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Trump-related risks continue

In the middle of 1971 I was fortunate enough to be included in a soccer exchange with a team from Seattle. When it was our turn to go down there for the weekend, I was placed with a nice family in a tidy suburb.
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In the middle of 1971 I was fortunate enough to be included in a soccer exchange with a team from Seattle. When it was our turn to go down there for the weekend, I was placed with a nice family in a tidy suburb. My take-aways included a lot of TV time and mostly watching football, which to me seemed very boring compared to hockey.

Also, they ate ice cream for every meal - I mean as a main course.

The entire family was obese. Go figure.

Eventually I talked my host boy in to going out for a walk with me and we chatted about our two countries. Somewhere along the way he said something which made me wonder if he had cheese twists for brains. "So that's that place you live in called, Cancouver? Vanada?"

Then he looked at me and started to laugh.

I can't say for sure, but at that moment I might have briefly lost my composure and pushed him off the sidewalk into a little pile of doggy discards.

It's a hockey thing. This might not have gone over that well when we got back to his house, had they been able to pull their heads out of their ice cream dishes for long enough to notice.

Meanwhile, also in mid-1971, Donald Trump was just turning 25, and was gifted control of his father's real estate company, Elizabeth Trump & Son. (Insert obnoxious comment here).

Mid-2018. The following are excerpts from our mid-year strategy paper, which, unlike some more technical treatises, is fairly readable. It's because economics majors have to take English classes, and accounting majors don't. As usual, much of it is focused on U.S. conditions, since it is our biggest trading partner, and the largest economy in the world.

As far as equities goes, the first half of 2018 has provided quite a contrast to the sunny trends that smiled on 2017. Last year's silky smooth markets have hit turbulence. The euphoria following tax cuts is now mixed in equal parts with concern about protectionism. Inflation and interest rates are no longer at rock-bottom readings and have been trending higher. Against this backdrop, risk assets like equities have struggled to make the kind of headway that came so easily last year.

Higher oil prices are a theoretical drag on global growth, though the limited boost resulting from low oil prices in 2015-2016 has called into question the strength of the effect in both directions. As such, we don't budget for too much economic damage from higher oil prices. Yes, U.S. consumers will be hurt, but by virtue of its shale-oil boom, the U.S. is transitioning from a period when high oil prices were a clear negative to one in which they have more ambiguous implications. The Eurozone and Japan are clearly hurt by higher oil prices, while Canada benefits.

We continue to hypothesize that the speed limit on developed-world economic growth is finally rising after a challenging decade. Several observations nudge us in this direction, though more evidence is needed before a definitive conclusion can be reached.

First, studies of prior financial crises have found that their negative effects usually fade within a decade. With roughly 10 years now under the bridge, it would make sense if the recent acceleration in growth was at least in part the sloughing-off of financial-crisis baggage.

Second, there is evidence that a degree of optimism and risk-taking - what we call animal spirits - has returned to the economy. Consumer and business confidence are now high and measures of market-based risk appetite are good, translating into additional business-investment plans

The current year's developed-market outlook is supported by high levels of consumer and business confidence, tax cuts, the diminishing drag from the financial crisis and a lingering boost from easy financial conditions.

Solid growth may be in the cards next year, but probably not quite to the standards of 2018 as the lagged effect of tightening financial conditions latches on.

Our developed-world growth forecasts are unchanged from last quarter, with the U.S. set to lead thanks in large part to fiscal stimulus.

Overall, our developed-world outlook is slightly above consensus, though with considerable variation among individual countries.

There are an ice cream bucketful of risks that could yet interfere with our base case forecast. Central among the potential negatives is that trade protectionism could be worse than we have budgeted for; the aging business cycle could finally expire; or the rising-rate/ tightening financial-conditions story could accelerate, perhaps spurred by inflation concerns.

There are also some smaller downside risks worth reckoning with. U.S. political uncertainty is high due to the basic unpredictability of Trump's government, a midterm election that threatens to alter the political power dynamic, and an FBI investigation that could conceivably upend the president himself.

If the Democrats win the House of Representatives in November's midterm elections as betting markets currently anticipate, various Republican initiatives related to immigration, deregulation and NAFTA become less likely to survive Congress. Of course, U.S. presidents still have considerable sway over foreign policy and the application of tariffs.

Lucky us up here in Vanada.

Mark Ryan is an investment advisor with RBC Dominion Securities Inc. (Member-Canadian Investor Protection Fund), and these are his views, and not those of RBC Dominion Securities. This article is for information purposes only.

Please consult with a professional advisor before taking any action based on information in this article. He can be reached at mark.ryan@rbc.com.