The US elections have become the world's greatest political spectacle. Two years, two dozen candidates, about as many debates, and some $10 billion in campaign costs. Populists have hijacked the Republican primary process: Billionaire Donald Trump has now led for nearly six months.
Does it matter? Hardly. We don't think Trump can be the nominee. Even if he is the nominee, he can't beat Hillary Clinton. And even if he did somehow beat Clinton, truly a lottery bet, his willingness and ability to deliver on his over-the-top campaign proposals (closing the borders to Muslims, building a wall at the border, a multitrillion dollar tax restructuring) wouldn't survive Congress or the courts. We're starting to worry about the ten-year horizon for the dollar, but for 2016 top risks, expect huge amounts of noise, plenty of punditry, and nothing substantive to see.
CHINA: NO HARD LANDING
In 2016, China faces its most serious macroeconomic balancing act to date: allowing the renminbi to depreciate, opening the capital account, deleveraging the banks, and permitting corporate defaults to advance state-owned enterprise reform. That's on top of the complicated internecine politics of the anticorruption campaign and worsening pollution. Balancing these competing priorities creates plenty of opportunities for volatility, which will surely come this year. Still, China's leaders well understand the challenges, as well as the dangers to themselves, of unchecked social instability. If anyone has the political heft and resources to manage economic instability and prevent a genuine hard landing, it's Xi Jinping—even if it means kicking the reform can down the road.
There's a very important macro point here. Many observers talk about global recessions arriving at an average of every seven or eight years in the postwar environment. Going forward, given the China footprint, recessions are increasingly likely to come from there (just as the post-2008 rebound was primarily China-driven). But given the country's political ability to stave off unrest, using political control and money in the bank, these cycles are likely to become longer. That's the good news. The bad news: When recessions hit going forward, they're also likely to be larger in magnitude.
As China rises, geopolitical risk across Asia will inevitably grow. But not this year. The region's top leaders, Japan's Shinzo Abe (hosting the Group of Seven meeting this year), India's Narendra Modi, and especially China's Xi (hosting the Group of 20), are now focused on stabilizing big power relations in Asia, not stoking tensions. With the entire regional economy slowing, it will be a year of more stimulus at home, less actions abroad. The opposite of Europe, where eroding political capital fosters insecurity, Asia's most worrisome conflicts are buffered by leaders who can focus on their top priorities.
And so despite plenty of tensions in the South China Sea—and continued posturing over Chinese-made artificial islands in that area—there's a limit to how far confrontation can go in 2016. So too China-Japan and South Korea-Japan relations, where none of the feuding governments is prepared to escalate the sort of political, diplomatic, or commercial conflict that might be bad for business. The exceptions are Taiwan and Hong Kong, considered internal issues by Beijing, and bringing little pushback from other powers. Indeed, the politics could be sufficiently strong to bring progress in conflicts historically seen as unyielding, raising the possibility, for example, that a politically unthreatened Putin could offer a deal for cash in Russia's longstanding territorial conflict with Japan. Even more dramatically, the personally unconstrainable Modi could throw his weight behind breaking his country's diplomatic impasse with Pakistan.