on gold.

Investors came into 2017 expecting a boost from Washington in the form of tax cuts and potentially infrastructure spending — resulting in the so-called ‘reflation’ trade. Gold’s performance may be most closely linked with what happens in DC.”

Some analysts have said counting on Trump to bring about significant change was foolhardy all along. As the House wrestled with Obamacare repeal last April, Jim Rickards said implementation of the Trump economic agenda was “sheer fantasy.”

The idea that Congress and the White House can somehow revive Obamacare repeal, reform the Internal Revenue Code, pass a major spending bill, raise the debt ceiling cap, and extend the continuing resolution to keep the government going until the budget is complete is sheer fantasy. It’s more likely that the Congress will descend into partisan fights between Democrats and Republicans, and internal fights among various Republican factions.”

Peter Schiff has also argued that a lot of Americans suffer from false optimism when it comes to Donald Trump. The president inherited a mess. Congress isn’t going to fix it. If Republicans can’t even pass modest reforms to Obamacare, how will they ever push through substantive tax reform? It just doesn’t seem likely.

I think a lot of people actually believe this is a game-changer, that he’s going to drain the swamp, that he’s going to solve all the problems, and people are now optimistic. Unfortunately, none of this is true. Nothing that Trump is likely to do is going to make any difference as far as the course we are on … Government is going to continue to grow. The Fed is going to keep printing money. We are continuing to head off the edge of an economic cliff.”

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