2017/08/24 Commentary: Trump Troika
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Commentary: Thursday, August 24, 2017
Trump Troika
The ‘Troika’of factors that weighed on US equities and the US dollar and bolstered the govvies remain in place. Yet after the extended problems of the US President due to his various actions regarding the Charlottesville protest, the lack of progress on the tax reform and infrastructure spending aspects of his legislative agenda and the still less than credible approach to the situation with North Korea (NOKO), he now owns various problems through self-inflicted wounds. As such, it is now the ‘Trump Troika’.
So why would we open a review of how those various factors combine to impede the US economy’s progress toward greater growth with a chart of the Euro versus the US Dollar? Quite simply because it is a good measure of how US prospects have been fading since the early enthusiasm for the Trump administration. While it has been most evident against the euro on EUR/USD strengthened from a 1.0340 January low to current levels, the greenback has also weakened against all other currencies, including emerging currencies for the first time in years. And key investors are losing faith in the ‘Trump trade’…
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NOTE: Given the likelihood the US economy will now get the structural reform that we (along with Mario Draghi and others) have been loudly complaining was not forthcoming since our dual It’s Lack of Reform, Stupid posts in January 2015, we need to adjust our view that a potential economic and equity market failure is coming. We previously referred you back to our December 8, 2015 post for our major Extended Perspective Commentary. That reviewed a broad array of factors to consider Will 2016 be 2007 Redux? While a continued regime of higher taxes and more regulation (i.e. under Clinton) might have fomented a continued weak or even weaker US economy, the tax and regulation changes proposed by the Trump administration will hopefully still be approved by the Republican Congress and diminish the similar fears we had to what transpired in 2007-2008.
[Thanks to barchart.com for the use of the opening graphic.]
…like Bridgewater Associates estimable Chairman and CIO Ray Dalio. While we do not count on other’s opinions for our perspectives, it is always gratifying when someone we respect as much as Mr. Dalio comes forth to confirm our instincts. We have questioned for some time whether the Trump administration reform and stimulus agenda would remain viable if he continued to create more controversy than constructive measures to build support for his agenda in Washington DC and beyond. A Tuesday Financial Times (FT) article Ray Dalio turns cautious amid Washington conflict (our marked-up version) reviews his perspective, and that he is especially concerned about the degree of acrimony in Washington DC as a potential primary driver for markets.
To wit, “…conflicts have now intensified to the point that fighting to the death is probably more likely than reconciliation…” regarding the divisions in Washington DC. The FT article by the well versed Robin Wigglesworth goes on to note, “The fading faith in Mr. Trump enacting his promised economic policies has been particularly pronounced in the currency and bond markets, where there have been sharp reversals in several Trump trades that were popular immediately following his election victory.”
And that currency market manifestation of the fading of the more upbeat US psychology is the reason we chose a EUR/USD chart for the opening of this post. This revision of views is now the case for the normally more long-term oriented Mr. Dalio, who was a fan of the announced Trump tax and stimulus agenda soon after last November’s US general election. So this was not just a random opinion by the very successful and respected Dalio… it was a full volte face from his shift to a more upbeat view last Fall on the potential for tax reform and stimulus.
The Trump ‘Dipsy-Doodle’
This has especially come back into focus after another Trump Monday-Tuesday ‘dipsy-doodle’ this week. Just like last week he was more scripted and professional on Monday, only to go totally off script, winging his sometimes almost bizarre ideas, on Tuesday evening at his Phoenix rally.
The return of ‘the real Donald Trump’ only raises the same old concerns about whether he was creating so much acrimony even in his own party (forget the Democrats) that not much is going to get done in Washington DC. And all the shifts on a broad range of positions is as disturbing that any particular position. It is as if whatever the President of the United States has to say on any given day cannot be trusted to be the same on the next day. And more so than the outright deficiency of the President’s response to the white supremacist violence in Charlottesville two weeks ago, this inconstancy and poorly founded over-confidence is more than a bit disturbing in any leader; and especially a President of the United States.
Trump regularly denied things he has said previous in spite of the video evidence of the fact he said them. Fortunately for him, his team is still willing to parse what he says with the indication that everyone should think about what he meant rather than the specific words. Unfortunately for everyone else both here and abroad, words have meaning. And Trump’s over-confidence that he always has the right answer on the fly and is then unwilling to backtrack from untenable positions is disconcerting… bordering on scary.
In his lengthy (77 minute) Tuesday election-style rally in Phoenix he returned to the guarantee of building an anti-illegal immigration wall along the entire southern US border. Even more telling and disturbing was his demand that Congress pass a bill to fund something that was promoted as being paid for by Mexico through the entire election campaign last year.
He then went even further, and possibly a bridge (or wall) too far, in suggesting that the Republic majority in Congress should hold the cyclical raising of the US debt ceiling hostage to the wall funding being included in the budget. This is almost bizarre on two fronts. Most border agents are readily admitting that a wall along the entire border is both unnecessary and possibly an impediment to the most effective forms of interdiction of illegal immigrants. Even more troubling is the degree to which linking it to the raising of the debt ceiling risks another US government shutdown if the debt limit hike misses its nominal deadline (when the Treasury actually runs out of money to pay the bills.) He even went so far as to say that it might be a good idea to go through a temporary government shutdown to make a point on the need to fund the wall that Mexico was supposed to be paying for in the first place.
This is nothing less that truly bizarre for anyone even passingly aware of recent US political history. It is a given in all recent US political phases that the more parsimonious Republicans are always blamed for any US government shutdown regardless of where the ‘blame’ might actually lay. So in addition to the other political squabbles that the President has fomented (more below), he is now threatening something that is a stone cold loser for his nominal party (as he is not really a Republican except by default.)
Intra-Party Acrimony
And that potential to cause a shutdown by not raising the US debt limit was immediately and forcefully rebuffed by Republican House Speaker Paul Ryan. He stated clearly that negotiations are underway, and he is confident that through compromise the US debt limit will be raised timely ahead of the nominal deadline. Yet this was not the only criticism Trump had for Ryan and other Republicans this week.
As part of a typical ‘Trump Tweetstorm’ he lumped Mr. Ryan in with Senate Majority Leader Mitch McConnell on criticism of the fact they did not attach the debt ceiling hike to the very popular and overwhelmingly passed Veterans Administration (VA) funding bill. Trump says that would have been so easy, and now Ryan and McConnell have left it a real mess. This simply demonstrates Trump’s inability to grasp how things work in Congress.
Had the debt ceiling hike (with Republican-driven spending reductions) indeed been tied to the VA funding bill, the Democrats who are not inclined to cooperate with Trump in any way would have had a reason to not vote for the combined bill. While Trump would have trumpeted (pardon the pun) this as a sign of the Democrats lack of patriotism and support for veterans, most Americans would have understood it had made it a referendum on the Republicans’ attempted spending reductions as part of the debt ceiling hike.
That just was not going to fly. And the ultimate result would have been the Republicans pulling the debt ceiling provisions in a clear legislative defeat. That would have been a negative for the entire party on its lack of political power and savvy, and something that adept Senate Majority Leader McConnell avoided for that very reason. This ongoing spat with the Republican Congress on a series of issues from healthcare to the Russian sanctions regime is not going to help Trump get his legislative agenda passed.
And as we have been stating for months, the ever more likely lack of ‘timely’ progress on tax reform and infrastructure spending are a problem for high priced US equities, and will likely continue to weigh on the US dollar while encouraging the govvies. As indicated recently by Senate Majority Leader McConnell, there can indeed be full tax reform (as opposed to what will be a less effective straight tax reduction.) Yet just this week he noted that this will occur (paraphrased) “sometime during this legislative session”, which means before this Congress adjourns in… January 2019.
And he has also specifically disparaged the idea that credible legislation can be crafted under a near-term deadline; like the original Treasury Secretary Mnuchin promise to have a tax reform bill on the President’s desk before the August Congressional recess, and the current White House request that they see it by Thanksgiving. McConnell has duly noted that the major Obama administration legislative programs (Obamacare and Dodd-Frank) were both signed in the second year of his first term.
Arizona Factor
Then there was the additional bizarre political aspect of Trump’s Phoenix rally on the sharp criticism and personal disparagement for both of Arizona’s sitting US Senators. Whatever one thinks of either John McCain or Jeff Flake, the idea that a sitting US President would sharply criticize two senior legislators from his own nominal party while on their home turf is striking. It is also another sign of how clumsy he is on any attempt to build a consensus for the passage of his reform agenda.
Recall that it was McCain who cast the vote that defeated the ‘skinny repeal’ legislation that was simply going to repeal Obamacare with the hope something more rational would evolve once the House and Senate entered ‘conference’ negotiations. Was this simply for the reasons he so eloquently stated on the need to end the acrimony in Congress? Or could it also have been in part for all of the bizarre criticism Trump had cast his way?
Or was it a bit of both? It can certainly be said that it is a very troubling and bad way to run a representative democracy for legislators to base their approval or veto of key legislation based on personal feelings toward the President. Yet these folks are people too, and they can sometimes vote based on general good feeling (most definitely NOT the case with Trump) or disdain (more likely now) for the person at the top.
While no US legislators have been quoted on it as yet (for all the obvious good reasons), off the record reports tell us that some feel Trump is such an unbridled narcissist that they cannot take him serious. And his obvious lack of knowledge on how Washington DC and much of the rest of the world works is as disconcerting to the professional political class as it is to many ordinary citizens.
North Korea
We have spent so much time on this in previous posts that we can be very brief here on the US President’s failings… especially regarding continuing unconstructive belligerent statements that cannot be backed up with action. At least they cannot be acted on without tragic consequences. So the extended comments from Trump in the wake of his “fire and fury and power” admonition in response to any further threats alone (not even action) by Kim Jong-un ring hollow.
There is some sense that maybe Trump’s belligerence has indeed caused some thought by the NOKO leader that was not necessary during the pacifist Obama administration. However, any window to act on an outright attack on North Korea closed at some point during the Obama administration neglect of the NOKO situation. Whatever one may think about now departed Trump Senior Advisor Steve Bannon, he is a very savvy guy with quite a bit of military background. It is instructive to review his take on NOKO from his interview in the very liberal American Prospect that ultimately got him fired.
To wit, “Until somebody solves the part of the equation that shows me that 10 million people in Seoul don’t die in the first 30 minutes from conventional weapons, I don’t know what you’re talking about, there’s no military solution here, they got us.”
Among other things that Trump doesn’t like, anyone who directly questions his opinion or judgement is immediately persona non grata. As Bannon was already under pressure as the presumed source of Trump’s lack of condemnation for the white supremacists in Charlottesville, this was easily the final straw that got him dismissed.
Yet in the broader scheme of things, Bannon is undoubtedly right. The US can counter North Korean threats with a very reasonable expectation that it will cease to exist if it is ever becomes benighted enough to actually launch an attack on the US or its allies or territories. This is likely the reason why any second tier nuclear power like Pakistan (or the other major ones for that matter) are not considered a threat.
And regarding Bannon’s observation on the potential damage to South Korea in the case of any conflict, the South’s new, more pacifist President Moon Jae-in has been generally supportive of the stronger US position. However, he has also categorically stated that no conflict with NOKO can proceed without South Korean approval. That is only rightful in the context of where the major damage will be incurred if there is a US-NOKO battle, even if the end result of NOKO be utterly destroyed is a foregone conclusion.
FOMC
And as we head into the Friday morning Chair Yellen speech at the KC Fed’s Jackson Hole Symposium at 09:00 CDT, we still suspect she will still be fairly accommodative in the context of stubbornly lower than expected US (and global) inflation. The question on the market response will be whether it will be like last Wednesday’s lack of any specification of the beginning of the Fed balance sheet ‘reduction’ in the expected July 25-26 FOMC meeting minutes (our marked-up version) which turned out to be a negative for the equities.
We will also need to see how the markets react to Friday’s late session (14:00 CDT) speech by ECB head Mario Draghi that is also expected to be dovish. Yet this gets back to why we used that EUR/USD chart at the top of this post. The real proof in the pudding (as always) will be the market responses. And if Yellen is once again less hawkish (or at least not as aggressively attuned to ‘removal of accommodation), the same effects may occur as after that dovish July 20th ECB press conference.
And this is also in the President’s bailiwick as part of the ‘Trump Troika’ due to the lack of reforms and infrastructure stimulus meaning the US economy is less likely to hit the 3.0% growth that might invigorate more inflation. While the various minions at the Fed are saying that they are not incorporating any political influences or changes into their inflation and growth forecasts, beneath the surface we (and quite a few other analysts) are feeling like the Fed must be hoping Trump’s reform agenda does indeed succeed.
Yet his continuing penchant for self-inflicted wounds, especially within his own (once again nominal) Republican Party, means the chances for his reform agenda passage into law continue to diminish. It is rare to see one US political party control the White House and both houses of Congress and yet manage to pass next to nothing on any major legislation… but Trump’s narcissism and bombast are leaving that a distinct possibility.
Market Quick Take
This also gets back to the EUR/USD chart at the top of this post as a likely bellwether for what transpires elsewhere as well. And the stronger than expected Euro-zone Advance PMI’s earlier this week allowed the upside leader euro to push back up to EUR/USD push up from 1.1700 area support without even challenging the broader up channel support (from its last April 1.0570 trading low.)
It also now has a short-term down channel into the low 1.1800 area from its August 2nd 1.1905 trading high. If that is violated by any Close above the recent low-mid 1.1800 area congestion, the technical up trend will be reinvigorated for a likely move to the 1.2000 area historic congestion, or beyond.
And along the way the US Dollar Index cannot seem to surmount its .9400 resistance. Any failure back below the .9300 congestion would suggest that a swing down to the key .9191 May 2016 2.5 year low that is also tied into monthly MA-48 at .9216. And much below that there is nothing as prominent until the .9000-.8900 area.
This would also imply further weakness for the US equities from the recently highlighted September S&P 500 future 2,445-51 congestion. And Closing below MA-13 at 2,443 last week left it vulnerable. So now, even though it held the selloff around lower support, with both weekly MA-13 and MA-9 in the mid-upper 2,440’s the lack of upside follow through so far may mean the market is ready for another test of lower support.
As noted extensively previous, there always were more major lower supports. The most prominent among them is the 2,405-00 late-February through mid-May congestion, which was also a retest of the major top from the March trading high. Along the way there is also the weekly chart up channel support (from the late-March 2,317.75 selloff low) at 2,420 that was tested earlier this week.
As also noted previous, there is now more meaningful higher resistance from two weeks ago after the failure from above the previous 2,475-80 resistance left a fresh weekly DOWN Closing Price Reversal (CPR.) That reinforced the importance of the 2,475-80 resistance at which it has failed repeatedly in the short term (now including last week Wednesday.) The previous week’s 2,472 Close is the DOWN CPR signal, with a Tolerance to the 2,480.50 late-July trading high.
On the other front, the govvies are encouraged by the return of that Trump turmoil, along with the weaker than expected US Advance PMI’s and New Home Sales. Upside leader September Bund future is trying to escape its 164.00-.50 congestion resistance.
And while the US dollar was generally recovering against emerging currencies, this still appears more of a correction than trend reversal, for now. The most interesting is the USD/ZAR rallying back up above 13.15-.20 and the 13.30 area previous failed UP Break. Yet previous rallies above that area have stalled into the 13.50-.60 area also seen again on the recent rally prior to dropping back into the lower levels.
And after rallying for the past month USD/MXN was finally back above its failed 17.90 support (August 2016 trading low) prior to dropping back without having violated the heavier congestion and weekly MA’s just above it in the 18.00-.10 area. The balance of emerging currencies are stuck around previous trend and congestion levels.
The Extended Trend Assessment with full Market Observations will be updated after Friday’s Close to fully assess how various markets perform in the wake of the important speeches at the KC Fed’s Jackson Hole Symposium on Friday. Those include a morning (10:00 EDT) speech by Fed Chair Yellen, and an afternoon (15:00 EDT) speech by ECB President Draghi. The expectation is the Fed will continue to sound less accommodative, yet still express circumspection on any definitive balance sheet reduction activity. Signore Draghi is expected to remain in full accommodation mode seen again at the last ECB press conference (as noted in the opening graphic.)
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