March 2018 - Politics & the Markets (Greg Valliere - Horizon Investments)

The ongoing thoughts from Greg Valliere, the Chief Global Strategist for Horizon Investments, who has a lot of great insights to politics & the ramification on financial markets.

March 29, 2018

Reading Donald Trump's Mind

THE LATE GREAT WILLIAM SAFIRE, the witty and perceptive New York Times columnist, a conservative, used to regularly write a column that professed to read the minds of top Washington officials. Partly conjecture and partly a compilation of what his sources were telling him, it was a must-read; he won the Pulitzer.

SO WITH APOLOGIES TO WILLIAM SAFIRE, we offer our following take on what Donald Trump is thinking...

I Have the Republicans in My Pocket: I can say whatever I want, I can tweet and fire people and outrage the establishment because of one huge factor – Republicans in Washington don't dare to challenge me; they know that 80% of GOP voters love me. Could Romney or Flake or Kasich deny me the nomination in 2020? Be serious. And McConnell and Ryan will look the other way, no matter what I do.

My base loves the tariffs: The academics and the Wall Street internationalists hate trade tariffs but I care about my base. They love tariffs in Bethlehem, that's what counts. I'll threaten a trade war, the base will love it, and I'll get some deals – because China and Canada and Japan are scared of a trade war.

The tax cuts will work: Pelosi and the Democrats are tone-deaf – they mocked the tax cuts as "crumbs," but try telling that to people who have more money in their pockets. I'm betting that the economy will be roaring by Labor Day – and if it is, the Republicans could surprise in the November elections. And why not call for even more tax cuts? It won't happen but Democrats in conservative states will squirm.

Pardons? You bet I've considered them: Firing Mueller is an option, sure, but the easier path may be pardons. Of course they're under consideration – just sending that hint will make people less willing to cooperate with the investigation. Meanwhile, Hannity and my talk radio friends are making this all about the biases of Mueller and the FBI – we can win that fight.

Impeachment? Bring it on: No way the Senate will convict. Period. The country is so sick of this stuff there could be a backlash. I can spin this as a witch hunt – let's see how many Republicans are willing to lose their seats in primaries by turning on me.

More firings? Nature abhors a vacuum: I can't go more than three days without my name on the front pages, okay? So we shake up the staff regularly, I like chaos. Sessions is safe for now, but General Kelly irritates me – it might be time for him to go. I'm not crazy about Mattis either, but the Pentagon would erupt if I fired him. Hopefully Kudlow hasn't signed a long-term lease in Georgetown.

No need to discuss the women: Roy Cohn taught me when to erupt and when to shut up. Can't win with women scorned, gotta deny everything and change the subject. Who cares about Stormy Daniels and her sleazy lawyer? My base doesn't care, the evangelicals don't care. Okay, it gets lonely in my private bedroom, but I have Fox.

The North Korean talks are a win-win: Kim doesn't know what to make of Bolton, neither do the Chinese. Even if we don't get much out of the talks, Kim will like me and he will keep negotiating with the South. Maybe we'll just get a continued stalemate, but I'll get headlines for trying.

What a job: The markets love me, the Democrats are inept, I'll get the beginnings of a Wall, I get to play golf twice a week, I've got a decent chance of winning re-election – and there's chocolate cake every night! Those pain-in-the-butt doctors aren't going to change my habits, no fruit for me.

So what if I have a temper? People who displease me will leave, that goes for everyone – including Jared. I can be my own chief of staff, my own communications director. Everyone has a temper in this business – I hate that Jeff Bezos. But what could go wrong? Republicans love me, world leaders are intimidated by me, and the stock market can only go up, right?

March 28, 2018

Washington Wakes Up on Facebook and Privacy Issues

GRIPPED BY STORMY DANIELS AND OTHER IRRELEVANCIES, the Washington establishment has been caught off guard by the furor over privacy and the potential need to regulate firms like Facebook. Only a tiny percentage of Congress has any understanding of this huge issue – but lawmakers know it generates publicity, which is the mother's milk of politics, so Washington will have to get involved.

WE'RE NOT QUALIFIED TO COMMENT on the valuation of the big tech companies, or their growth models, but we do know that Washington suddenly has a Big Issue, with high-profile hearings beginning this spring. Facebook's Mark Zuckerberg will testify soon, undoubtedly expressing contrition for allowing his firm's data to be manipulated. He will pledge tougher internal controls, but that may not be enough; there's blood in the water.

COULD A PRO-FACEBOOK BACKLASH EMERGE? Amid the stock sell-offs and general hysteria over Zuckerberg's use of data, a backlash may emerge: do we really want to crack down on America's most successful industry – Facebook has over two billion users – with new policies that may allow foreign companies to fill the void if Facebook and others are crippled? Chinese firms like Baidu and Tencent are ready to pounce.

IT'S UNLIKELY THAT THIS FAMOUSLY ANTI-REGULATION administration will crack down too hard on Facebook, and it's even less likely that Congress can come up with legislation that can pass any time soon. Congress can't agree on anything, and with members enjoying huge campaign contributions from the industry, there's a high likelihood that any tough bill – regulating online political ads, for example – would stall.

THIS DOESN'T MEAN THE INDUSTRY IS OFF THE HOOK, HOWEVER: The public relations aspect is enormous, as users begin to wake up to the violation of their privacy; these users are actually products to be marketed, and they may conclude that this is creepy. Likewise, advertisers may become uneasy about their role, and suddenly the explosive growth of these tech companies could stall. And millennials, not big fans of Donald Trump, may conclude that Cambridge Analytics's use of Facebook data helped him win the 2016 election.

OUR BOTTOM LINE is that Congress and the regulators will huff and puff but won't do anything the industry can't live with; Facebook can hire hundreds more lawyers and thousands more compliance officers. The greater risk, in our opinion, is this: even with new internal controls on content and data usage, that may not be enough to reverse the loss of trust.

THE BLOOM IS OFF THE ROSE for Facebook and others, who may be viewed with suspicion for years to come. Is Zuckerberg clever enough to contain the damage and rebuild trust? We'll find out in the next few weeks; simple contrition is not enough – he needs to roll out new internal controls that have real teeth.

March 27, 2018

One Big Wild Card as Republicans Look for Election Issues

ALL EYES ON THE FALL: Congress is gone for two weeks, with growing signs that Republicans need some more issues to drive voter turnout in this fall's elections. Party leaders think the tax cuts eventually will prove to be a winner, but is there any other issue that could stir the GOP base? The answer is yes – a potential Supreme Court vacancy.

FIRST OF ALL, THERE'S A SENSE that Congress is too timid to act on pressing issues for the rest of this year, willing to abdicate on gun control, immigration reform, infrastructure, etc. That doesn't mean Washington won't be busy – foreign policy, Robert Mueller, interest rate hikes, trade disputes, a banking bill, etc. – will keep the politicians and the markets on their toes.

REPUBLICANS NEED TO RALLY THEIR BASE: They think the tax cuts will rapidly heat up the economy, but that hasn't happened yet and most voters believe only the wealthy will benefit. But House leaders are determined to pass still another package of tax cuts this summer – probably a talking point for the fall, but there's little chance the Senate will act on another tax bill.

WHEN IT COMES TO MOTIVATING THE GOP BASE, there's nothing like the Supreme Court, where there could be a vacancy this summer. A piece in confirms this morning what we've been hearing on Capitol Hill: GOP leaders are openly rooting for Anthony Kennedy's retirement. Kennedy, 81, is the court's great swing voter; he has been mulling retirement for the past year.

A DEBATE OVER KENNEDY'S REPLACEMENT could keep many moderate Republicans on the reservation. They are horrified by Trump, but they want a conservative judiciary, which Mitch McConnell is methodically putting in place in federal courts around the country. A pick similar to Neil Gorsuch would easily win confirmation, based on new Senate voting rules, and it could give President Trump a major pre-election victory.

IT'S ENTIRELY POSSIBLE that neither Kennedy's retirement nor tax cuts will be sufficient to prevent an election disaster for the Republicans. We think there's at least a 60% chance the Democrats will capture the House, where GOP resignations are a huge factor. And even the Senate could be in play.

THE KEY, OF COURSE, IS TRUMP: His job approval rating has inched higher, but in many highly contested districts he and GOP candidates will encounter fierce opposition, especially from women. He is virtually the only issue for Democrats, raising a risk that doomed Hillary Clinton's candidacy: what do the Democrats stand for, other than hating Trump?

IF THE GOP CAN'T COME UP WITH ENOUGH ISSUES to keep the House, we think Speaker Paul Ryan will step down late this year. There was more speculation yesterday that he wants to return to his family in Wisconsin, with Rep. Steve Scalise as his likely successor. Ryan's office issued the standard denial, but we can't see him sticking around to work with potential Speaker Nancy Pelosi – who undoubtedly will be a huge issue herself, as Republicans candidates look for a foil.

March 26, 2018

We're Not Buying the Hype – Not on China, Interest rates, Facebook, or Stormy Daniels

HYPE ALERT: We were adamant late last week that the U.S. and China are in a trade dispute – not a trade "war," as hyped by the media. Sure enough, this morning's Wall Street Journal describes behind-the-scenes talks between the two countries, neither of which wants a "war."

THE TEMPERATURE IS FALLING ON TRADE, as the U.S. exempts most allies from steel tariffs and the Trump Administration cools the rhetoric. Our guess is that top Wall Street leaders got to Trump, Steve Mnuchin and others late last week, telling administration officials to dial it back. And they have. Trump views the stock market as the ultimate arbiter of his policies, and last week's selloff sent him a message.

CHINA SEEMS EAGER to negotiate; their initial response to Trump was mild, threatening only $3 billion in new tariffs, a rounding error. We'll be paying particular attention to talks between Mnuchin and China's top economic policymaker, Liu He; the first breakthrough may come on tariffs imposed on U.S. autos.

ANOTHER OVER-HYPE is that interest rates are now a huge concern after the Fed's rate hike last week. Well, guess what – interest rates have fallen since the Fed moved, perhaps reflecting trade anxieties, tame inflation and a mediocre first quarter GDP. Yields could rise again if the stock market comes back quickly, but the markets are calling the tune on rates, not the Fed – and the markets aren't buying the hype that the Treasury 10-year bond yield is about to break through 3%.

ANOTHER HYPE INVOLVES THE TECH SELLOFF: Our take is that Mark Zuckerberg will continue to apologize profusely, and faces a public flogging before Congress, but this is not a reason to sell off the entire sector. An industry with such spectacular growth is bound to face growing pains and public relations headaches, but we do not see imminent regulations or legislation that will hit the industry, which will pledge to self-regulate.

AND THEN THERE'S STORMY DANIELS: The Kansas-Duke game was more exciting than 60 Minutes, which didn't shock anyone. Yes, we get it, Trump is promiscuous. But did Stormy Daniels really affect many voters? People who hate Trump still hated him after the interview; people who love Trump still loved him after the interview. The only shock, frankly, was that Trump allegedly had sex with a porn star without using protection. If true, that's shockingly reckless.

SO OUR THEME THIS MORNING is to beware of the hype. We all got sucked into a "will he/won't he" hype on Friday afternoon as the president threatened to veto the pork-filled budget. He didn't, of course, but everyone was glued to their TVs, seduced by the hype.

WE REITERATE: The big story for the markets is that we're simply in a trade dispute, not a trade "war," between the U.S. and China. Our odds are 75% that Beijing will grant concessions, with both sides claiming victory after several weeks of negotiations. This will be classic Trump – he has bombastically appealed to his base, and will get something from China after he backs down on radical proposals. The markets should ignore the hype.

March 23, 2018

Trade War? More Smoke Than Fire

THE MEDIA LOVES AN EYE-CATCHING HEADLINE, so hype about a "trade war" is good for ratings and subscriptions. But yesterday's action strikes us as relatively mild, setting the stage for talks that could save face for all involved – especially for Donald Trump, who wants splashy victories but often retreats as the fine print emerges.

THE BEST EXAMPLE OF THIS is the steel tariffs he announced last month, which suddenly have been dropped for key American allies – the EU, Canada, Mexico, South Korea, Brazil, and Australia all got waivers yesterday. And the new tariffs on China will now enter a "consultation period," which may produce similar waivers.

FOR A "TRADE WAR," THE CHINESE REACTION WAS AWFULLY MILD: Beijing announced tariffs of $1 billion on U.S. exports. One billion? That's a rounding error, with modestly higher tariffs on U.S. shipments of fruits, wine, soybeans and pork. The Chinese undoubtedly know there will be negotiations on intellectual property rights and their high existing tariffs on U.S. goods, so their initial reaction was muted.

WHAT THE SKITTISH MARKETS SEEMINGLY SAID YESTERDAY was that the "smash mouth" U.S. approach was a shock that could lead to an escalating trade dispute that brings with it the threat of inflation, reduced economic growth and general uncertainty. We get that, and as usual the Wall Street Journal editorial page gets it mostly right this morning.

BUT THIS IS NOT A TRADE WAR, at least not yet. It's a dispute that had been telegraphed for the past several weeks; this should not have come as a surprise. The obvious issue is whether this is sufficient to end the bull market for equities. It may be a negative for certain companies like Boeing that might suffer if a real trade war erupts, but is it a negative for equities overall?

THE FUNDAMENTALS HAVEN'T CHANGED: The U.S. economy is on sound footing, likely to expand in the second quarter. Inflation – and inflation expectations – are still well contained. The labor market is red hot, and increased hiring will boost real disposable income. Corporate earnings are solid. Interest rates, as we predicted earlier this week, aren't a threat.

YES, THE ATMOSPHERICS HAVE CHANGED: Most world leaders are horrified by Trump, but he sure knows how to get their attention. This opening salvo in a trade dispute will now lead to negotiations as these leaders nervously attempt to calm the waters. Again, we think yesterday could have been worse; this is far from a "war." And it's possible – or maybe even likely – that the markets over-reacted.

March 21, 2018

The Case for No Rate Hike Today

WILL ANYONE DISSENT? The Federal Reserve has prepared investors for a rate hike today, so it's highly unlikely that Jerome Powell will begin his tenure as chairman by surprising the markets. But a case can be made – and probably was made, internally – against tightening today.

LET'S LOOK AT THE FACTS: The first quarter curse has struck again, with GDP expected to come in well below expectations at the beginning of the year. Instead of GDP growth of 4% or even better, which some experts – including the Atlanta Fed – had been predicting, consensus now is closer to 2%. Something is wrong with the seasonal adjustments; the first quarter almost always disappoints.

INFLATION IS STILL DORMANT, and inflation expectations are well-contained. There are no signs of a breakout, and wages are still surprisingly moderate despite the tight labor market. We're getting closer to the Fed's inflation targets, but we're not there yet.

AND A TRADE WAR LOOMS, with President Trump expected to ramp up sanctions against China tomorrow – a move that undoubtedly will prompt retaliation from Beijing. The North American Free Trade Agreement is on thin ice, and sanctions loom as the U.S. hikes tariffs on steel and aluminum. This is a major reason for the stock market's recent volatility.

AND THE U.S. FACES a threat of increased political instability, as Robert Mueller widens his net and the president runs a risk of getting bogged down by the Russia probe and increasingly credible sexual allegations.

ALL OF THESE FACTORS have kept the Treasury 10-year bond yield remarkably steady, unable to penetrate 3% – indeed, unable to get much past 2.9% despite the strong labor market and the likelihood that growth will pick up in the second quarter. Our friend Stuart Hoffman at PNC and other economists expect GDP of close to 4% in the next quarter as the impact of huge fiscal stimulus kicks in.

BUT WHY THE RUSH ON RATES? We think there will be at least one dissent today; some Fed officials want to be sure the first quarter slump is just temporary, and they don't see an inflation threat that is imminent. There should be enough votes to hike rates – but enough doubt for Powell to indicate in his press conference that the Fed is in no rush to overdue the tightening.

THREE MOVES THIS YEAR are probable, but four seems unlikely unless inflation suddenly percolates. And let's not forget the bond market, the greatest dissenter of all, which isn't buying the overheating scenario and has kept rates low, with yields staying stubbornly steady despite today's hike.

March 20, 2018

What We're Hearing on Capitol Hill – Ten Quick Themes

OVERVIEW: Several unsettling issues dominate Congress now, and lawmakers in both parties are are ten quick themes:

1. Mueller probe: Everyone is on edge; there's a sense that this is about to explode into a Constitutional crisis. "I think Mueller has the goods on Trump's inner circle," one Hill staffer says. Virtually everyone we talk with expects Trump to fire Mueller.

2. Impeachment: Plenty of Hill staffers are expecting impeachment after the fall election, but no one thinks conviction is likely – we reiterate, there aren't 67 votes in the Senate to oust Trump unless Mitch McConnell and Paul Ryan ditch him, which is unlikely. "Trump can ride this out – if he doesn't over-react," a GOP aide says.

3. Economy: A slight mood shift – euphoria after tax cuts has faded amid a choppy stock market. New Fed Chairman Jay Powell gets high grades, but the likelihood of rate hikes and a trade war have made Republicans uneasy. They were stunned that tax cuts were a negative in the recent Pennsylvania special election.

4. More tax cuts: Despite Pennsylvania, this idea has gained momentum – an emerging GOP bill would make recent cuts permanent, reduce the capital gains rate, further lower corporate taxes, etc. Chances for this measure are below 50% this year, but it gives Republicans something to talk about.

5. Trade war: Two totally separate issues – there’s widespread support in both parties for cracking down on China (harsh sanctions are coming from Trump, apparently on Friday), but there's little support for tariffs on steel and aluminum, which will invite retaliation. No way Congress can stop Trump on trade.

6. Facebook: Hearings are likely as Congress looks at invasion of privacy by tech giants. Facebook needs to pledge internal reforms, one staffer told us, but the firm faces a public relations debacle, not serious new legislation or regulations. Bigger threat to the industry will come from Europe.

7. Budget bill: Lawmakers want to put everything but the kitchen sink in this week's pending bill – ranging from immigration to tax law changes on baseball trades – but a relatively clean bill should emerge within a few days. Big picture budget issue: not enough support for serious deficit reduction; red ink is about to soar.

8. Pending legislation: High hopes for banking bill have faded a bit; moderate Senate bill that won votes from 17 Democrats will be toughened up by the House – jeopardizing the entire measure. Infrastructure legislation still sounds good in principle, but the details are daunting. Gun and immigration bills are stalled, as usual.

9. Fall election: Most people on Capitol Hill now expect the GOP to lose the House. "More and more districts are becoming competitive, and that's bad news for the Republicans," one staffer says. Democrats have an uphill fight to recapture the Senate – but it's not out of the question.

10. Ryan and Pelosi: House Speaker Paul Ryan is assumed to be leaving late this year, regardless of the election outcome; he's tired, misses his family, and has no chance of getting entitlement reform. Nancy Pelosi, about to turn 78, is an albatross for many Democrats but won't go easily.

BOTTOM LINE: As usual, there's a disconnect between Congress and the country. On Capitol Hill the mood is dour and apprehensive over Mueller, trade wars, etc. The general public sees a hot labor market and a booming economy in 80% of the country – and people don't wake up every morning thinking about the Russia probe.

THERE'S ONE THEME that unites both Congress and the public – a sense that Trump is spinning out of control, acting like he's guilty of something, as Rep. Trey Gowdy said this weekend. And there's virtually no one – not on Capitol Hill or in Middle America – who agrees with Trump that chaos is good.

March 19, 2018

Another Wild Week Coming in Washington

DONALD TRUMP'S TWO BIGGEST HEADACHES in 2018 will intensify this week – a Federal Reserve Chairman determined to cool economic exuberance and a special counsel who is closing in on fresh indictments. This comes as still another budget crisis could erupt by the end of the week.

THE ONLY CERTAINTY is a rate hike from Jerome Powell, whose press conference on Wednesday will be carefully scrutinized for signs on the pace of future increases. Based on recent data showing tame inflation and mediocre first quarter economic growth, we'd bet that he and the the FOMC statement will point to a slow pace of rate hikes, but the red-hot labor market undoubtedly is a long-term concern.

THEN THERE'S THE MUELLER INVESTIGATION, which appears to be on the verge of a major inflection point. We believe the president and his aides sense a widening probe, focused partly on his business dealings, which will produce indictments within the next few weeks. That likelihood prompted seething tweets from the president this weekend – undoubtedly designed to stir up his base, which will be a crucial source of support if he fires Mueller.

THE WILD CARD THIS WEEK is the possibility of a shutdown on Saturday if Congress runs out of time to finish its massive bill to fund the government thru Oct. 1. Overall funding levels were set in January's pig-out spending bill, but the details aren't set yet – and plenty of non-germane amendments may be added to this must-pass measure.

OUR GUESS is that neither party wants blame for a shutdown, so a last-minute continuation – kicking the can, in the finest Washington tradition – will give then another week or two to finish the job. But this is an increasingly difficult call, because just one Senator (Rand Paul, in all likelihood) could upset a deal at the last minute.

SO WHAT SHOULD THE MARKETS FOCUS ON? That's easy – Powell and the Fed. The goldilocks economy, with surprisingly low interest rates, continues to dwarf all other issues for investors. The intensifying Trumpian melodrama – the tweets, the firings, the palace intrigue – is just irritating background noise, at least for now.

March 16, 2018

Fiduciary Rule; Crossing Trump's Red Line; Purge Watch Today

IN A MAJOR REGULATORY DEVELOPMENT, the Fifth Circuit court voted 2-to-1 late yesterday to strike down the controversial Fiduciary Rule, which now appears to be on life support. The anti-regulation Trump administration has been reviewing the Obama-era changes to financial advice and retirement plans; there's already a delay in full implementation until June of 2019.

NOW IT APPEARS THAT THE RULE will be in limbo for the foreseeable future. It could eventually wind up in the Supreme Court, or the Fifth Circuit could instruct all of its judges to review it. Still another option would have the Labor Department accept the ruling, which then would begin a lengthy process of re-writing (and softening) it, perhaps with input from the SEC. Our guess is that the original proposal will never be fully implemented; its legacy may be that while it burdened small firms, it has prompted tougher self-regulation by the industry as a whole.

DONALD TRUMP'S RED LINE: We have always believed that two actions by special counsel Robert Mueller could get him fired. One would be indicting someone in Donald Trump's family – either his son or his son-in-law. The other would be delving deeply into Trump's opaque business dealings with Russia. The latter apparently has occurred, which puts Mueller on thin ice.

TRUMP COULD FIRE MUELLER, asserting that the investigation has far exceeded its original mandate. Then all eyes would be on Paul Ryan and Mitch McConnell, who have been loyal to Trump – reflecting the overwhelming support the president enjoys in the GOP base. Our guess is that Ryan and McConnell would protest if Mueller is sacked, but they would not support impeachment proceedings, and we reiterate that getting 67 votes to convict in the Senate is a very, very high bar to clear.

IS IT MOVING DAY? Late Friday afternoon is the preferred time to avoid the glare of bad publicity, so we're betting that someone gets thrown under the proverbial bus in about ten hours as many of us watch basketball. Who goes? National Security adviser H.R. McMaster is the most likely candidate, but there's a very long list that includes Veterans Affairs chief David Shulkin and HUD Secretary Ben Carson.

ONLY TWO DEPARTURES WOULD REALLY SHAKE THIS TOWN: Jeff Sessions, whose sacking would be a sign that Trump wants someone at the Justice Department who can stand up to Mueller; and John Kelly, the embattled White House Chief of Staff. Kelly often reins in Trump; his departure would signal that there's virtually no one left who could stop Trump from firing Mueller. It all comes back to the Russia probe, which appears to be widening.

March 15, 2018

An Economic Soft Patch; NAFTA Prospects Continue to Slip; Another Tax Cut?

THE FIRST QUARTER AIR POCKET: Analysts (including us) who had predicted surging first quarter economic growth have egg on our faces. Instead of growth of over 3% this quarter, most forecasters have scaled back their estimates to about 2%. The first quarter is historically fluky, tax refunds are slow, retail sales have been soft, and weather has been a factor. And we still think growth will be significantly stronger in the second quarter.

BUT THIS HAS TO CONCERN OFFICIALS AT THE FED: They're locked into a rate hike next week, but recent tame inflation figures combined with the first quarter air pocket may add a note of caution to Chairman Jerome Powell's press conference. The Fed may have the luxury of moving slowly this year; another couple of hikes are likely in 2018 but fears of dramatically higher rates have subsided, at least for now.

NAFTA PROSPECTS CONTINUE TO SLIP: Anyone hoping for a resolution of NAFTA negotiations this spring had to be concerned after President Trump's rant yesterday about U.S. trading partners, including Canada and Mexico. After boasting that he made up trade data in his talks with Canadian Prime Minister Justin Trudeau, Trump had this to say about NAFTA: "The best deal is to terminate it and make a new deal."

GOOD GRIEF, ANOTHER BUDGET DEADLINE: Still another budget snag to worry about – there's a March 23 deadline to complete all the legislative language required to ratify the budget deal that passed Congress in January. The problem is that lawmakers and their staffs aren't finished yet, and more importantly this must-pass bill is a magnet for other provisions. We think this will get done by March 23, but that no longer is certain.

SENATE PASSES BANK BILL: Signs of bipartisanship in Congress, for a change: the Senate easily passed a bank reform bill yesterday, with 17 Democrats voting for a measure that would lighten up the regulatory burdens on small and medium sized banks. The bill now goes to the House, which wants to beef it up, perhaps killing the Consumer Financial Protection Bureau. That would be too much for the Senate, so there's still a risk that the bill could stall, but we're betting on enactment by summer.

MORE TAX CUTS? Republicans are still trying to spin their way out of their apparent loss in Pennsylvania, so they're eyeing an old reliable issue – more tax cuts !! House Ways and Means Committee Chairman Kevin Brady has told colleagues he may mark up a bill that would make the recent cuts permanent; many provisions expire in 2025. He also is considering even lower corporate taxes and incentives to boost savings.

NOT GONNA HAPPEN: Perhaps some voters will like to hear about more tax cuts, but that dog didn't hunt in Pennsylvania, and any effort to lower taxes again would run into strong opposition in the Senate; the so-called "reconciliation" process can't be used again, so passage is highly unlikely.

THE TRUMP-KUDLOW MARRIAGE: Did you ever go to a wedding where everyone whispered at the reception that the match would never last? That's how we feel about the Donald Trump-Larry Kudlow matrimony. Trump just fired his Secretary of State because they couldn't agree on issues, and Trump concedes that he and Kudlow already disagree on trade tariffs. Kudlow, despite his TV bombast, is a nice guy who now must swim in shark-filled waters; Trump is impossible to please and we fear our old pal Larry will be gone by Thanksgiving.

March 14, 2018

China Trade War Imminent; the Biggest Surprise in Pennsylvania

"MAKE IT BIGGER," President Trump has thundered to aides who are proposing major new sanctions against China. He wants dramatic new tariffs and even visa restrictions, which may be unveiled as early as next week. The likelihood of imminent new sanctions – first reported yesterday in Politico – reinforces our view that a serious trade war with China is one of the very few negatives for a stock market that has soared because of fabulous fundamentals.

TRUMP HAS MORE SUPPORT FOR CHINA SANCTIONS than he does for steel and aluminum tariffs, which have dismayed U.S. businesses and many Republicans. But the Chinese have so brazenly stolen U.S. intellectual property – perhaps by as much as $30 billion a year – that most politicians in both parties favor a crackdown. And that support extends to the EU and many global trading partners, who are exasperated by China's behavior.

SO TRUMP IS PREPARED TO IMPOSE TARIFFS on more than 100 products, according to Politico. They would include electronics, communications, furniture, toys, etc. And the new sanctions may extend to Chinese investments in the U.S. and might even include curbs on the number of Chinese students attending American universities, especially those students who focus on technology. This looming trade war is a very big deal; there's virtually no chance Trump will relent – and Congress will not thwart him.

WHAT TOOK SO LONG? The markets yawned – there was nothing remarkable about Rex Tillerson's departure, other than the crude way he was thrown under the bus. He has virtually no allies in Washington and was often dismissive of Trump; you simply can't call the boss a "moron" and expect to survive.<

MIKE POMPEO WILL HAVE A DIFFICULT CONFIRMATION HEARING but we expect him to prevail by the August recess. A hawk and a former Tea Party activist, Pompeo will have a full plate. He's an adamant critic of the Iran nuclear deal, which could be on thin ice this spring. Pompeo supports tariffs, unlike Tillerson.

AND LIKE EVERY INTELLIGENCE EXPERT in both parties, Pompeo believes Russia tried to influence the 2016 election, which eventually could become a source of friction with Trump. H.R. McMaster, who is outspoken about Russian interference, will be gone soon as the purge of moderates continues.

THE BIG STORY IN PENNSYLVANIA wasn't that the Republicans lost a 20% margin in a year and a half; the big story was that tax cuts did not help the party – and in all likelihood hurt the GOP nominee. Republican strategists had been planning to run on the huge tax cuts in the fall elections, but after highlighting the issue in Pennsylvania this winter, the party virtually abandoned all references to tax cuts in the final week of the campaign.

POLLS SHOWED LITTLE ENTHUSIASM for the tax cuts, with close to half of all voters agreeing that they only benefit the super-rich. We think a strong economy this fall is still the GOP's best hope for keeping the House, but if they can't win in a heavily Republican district in Pennsylvania, they're in big trouble this fall. Democrats have the most motivated voters, and the party is increasingly likely to recapture the House; the Senate is a higher bar to clear.

March 13, 2018

Some Quick Hits This Morning

WE TRY TO MAKE THIS a one-minute read every morning, and that's often a challenge. So here goes with some quick hits –

A MAJOR DETERIORATION IN RELATIONS between the U.S. and China is coming. Emperor for life Xi Jinping was barely consulted on the Korean summit; denial of the Qualcomm deal was a slap at China; and major sanctions are coming to punish China for its blatant thievery of U.S. intellectual property. A deep chill looms.

DEMOCRAT CONOR LAMB is the favorite to win in Pennsylvania tonight, and like all special House elections this will be over-analyzed. But make no mistake – the Democrats have the most motivated voters.

STORMY DANIELS IS GOOD AT TWO THINGS: The other one is her Trumpian skill at generating publicity; she will find a way to stay in the news. Rumor about town is that she has emails from Trump, maybe pictures.

THE NRA, UNDEFEATED CHAMPIONS: No one can touch the gun lobby, not even Trump, who essentially threw in the towel yesterday. It's up to the states to pass anything meaningful.

HERE WE GO ON THE DEFICIT: Data released yesterday showed revenues fell by 9% this February compared to last year, as new withholding tables took effect. Red ink in February alone was $215 billion, on its way to nearly $1 trillion this year and well above that in fiscal 2019.

DEMOCRATS CAVE ON DREAMERS: Lawmakers are working on final details for the January spending spree; the deadline is March 23. Democrats have some leverage on this and on a technical corrections tax bill – but they have given up on acting on DACA. Maybe Trump is right – the Democrats don't really want a Dreamers bill, it's a potent campaign issue with Hispanics.

THE HOUSE INTELLIGENCE COMMITTEE'S finding of no collusion, strictly partisan, pleased the President – but the real action will come from the Senate committee, strictly bipartisan. And then there's Robert Mueller. A pyrrhic victory for Trump yesterday, despite his euphoria.

A CLEAR AND PRESENT DANGER: Intelligence experts say there are more Russian agents in the UK today than at the height of the cold war – and many of them have access to Novichok, the deadly nerve agent, which is not good for the London restaurant business. Criticize the thug Putin? The silence is deafening from the White House.

HOW LONG WILL LARRY KUDLOW LAST? Forget the March Madness basketball brackets – let's start a pool on how long our old pal Larry Kudlow will last in the Trump administration. He's the favorite to replace Gary Cohn, but Larry is very outspoken and loves the cameras; no room for two of those types in this White House.

NANCY PELOSI, LIGHTNING ROD: A major issue in the Pennsylvania House race – and many other campaigns – is that the uber-liberal from Nob Hill is a clear albatross for the Democrats. Grumbling among the rank-and-file is growing about Pelosi – and about Chuck Schumer, who has not met expectations.

March 12, 2018

Only One Thing Matters for the Markets

FORGET THE BACKGROUND NOISE: Stormy Daniels may be on 60 Minutes next weekend; U.S. trading partners are furious over tariffs; a lackluster GOP House candidate could lose in Pennsylvania tomorrow; Congress is unable to get anything done on guns or immigration. But for investors, only one thing matters.

THE ECONOMY IS ON FIRE, we’re off to the races, headed for growth of 3% or much better this year, propelled by a roaring labor market that undoubtedly will boost real disposable income, which in turn will fuel consumer spending – which is already likely to surge because of tax cuts. And, incredibly, there's no major sign of inflation yet.

LAST FRIDAY'S EXTRAORDINARY JOBS REPORT put to rest any anxiety over a recession. Sometimes we meet with retail investors who worry about the next recession, but as regular readers may recall, we have been predicting since January that the only economic risk is over-heating.

THE FEDERAL RESERVE will have no choice but to hike rates at the March 20-21 FOMC meeting, but how can Chairman Jay Powell, in his press conference, warn about inflation when there isn't much? Is the economy at full employment? It's close but may not get there until summer or fall. The full employment rate, it appears, may be 4% or lower.

WHERE ARE THE EXTRA WORKERS to accommodate a 3%-plus economy? It's becoming apparent that the participation rate is not just about demographics or a lack of jobs – there's a genuine crisis in ailing pockets of America because so few potential workers can pass a drug test. And Donald Trump's drumbeat against immigrants – legal and illegal – makes the labor market even tighter.

AT SOME POINT, MAYBE BY FALL, the economy will get so hot that inflation fears will drive interest rates higher and produce anxiety in the stock market. But we're not there yet – demand for Treasuries is remarkable, both domestic and from abroad, despite the certainty of high deficits and trade tensions.

TO BE SURE, THERE ARE THINGS TO WORRY ABOUT: The Korean talks could go badly, Robert Mueller is close to major new indictments, a trade war is possible, etc. But we learned an important lesson years ago from the great economist Lyle Gramley, who believed that recoveries are self-reinforcing. This surging recovery is a classic example, fueled by more fiscal stimulus than necessary. We're off to the races...

March 9, 2018

Some Quick Points on the Trump-Kim Summit

NO ONE CAN STUN LIKE DONALD TRUMP: The Washington establishment was shocked, again, by the President's unpredictability, agreeing to a summit this spring with North Korean despot Kim Jong Un. Most foreign policy experts, caught off guard, stressed the risks – but we think there are several reasons why this makes sense for Trump:

FIRST, IT DIVERTS ATTENTION away from his extremely controversial tariffs, which have dismayed congressional Republicans, many U.S. businesses and – most importantly – U.S. allies like Japan, Germany and Brazil, which apparently won't even get a temporary reprieve, like Canada and Mexico. Once again, the Wall Street Journal's editorial page this morning says it all: these reckless tariffs jeopardize the plusses from tax cuts and regulatory reform.

SECOND, IT DIVERTS ATTENTION from an increasingly embarrassing story about Stormy Daniels. We had vowed not to mention her, but this is a scandal that won't die. Trump's promiscuity is his own business, but it's such rich fodder for late night comedians that he needs a diversion. She's now back on the sidelines; once again Trump has adroitly changed the subject.

THIRD, IT MAY COMPLICATE ROBERT MUELLER'S STRATEGY: The Special Counsel undoubtedly is preparing new indictments, but would he hold back – unwilling to cripple the President ahead of such an important summit? Trump may have bought some time.

FOURTH, IT'S A SIGNAL TO CHINA that Trump doesn't need Beijing to lean on North Korea; his willingness to negotiate directly with Kim leaves the Chinese on the sidelines. Perhaps this is a signal that tough new trade sanctions against China are imminent; a looming trade war between the U.S. and China could make the steel tariffs look tame.

FIFTH, IT'S A WIN-WIN: If the meeting breaks up without any progress, Trump can return to his hard-line stance. If there are concessions from North Korea, and an easing of U.S. sanctions, Trump can claim a breakthrough and ask why he can't win the Nobel Peace Prize, like Barack Obama. At the least, chances of war have diminished.

SIXTH, TRUMP REALLY, REALLY CARES about the stock market, which he considers the ultimate arbiter of his administration. This lessening of tensions with North Korea is a very positive story for Wall Street, potentially removing the biggest wild card from an otherwise great climate of solid earnings, surging GDP, the labor market boom, etc.

SEVENTH, TRUMP’S EXCELLENT PHOTO OP at the White House yesterday with steelworkers probably improved the GOP’s prospects in next Tuesday’s special House election outside of Pittsburgh.

IT'S ALL ABOUT THE SPIN for Trump, he's not a detail guy and his administration is woefully understaffed on Korea, with very few experts on the peninsula. But Trump knows he can spin the summit to his advantage – while dominating the headlines and diverting attention away from tariffs and Mueller and Stormy.

ADULTS IN THE ROOM: Yes, there are risks inherent in this summit, but we've been told by a very reliable source who knows all the players that there's a rock-solid agreement between Rex Tillerson, Jim Mattis and White House Chief of Staff John Kelly to thwart any impulsive Trump move on geopolitics, whether it involves military action or an agreement that doesn't make sense. They're prepared to rein in Trump, with an implicit threat that they will resign if he goes too far.

March 8, 2018

A Fake-out on Trade -- the Narrative Changes Hourly

THERE'S A TEMPTATION TO WRITE ABOUT STORMY DANIELS this morning – it's less complicated than steel tariffs and one heckuva lot more fun. But since she has absolutely no impact on the markets, we'll stick with the rapidly changing outlook on trade, which seems to shift hourly.

THE BIG DEVELOPMENT YESTERDAY was the furious pushback from Republicans in Congress – from Paul Ryan, Kevin Brady, Mitch McConnell, the Freedom Caucus, etc. – that apparently persuaded the White House to exempt Canada and Mexico from tariffs, at least for a while.

LAST WE CHECKED, Trump staffers were preparing for an all-nighter, attempting to get new regulations finished in time for an announcement late this afternoon. They probably will run out of time today; trade regs are incredibly complex.

FOR THE FINANCIAL MARKETS, seeking a positive spin on trade, hints of flexibility yesterday from the White House were viewed as a sign that a trade war might be avoided. That, unfortunately, may be a fake-out. We think the stock market can go higher because the economic fundamentals are still good, but with free traders in full retreat in the Trump Administration, it's wishful thinking to assume a trade war will be avoided, for three reasons:

1. An attempt to force concessions from Canada and Mexico on steel and aluminum by tying this to a final NAFTA deal is ridiculous; the two issues are apples and oranges. Trump, flying solo, without even Peter Navarro making decisions, apparently thinks he can force a favorable NAFTA deal, even though both sides are far apart with no further negotiations scheduled for the next month. A delay on sanctions against both of those countries is a market plus – but there's simply a delay, not a resolution.

2. The real target in coming weeks is China, which is about to get hit – justifiably – with upcoming U.S. sanctions because of its piracy of U.S. intellectual property. This has nothing to do with steel and aluminum. China will retaliate this spring, and a nasty escalation of trade tensions between the two countries seems inevitable.

3. The European Union's bureaucrats, who clearly loathe Trump, are preparing a long list of retaliatory measures that would target iconic U.S. products like bourbon and blue jeans. Trump will retaliate, and the ultimate big loser could be U.S. agriculture. In the imminent White House announcement, likely to be delayed today, there may be no "carve out" for Europe on steel or aluminum.

A CYNIC MIGHT CONCLUDE that Trump is dialing up the volume on trade because Republicans suddenly look vulnerable in Rust Belt states that propelled him to the presidency. A lackluster GOP candidate has gone from the clear favorite to a dead heat in the March 13 House race in suburban Pittsburgh – a district Trump won by 19 points in 2016. Trump's support from blue-collar voters has slipped, so he needs to throw them some red meat.

A FINAL POINT ON TRADE: This stuff is nearly as complicated as the IRS code, a maze of mind-numbing provisions and tariffs in every major country. Trump is not a detail guy, to put it charitably. He wants results, and the markets want a positive spin – we get that – but we worry that the world is about to slide down the rabbit hole on trade. Tariffs and sanctions and retaliation are coming from all sides in the coming months.

A POSITIVE SPIN: Looking for something positive this morning, we think the threat of a trade war – and the uncertainty that would bring – may have an impact on new Fed Chairman Jerome Powell. Would he raise rates aggressively amid the uncertainty of sanctions and tariffs? This is a wild card for the economy, and could keep the Treasury 10-year bond yield from blowing past 3% anytime soon.

March 7, 2018

What's Next to Go – Maybe NAFTA?

THE MARKETS NEED TO HAVE CONFIDENCE: Markets soared in 2017 in large part because investors had great confidence in Donald Trump's policies, if not him personally. But the past several weeks of White House chaos – with the promise of more to come – is eroding that confidence.

THE DEPARTURE OF GARY COHN is a very big deal for two reasons. First, it signals that protectionist ideologues have prevailed over market-friendly pragmatists. Second, the vast majority of Republicans are in open rebellion against Trump on tariffs – this is a Chamber of Commerce party, at least on Capitol Hill, that loves free trade.

WHAT'S NEXT? The departure of Cohn virtually guarantees that tough new steel and aluminium tariffs will take effect later this spring, and also means the chance of NAFTA failing has increased significantly. More trade complaints are forthcoming; China – with its history of brazenly stealing U.S. intellectual property rights – faces tough new sanctions within weeks that almost certainly will provoke retaliation.

WHO'S NEXT TO GO? The President apparently loves chaos, and there will be plenty in the coming weeks. There's an 80% chance national security adviser H.R. McMaster will be gone soon and a 60% chance Chief of Staff John Kelly will leave by May. Jared Kushner and Ivanka Trump have become liabilities and will be gone soon – not even family members are immune from a toss under the bus.

WHO WANTS THIS JOB? Our old pal Larry Kudlow has virtually no chance of replacing Cohn, press reports to the contrary. Larry is a very outspoken proponent of free trade – the mouth that roars – and he might not last a month with Trump. A rare White House survivor is OMB Director Mick Mulvaney, who might replace Cohn. If trade hawk Peter Navarro gets the job, virtually everyone on the National Economic Council staff would resign.

IT'S IMPORTANT TO REMEMBER that Donald Trump's campaign promises have to be taken literally – he's determined to build a wall with Mexico, establish an American embassy in Jerusalem, and wipe out the U.S. trade imbalance. These and many other goals are non-negotiable, and who can blame him: he got tax cuts, regulatory reform, the demise of ISIS, etc. So why would Trump relent on his core goals?

THE MARKETS PROBABLY CAN LIVE WITH TRADE TENSIONS: Earnings and interest rates are more important, and they still look good for the markets. And Cohn, a Democrat from Goldman Sachs, was always a square peg in a round hole. His departure will be big news for a few days, then the solid market fundamentals will re-assert themselves. If there’s a solid jobs report on Friday, the Cohn story will fade.

BUT THE MARKETS HATE UNCERTAINTY, and the uncertainty generated by looming tariffs and retaliation won't go away. U.S. firms ranging from Harley Davidson to Jim Beam – which enjoyed the pro-business climate generated by the president in 2017 – now have to worry about declining overseas sales in 2018 as Donald Trump gets his trade war.

March 6, 2018

A Major Defeat for Elizabeth Warren; Is Trump Wavering on Tariffs?

WHEN WE LAST SAW ELIZABETH WARREN, she was berating Fed Chairman Jerome Powell in her typically ferocious style, but the simple fact is that she doesn't have enough support for her bank-bashing from Democrats, many of whom fear she will be a serious presidential candidate in 2020. And now in a major setback for Warren, she is about to lose a fight in the Senate on relaxing Dodd-Frank rules on mid-sized banks.

EVEN BARNEY FRANK CONCEDES that his bill was too harsh on smaller banks, which are struggling with regulatory burdens while the big banks can deploy an army of attorneys to ease compliance. This argument has persuaded over a dozen Democrats to support the bill, which may win 65 to 70 votes in the Senate and has equally strong support in the House.

KEY PROVISIONS INCLUDE exemptions from tougher oversight for regional banks with $50 billion to $250 billion in assets, relaxed mortgage regulations for these banks, and a directive to the Federal Reserve to ease its capital and liquidity requirements for these banks. Smaller community banks, with assets of less than $10 billion, would get the most regulatory reform, including relaxed underwriting and mortgage standards.

WARREN WILL MAKE THIS BILL A CENTERPIECE of her likely presidential campaign, claiming that the measure is a giveaway to reckless banks. But it isn't; it should free up mid-sized and small banks from a crushing compliance and paperwork burden, while allowing them to lend more easily. This bill is looking like a rare bipartisan accomplishment in this fractured Congress.

IS TRUMP WAVERING ON TARIFFS? Insiders are convinced the president will delay or water down the imposition of trade sanctions; they cite overwhelming opposition to steel and aluminum tariffs from Republicans, business leaders and economists. But we're not convinced that Trump will change his mind.

EXECUTIVES FROM INDUSTRIES THAT WOULD BE HURT by the tariffs will meet with Trump at the White House on Thursday, and he always seeks to please his guests at these types of meetings. The president probably will hint that he could consider exemptions, and that may be a reason why the stock market shrugged yesterday.

BUT MAKE NO MISTAKE: Trump is a populist and a protectionist, and he will not relent on his conviction that the U.S. is getting fleeced on trade; it's easy to demagogue on this very complicated issue – and besides, it plays well as a March 13 special House election approaches in a blue collar district outside of Pittsburgh.

SO WE COME DOWN ON THE SIDE that believes there will be some new sanctions; Trump is not bluffing. He knows that there aren't enough votes in Congress to stop him, since lots of Democrats like tariffs. So the real issue isn't whether Trump will cool his rhetoric and relent on tariffs; the issue is whether they could be watered down or delayed, which we don't rule out.

March 5, 2018

The Real Risk With Tariffs; Bank Reform Bill is Moving

THE REAL RISK WITH TARIFFS: It's not that a can of Campbell's soup will cost a fraction of a penny more; we agree with Wilbur Ross that the inflationary impact will be negligible. The real risk is that Europe may retaliate against U.S. blue jeans, Bourbon and other iconic American products, which will prompt a counter-retaliation by the U.S. – perhaps targeting cars, cheese and wine? – and we'll be off to the races, with the easily-provoked Donald Trump keeping everyone guessing on the next products to get hit.

IRONICALLY, THE REAL VILLAINS ON TRADE – the Chinese, who steal U.S. intellectual property with impunity – will pay a relatively small price, while U.S. allies in Canada, Europe and Brazil will get clobbered. For the fragile EU, now grappling with potential instability in Italy, a trade war would be most unwelcome.

NAFTA ON THIN ICE: Trade anxiety is rising in Canada and Mexico, which have to grapple with the potential that NAFTA could collapse. The latest round of talks end today in Mexico City amid reports that – ironically – real progress has been made on chemicals, communications and anti-corruption provisions. The next round of talks resume in Washington this April; by then there could be retaliation from Canada on steel tariffs.

COULD TRUMP BACK DOWN? It's not in his nature, and hard-line trade ideologue Peter Navarro has indicated there will be no exceptions when the plan is officially unveiled later this week. Trade wars can be a good thing, Trump tweeted this weekend, even though there is no evidence to support that assertion (except from the unions and leftist Democrats).

BUT A WHO'S WHO OF REPUBLICAN economic stars have blasted the plan – Art Laffer, Stephen Moore, Larry Kudlow, etc. – who think this is a dumb idea (as do we). The only factor that could prompt Trump to water down the plan would be a continued stock market selloff; he listens to the markets.

A SILVER LINING: As trade anxiety increases (and Robert Mueller prepares fresh subpoenas), the resulting uncertainty now gripping Washington may keep a lid on interest rates. The Treasury 10-year yield made a move toward 3% a few weeks ago but has backed off – and you have to wonder how enthusiastic Jerome Powell is to hike rates aggressively with the President tweeting that he welcomes a trade war.

ANOTHER BIT OF GOOD NEWS, at least for mid-sized banks, is that legislation may move quickly in the Senate – starting with a procedural vote tomorrow – to reduce aggressive Federal Reserve supervision. This obviously has outraged Elizabeth Warren, but over a dozen moderate Democrats support the measure, which stands a good chance of enactment later this spring.

ALSO – CAN'T OVERLOOK THE LIKELIHOOD of a solid jobs report this Friday, with markets expecting a 200,000 jump in nonfarm payrolls. Luckily for Trump, the economy still looks solid – but for the markets, a mood of uncertainty and volatility is what you get with trade wars.

March 2, 2018

Tariff Decision Stuns GOP, Adds New Element of Uncertainty

YESTERDAY'S STEEL TARIFF DECISION – the biggest policy blunder of Donald Trump'''s presidency, according to a Wall Street Journal editorial – was announced ad hoc by the president, after a formal declaration was scuttled because the White House could not produce documents to announce any decision. Warring aides are still locked in a bitter power struggle over tariffs.

MOST REPUBLICANS WERE STUNNED by Trump's tariff decision; this morning's Journal editorial said "this tax increase will punish American workers, invite retaliation that will harm U.S. exports, divide his political coalition at home, anger allies abroad, and undermine his tax and regulatory reforms." Labor unions and the Democrats' left wing cheered the move.

THE IMPLICATIONS WILL BE WIDESPREAD: U.S. agriculture almost certainly will be targeted for retaliation; soybeans are vulnerable. China in particular will retaliate, but other angry countries include Canada, Brazil, and EU members. Moderates in the Trump administration, including Gary Cohn and H.R. McMaster, are likely to leave this spring; they have lost their fight with protectionists.

SUDDENLY, IT APPEARS THAT A MOOD OF UNCERTAINTY will prevail in many U.S. industries – from autos to beermakers – which face higher input costs because of the tariffs. They will have to pass along these costs, raising the threat of inflation. This new mood of uncertainty is in contrast to the smooth sailing, amid regulatory reform, that prevailed for business in 2017.

CAN TRUMP WALK THIS BACK? The reaction in the stock market and among most Republicans was so scathing that it's possible Trump could soften the tariffs between now and the official unveiling next week. But don't bet on it; the president has sided with the protectionists. He made a campaign promise, and he is determined to stick with it – raising the threat that NAFTA could be next on the chopping block.

THIS DEVELOPMENT COMES ON THE HEELS of inexplicable comments from Trump on guns, also ad-libbed, that sounded like they were scripted by the Democrats. Trump seemingly is willing to abandon due process in exchange for gun control, which has outraged the NRA and conservatives. But he probably will walk back those comments, because everyone at the White House knows that nothing with any teeth could ever pass in the House.

WE TALKED WITH SOMEONE LAST NIGHT who has close ties to the White House. He's dismayed that "something is seriously wrong" as the Administration veers off the rails. Trump mocks his Attorney General as an addled "Mister Magoo." Chief of Staff John Kelly is on thin ice. Business deals by Jared and even Ivanka Trump have raised new questions about their security clearances. More departures of key officials appear to be imminent. The Mueller probe is intensifying.

MUCH HAS BEEN WRITTEN about Trump's "chaos management." It works in some environments, but not at the White House, where the President seems to be close to incoherence on policy issues. We always thought that the solid economy and stock market were Trump's greatest assets – but now those sectors look less certain because of the anxiety that is inevitable as a trade war looms.

March 1, 2018

Getting Tough on Trade Today

THIS CHAOTIC WEEK may get even wilder today, as President Trump amps up the volume on trade. Reports overnight indicate that he will announce major new tariffs on steel and aluminum, with China as the main – but not the only – target.

THIS WILL INCREASE FEARS of retaliation, and concerns may grow about a possible collapse of negotiations on the North American Free Trade Agreement (NAFTA), which is on thin ice already. Ironically, U.S. businesses are largely opposed to tough new trade policies.

THIS LATEST BOMBSHELL comes after a memorable day – the resignation of Hope Hicks, a renewed feud between Trump and Jeff Sessions, Trump's apparent break with the NRA on gun reform, speculation about why Jared Kushner can't get a top security clearance, and fresh reports that Robert Mueller is widening his probe, focusing on business dealings by Trump and his inner circle.

WE HAVE A VERY EARLY FLIGHT this morning, and will return to these issues tomorrow. In the meantime, the markets will have to focus on a new concern – trade protectionism. Trump made a campaign promise to get tough on tariffs, and it appears he will, starting today.

AS FOR FED CHAIRMAN Jerome Powell, our guess is that he may seek to dial back speculation that the Fed might raise rates four times this year. The truth is that Powell has no idea if such drastic action will be necessary, and he may seek to calm the markets on that point in his Senate testimony today.

DISCLAIMER: Horizon Investments, LLC is an SEC-registered investment adviser. The views expressed are those of the author, Greg Valliere, and do not necessarily reflect the views of Horizon Investments. They are subject to change, and no forecasts can be guaranteed. The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. Horizon Investments is not soliciting any action based on this document. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Investing involves risk, including the possible loss of principal and fluctuation of value. For more information about Horizon Investments, contact us by calling 866.371.2399 or visit our website at