Introduction David Woo MLPF&S [email protected] First came Brexit, then Donald Trump’s election as the president of the most powerful country in the world. The world has changed. Possibly irrevocably so. These ground shifts have been brought on by a backlash to globalization, increasingly viewed as the culprit for wage stagnation (Chart 1), growing disparity of income and wealth between the rich and the poor (Chart 2), and the loss of national identity. We suspect the trend of anti-globalization is here to stay. Chart 1: US real median household income Chart 2: Income inequality and globalization 60,000 - 23 18 China entered 58,000 WTO 22 rte 21 - 14 56,000 é‘ 20 49 54,000 19 , 10 52,000 8 8 17 6 50,000 ‘ 16 4 ~~ OMMOMmM Dr MOWOR DWT MMO Ke OT MW oaowmonwmnwwooomomomomoecec”’”ooo yy > 48,000 SPS SL SE2SFE2RRARARAR 46,000 =——— share of aggregate income going to top 5 percentile (%, LHS) ~~ MmMWwWMnMm~ Dr MWR OWT MWB re DBwTM WH BSSSSRSSRSSSESEERR ——imporGOP (¥, RHS) Source: BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research Wide-ranging consequences for financial markets In our view, the anti-globalization theme will have at least seven major consequences for financial markets in 2017. 1. Monetary easing will give way to fiscal easing The history of populism is one of fiscal largesse. Furthermore, with limited scope for further monetary easing, fiscal easing is becoming the last and only resort for policymakers. It seems reasonable to assume that the combination of these two factors will soon usher in a period of easier fiscal policy. Nowhere will the impact of fiscal easing be felt more than the US in 2017, in our view. The GOP has achieved a rare clean sweep in the latest elections. During the 18 years that a single party controlled both the Presidency and Congress since 1965, US structural budget balance as a share of potential GDP deteriorated by 0.4pp a year on average (Chart 3). In other words, history tells us that a clean sweep is