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.
April 19, 2018
Doubling Down on Tax Cuts
THE DEFAULT MECHANISM: In need of an issue – fast – for the fall elections, Republicans are coalescing around their tried-and-true theme: tax cuts. Never mind that less than a third of the public likes the new cuts, the GOP will return to the issue this summer, for two reasons:
First, supply siders like Larry Kudlow think they won't be in this position for a long time to come: enough votes to pass fresh tax cuts in the House, with some Senate Democrats possibly going along. Kudlow wants to make the new tax bill's provisions permanent, with capital gains taxes reduced and indexed for inflation, and corporate tax rates cut even further.
Second, GOP strategists think this could help them in the fall election. If the economy is surging by Labor Day – entirely possible, in our opinion – Republicans can claim even more tax cuts could boost the economy to a 3 or 4 percent GDP path by next year. From a political standpoint, they think this could squeeze incumbent Democrats from conservative states, who might feel compelled to vote for more tax cuts or face a barrage of negative ads this fall because they voted against the bill.
BUT THE OBSTACLES ARE HUGE, STARTING WITH THE DEFICIT: Kudlow and other supply siders have mounted a furious rhetorical assault on the Congressional Budget Office’s forecasting track record; Kudlow claims still another tax cut would raise revenues. The CBO recently estimated a $1.9 trillion loss over ten years from this winter's bill, and initial data from fiscal 2018 show a sharp drop in receipts and the likelihood of $1 trillion annual deficits for the next decade.
NO ONE IS TALKING ABOUT HOW TO PAY FOR NEW TAX CUTS, other than to claim they will pay for themselves, and that's not good enough for a handful of Republican deficit hawks – led by Sen. Bob Corker – who will oppose any new tax cuts this year. Another negative, many economists say, is that even more fiscal stimulus could make the Federal Reserve increasingly hawkish later this year.
NEVERTHELESS, THE FULL HOUSE is expected to pass a package of new tax cuts by summer, sending the bill to a skeptical Senate. Mitch McConnell and other GOP leaders are now worried that some Democrats will say "sure, we'll vote for these tax cuts," giving them some inoculation in states where Republicans are strong.
THIS DOG WON'T HUNT: Our bottom line is that further tax cuts are unlikely this year, largely because the public is indifferent at best. Maybe the GOP will get some favorable sound bites in states where they're strong, but if the Republicans want a populist issue that resonates with conservatives, they might be advised to step up efforts to tie food stamps to work requirements – a potential deficit reducer that appeals to the GOP base.
EDITOR'S NOTE: We're off for a long spring weekend, not publishing tomorrow or Monday – back on Tuesday, April 24.
April 18, 2018
What We're Hearing on Capitol Hill
EVERY COUPLE OF MONTHS we run this feature, because it's useful for our readers to hear the buzz in Congress, where what's said in private usually differs from what's said in public. Here's our latest take:
BAD TIME TO BE A REPUBLICAN: To describe the GOP as apprehensive about the fall elections is an understatement. Everyone knows that Paul Ryan is leaving partly because the House will flip back to the Democrats, and now there's anxiety that the Senate could fall as well. Morale in the country has picked up, but morale among Republicans on the Hill is at rock-bottom, as veteran GOP members retire in droves.
REPUBLICANS ARE STUNNED that the public dislikes the tax cut. Most Americans have more money in their paychecks, but the GOP has done a poor job of messaging; voters understand that the economy has improved – but perhaps not as much as the markets understand. Many voters believe only the wealthy are beneficiaries.
CONGRESS HAS GIVEN UP ON FISCAL RESTRAINT: Mitch McConnell's decision yesterday to abandon efforts to re-do the budget angered the White House, but McConnell knows most of his members have no stomach for re-opening this fight. The looming $1 trillion deficits are a deep embarrassment for many Republicans, but they just couldn't resist the temptations.
WAITING FOR A SUPREME COURT FIGHT: Everyone's speculating about when Justice Anthony Kennedy will step down; a pre-election Supreme Court fight may be just what the doctor ordered for the GOP.
WHAT'S THE MESSAGE FOR THE FALL? The Democrats still don't have one, other than a scathing disgust with Trump, but it's possible they don't need a blockbuster agenda. The Republicans will run on the economy, but Trump’s tweets don’t help; they often worry the markets, which hate headline risk.
THE AGENDA: Gun control has no chance, immigration reform has stalled, a bank regulatory relief bill may pass, an infrastructure bill has a faint pulse rate and more tax cuts have no chance in the Senate. It's an election year, not much gets done – everyone is playing defense.
GETTING USED TO TRUMP: The tweets, the firings, the sex scandals, etc. have hit their expiration dates with many voters. Scandal fatigue has set in; politicians in both parties report that many of their constituents are ready move on. Talk of impeachment, even from Democrats, has subsided – for now – but everyone on Capitol Hill knows Robert Mueller will be a dominant player by summer.
TRADE ANXIETY: If there's an issue that worries Middle America, it's a trade war, which would be especially unpopular in the Farm Belt, where Trump's adoring base is grumbling. Despite trade anxiety, there's widespread support in Congress – in both parties – for sanctions; there's a strong sense that China doesn't play fair.
FOREIGN POLICY CONFUSION: Congressional hawks miss the righteousness of John McCain, who expresses the majority Republican view on Russia and the Middle East. His followers – led by Lindsey Graham and Nikki Haley -- are dismayed by this populist, isolationist president who is reactive, with no clear plan on geopolitics.
IN A CITY WHERE EVERYONE DISAGREES, there's widespread respect for the feisty, sharp-tongued Barbara Bush, a true original who passed away yesterday. She and her ailing husband came from a selfless generation that believed in service to the country, and they deserve our deep gratitude.
April 17, 2018
Biden Prepares to Run Again; Headline Risk for Drug Companies?
SAY IT AIN'T SO, JOE: With the Democrats in desperate need of fresh blood, it's looking likely that Joe Biden, who will turn 78 right after the 2020 election, is planning to run again – and is the early favorite to win the nomination, based on polls that show him slightly ahead of Bernie Sanders, who will turn 79 before the election.
UNCLE JOE HAS WIDESPREAD GOODWILL among blue-collar and older Democrats; he's the leader of the party's establishment wing but our sense is that this is an angry party that's veering to the left. There's little patience among progressives for a moderate like Biden, who seems vulnerable on issues he once supported such as a tough crime bill, the Iraq war, and bankruptcy reform – all of which are intensely unpopular among activists.
IF THE PARTY REALLY WANTS TO MOVE LEFT, Sanders is the logical choice; colleagues report he still believes he was robbed of the nomination in 2016 and probably will run again. But there's a cloud hanging over his wife, who is the subject of an investigation into her financial dealings with a failed Vermont college. Another obvious choice on the left would be Elizabeth Warren, who worries many party leaders who view her as too polarizing to win a general election.
THE OBVIOUS PATH FOR THE PARTY would be to find some fresh blood – Sens. Kamala Harris or Cory Booker or Kirsten Gillibrand or Amy Klobuchar, Los Angeles Mayor Eric Garcetti, Colorado Gov. John Hickenlooper, Ohio Rep. Tim Ryan...the list is endless...Moreover, Biden would be a risk: he may not wear well, he's gaffe-prone and windy, without any new ideas. And he has that creepy habit of massaging womens’ shoulders. But for now, Biden appears to be running – and he's the slight favorite to win the nomination.
HEADLINE RISK, AGAIN: Regular readers know that we think headline risk from Washington has become a permanent feature of the Beltway-Wall Street dynamic, and it's coming again next week as President Trump prepares to target drug industry pricing, one of his favorite populist issues.
TRUMP'S SPEECH, tentatively scheduled for next Thursday, April 26, reportedly will call on HHS to work on new plans to curb pricing, which undoubtedly will require more aggressive negotiations on pricing by Medicare and Medicaid, and may advocate wider use of "biosimilars." Perhaps Trump will sign a proclamation calling for tougher measures, but we don't expect Congress to act on anything this year. Trump will talk tough about pricing, but this headline risk may subside after a day.
GEOPOLITICAL CONFUSION: If there's a coherent U.S. policy on the Middle East, it hasn't emerged yet. Reports overnight indicate that President Trump may soon endorse pulling U.S. troops out of Syria in favor of an all-Arab force, and Trump has ordered a delay in new sanctions against Russia that were announced yesterday by United Nations Ambassador Nikki Haley. "We don't have a strategy," Sen. Lindsey Graham said last night.
April 16, 2018
A Whiff of Inflation?
INFLATION ALERT: Lost amid all the headlines – James Comey's book, Paul Ryan's retirement, the raid on Syria, etc. – are signs that inflation is creeping higher, with most indicators finally hitting the Federal Reserve's 2% target, making it easier for the central bank to justify rate hikes.
WE DON'T ANTICIPATE AN UPSIDE BREAKOUT of inflation or interest rates, not with signs of only moderate economic growth now and geopolitical concerns rising. But the U.S. unemployment rate is likely to fall below 4% soon, so wage pressure seems inevitable; compensation already is inching higher – and Fed officials are suddenly talking tougher.
FEDSPEAK HAS SHIFTED: Inflation's upward creep has had an impact on the central bank's members; all of them now believe there's no threat of deflation in the U.S. Normally dovish officials like Charles Evans, Lael Brainard and Neel Kashkari are noting that inflation has hit the Fed's target. "There probably are inflationary pressures that are building," Kashkari, the uber-dovish Minneapolis Fed president, tells the Wall Street Journal this morning.
A VETERAN FED MODERATE, Eric Rosengren, the Boston President, said over the weekend that “we have to be vigilant to make sure we’re not overstimulating the economy and generating either wage or price increases that are faster than what we’re going to want in the long run."
WAGE INCREASES have crept up to 2.7% year-over-year, not yet in the danger zone, but signs of unrest over persistently low wages have begun to erupt (are the Oklahoma teachers the proverbial canary in the coal mine?). Also not yet in the danger zone is the Fed's core personal consumption expenditure index, but most economists expect that to hit 2 percent later this spring. CPI and PPI already are around 2%, and inflation expectations – still fairly well contained – have inched higher.
ANOTHER RATE INCREASE is likely at the June 12-13 FOMC meeting, with at least one more hike in the second half, when fiscal stimulus – tax cuts and spending increases – could be having a major impact on the overall economy. We don't think Chairman Jerome Powell will overdo rate hikes, since the political and economic climate looks highly uncertain in 2019, but the risks – to both the economy and inflation – are now upside risks.
BOTTOM LINE: There's little reason to expect slightly higher inflation to have a major impact on interest rates or the stock market any time soon. But this is just one more source of volatility markets have to deal with – along with headline risk from Washington, soaring budget deficits, and geopolitical uncertainties. We're watching the wage data; it's the most important inflation factor to monitor in the next few months.
April 13, 2018
The Plot to Remove Donald Trump
SOME LAW ENFORCEMENT AND INTELLIGENCE OFFICIALS, alarmed at what they perceive as an un-hinged president, are intensifying their efforts to force Donald Trump from office. The sanctimonious James Comey is just one of many players in this deeply troubling drama.
THE ANTI-TRUMP CRUSADE shifted into another gear this week with the revelation that attorney Michael Cohen regularly taped conversations – which was known to the FBI and may have been a major reason for the raid on his offices. The tapes are an enormous threat to Trump.
AIDES WHO ARE IN REGULAR CONTACT with Trump are alarmed by his wild swings – in particular his tweets vowing that "nice and new" missiles will rain down on Syria, which blindsided his advisers. Trump changed positions twice yesterday on U.S. re-entry into the Trans Pacific Partnership, stunning aides like Larry Kudlow, who were not tipped off in advance.
WHITE HOUSE CHIEF OF STAFF JOHN KELLY, likely to depart soon, is said to fear a Constitutional crisis if Trump fires Rod Rosenstein, Jeff Sessions or Robert Mueller – an obsession with Trump, who wants the investigation to come to an end and will not listen to advisers on this subject.
MUELLER HAS GATHERED TONS OF DIRT, and indictments are imminent, but the special counsel is said to believe that a sitting president can't be indicted – only impeached. Since Trump may have enough votes in the Senate to avoid removal, Mueller and law enforcement officials need something more damning – and they may have struck gold with the Cohen tapes.
IF TRUMP IS ON THE TAPES, advising Cohen on how to handle the Stormy Daniels mess, this could directly implicate the president in a cover-up and obstruction of justice. How ironic – after Russia clearly attempted to influence the 2016 election, Trump could be brought down by a porn star. You can be sure if there are Trump-Cohen tapes, they will be leaked to the press.
TRUMP'S GREAT HOPE is that the economy stays strong and his support in the GOP base holds up; evangelicals in particular view him as a reliable supporter of their agenda. But it's possible that Trump's vulgarity – on tape – could be the last straw for his base.
WHAT'S CHANGED? It's a growing perception in Washington that Trump's temperament is increasingly erratic. This view is held – in private – by most Republicans; it's one reason why Paul Ryan is leaving. And it's worth noting that Trump's once-solid support in the Farm Belt and on Wall Street is wavering. Trump has given Wall Street what it wanted – huge tax cuts – and now he has become a headline risk for investors.
WATCHING FROM BACKSTAGE is Mike Pence, who has reached out to lobbyists in the past year, lining up potential campaign contributors should he be the 2020 nominee, not Trump. It's a stretch to call Pence disloyal, but he knows that Trump could implode, and Pence knows that he's acceptable to Congress and the markets.
WE'LL PROBABLY GET EMAILS from the right and left, accusing us of over-reacting to the Cohen tapes and Trump's highly erratic behavior in recent days. Fair enough. But what really worries us is that un-elected officials, largely unaccountable, have decided that Trump must go – and you have to wonder: do they have the right to make that call?
April 12, 2018
What Happens if Democrats Take the House?
WINDS OF CHANGE: It sure looks like the Democrats will recapture the House this fall; they need a net pickup of 23 seats, and something like 30 looks possible. If not quite a "wave" election, a policy change is coming in 2019-20 even if the Senate stays Republican by a seat or two, which is the safest (but not certain) bet.
REPUBLICANS THINK A SURGING ECONOMY this fall could allow them to keep their majorities in both houses, with the Senate staying Republican because their base wants confirmation of conservative judges. But the base to watch this fall is the Democrats' base – motivated and angry, with a strong turnout likely from women, young voters and minorities.
THUS THE MOST LIKELY OUTCOME is a Democratic House (70% chance) and a Republican Senate (60% chance). What would this mean for policy?
First and foremost, gridlock: The Trump agenda has stalled; he got his two great priorities – tax cuts and regulatory reform. Prospects are fair for an infrastructure bill, but everything else – from more tax cuts to spending restraint – looks unlikely. This is not a bad scenario for the markets, which generally like gridlock.
Second, impeachment and investigations: House Democrats would investigate every conceivable transgression by the Trump Administration, and the left would insist on an impeachment vote. Most of the party's moderates think impeachment could backfire – with virtually no chance of a conviction in the Senate and a risk that Trump's "witch hunt" theme would fire up his base in 2020.
Third, what WON'T happen: There was speculation yesterday after Paul Ryan announced his departure that the new tax cuts could get repealed. That won't happen for one major reason – Trump's veto power will remain intact and there's no way the Senate could come up with the 67 votes needed to overturn a veto of a tax bill repeal (or anything else, in our opinion).
Fourth, Trump would still have other powers. Even if Democrats control the House, the president should be able to prevail in the Senate on judicial appointments, which is the least appreciated aspect of Republican rule, as young conservative judges win lifetime Senate confirmation. And Trump would still have executive power to wage wars, alter trade deals, reform regulations, etc.
THE OVERRIDING THEME if the Democrats take the House would be a pendulum shift away from the Republicans. Ryan knows this, as do three dozen of his GOP colleagues who won't seek re-election this fall. The Democrats are almost certain to take the Senate in 2020, and while Trump probably could win re-nomination, he may not have enough centrists to win another general election. All the Democrats need is a compelling candidate and an agenda, neither of which seems imminent.
BUT FOR NOW, the big political story is the likely House flip to the Democrats – a sign, as Ryan surely knows – that the Trump Revolution has faded after only a year, a victim of the President's self-inflicted wounds.
April 11, 2018 – Special Edition
PAUL RYAN'S DECISION not to run again has several major implications:
1. It was a de facto concession that the Republicans are clear underdogs to maintain control of the House this fall. Ryan obviously does not want serve under Nancy Pelosi – who, incredibly, may be back as Speaker at age 78.
2. It also was a de facto concession that Ryan knows the GOP agenda has stalled. He helped win tax cuts and regulatory reform, but Ryan's other great goal – entitlement reform – has no chance.
3. This begins a fierce battle within the GOP – who replaces Ryan? Kevin McCarthy, who is Donald Trump's golfing buddy? Or Steve Scalise, who has survived a near-fatal shooting?
4. Ryan won't say this, but we think a reason for his departure is his unwillingness to continue defending Donald Trump; in private he's scathing about Trump's temperament. And Ryan surely knows that the Trump base hates him.
5. Ryan's major reason for leaving was simply to spend time with his wife and teenage children. It's not a cliche – he wants to be with his family in Wisconsin, Rayn, 48, is sick of sleeping on a cot in his House office.
BOTTOM LINE: One of the great supply siders – a Movement Conservative – will be leaving a huge void in the Republican Party. Once his kids are in college, we may see him again on the national stage.
April 11, 2018
Trump Crisis Deepens; More Positive Signals From China; What About Deficits?
DONALD TRUMP, ENRAGED, believes that Robert Mueller is totally out of control, prying into the president's personal life and his finances, while targeting members of his family. The seething Trump will not sit back and allow this to happen, in our opinion. He needs to fire someone.
TAG – YOU'RE IT: Rod Rosenstein is on very thin ice; he's the boss of Robert Mueller, and he approved of the raid on Michael Cohen's offices. Trump knows he probably can't fire Jeff Sessions, who is highly regarded by Senate Republicans, and he knows that firing Mueller would ratchet up calls for impeachment. So Rosenstein is the obvious target; we think he will be gone soon.
SO – DOES ANY OF THIS MATTER FOR THE MARKETS? The temperature will soar this weekend, as James Comey begins a one month public relations blitz for a book that undoubtedly will have its share of bombshells. Trump will respond furiously, and the image of a flailing president could unsettle the markets, which worry about headline risk. We STILL don't anticipate impeachment and conviction, but the permanent crisis mode in Washington is just one more reason why the stock market theme of the year is volatility.
WHAT MAY MATTER MORE FOR THE MARKETS are continuing signs that China wants a trade truce. There was more encouraging news from China this morning, following up on President Xi Jinging's comments yesterday. People's Bank of China Gov. Yi Gang pledged today that China will open up its financial system to foreign investment, implementing a plan announced late last year to raise foreign ownership limits to 51% in securities, fund management, futures and life insurance.
WE'LL SEE IF THESE CHANGES come quickly, but this is still another sign that the Chinese are in damage control; they will lower tariffs on U.S. autos and make concessions on intellectual property. None of this may make much of a difference for the U.S. trade imbalance with China, but these concessions – and a potential NAFTA deal – could give Trump some badly needed victories and ease exaggerated fears of a trade war.
THE DEFICIT – DOES ANYONE CARE? Lost amid all the news this week are horrendous new projections from the Congressional Budget Office that show red ink of over $1 trillion annually starting in fiscal 2019 and lasting for over a decade. Total debt by the end of that period will approach 100% of GDP, and annual net borrowing costs eventually will exceed all domestic spending.
THE WASHINGTON RESPONSE – STUNTS: The House is expected to pass a balanced budget amendment tomorrow, the height of hypocrisy, since lawmakers voting for this just recently approved a spending pig out and tax cuts that will cost over $1.5 trillion in the next decade. Virtually no one voting for the balanced budget amendment dares to stipulate the actual steps required to get to a balanced budget; the prescriptions are politically radioactive.
SO FAR, SO GOOD: Demand for Treasury debt is so robust that interest rates have stayed low, and that may continue for a while – but it can't continue forever. Yet the politicians – whether in Illinois or inside the Beltway – are paralyzed, unwilling to even consider a modest CPI change to retirement benefits. So does anyone care? Maybe a few deficit scolds, but Washington won't act until the markets get angry.
April 10, 2018
Did China Just Blink? Plus, Implications of the FBI Raid
THE NEWS CYCLE IS SO INTENSE TODAY that the biggest story for the financial markets – signs of concessions from the Chinese – may not even make the front pages. But for investors, this is a big deal; China clearly wants to lower the temperature on tariffs.
PLAYING THE ROLE OF GOOD COP, Chinese President Xi Jinping asserted this morning that he wants free trade. He pledged to open up his country to financial services firms and insurance companies, and most importantly, Xi pledged to lower auto tariffs – a key issue that President Trump highlighted over the weekend. This is a very good start.
TOO EARLY TO DECLARE VICTORY: The Chinese have pledged before to open up markets but haven't followed through. And what will be sufficient for Donald Trump to declare victory and call for a truce? His endgame is unclear. But these comments from Xi have to be viewed as constructive; Beijing clearly doesn't want a trade war which, in our opinion, would hurt the Chinese more than the U.S.
THE FBI RAID: The markets may be breathing easier as a trade war seems less likely, but could a genuine crisis be looming for the Trump administration on the legal front? Two points:
First, the Michael Cohen raid is an unusually aggressive move by the FBI, approved by the DA for the Southern District of New York, a Trump appointee. There must have been solid grounds for this move, which is not directly related to the Russia probe. It involves the pre-election payoff to Stormy Daniels, which raises all sorts of issues – money laundering, bank fraud, campaign law violations, etc. The issue, of course, is whether Trump was involved in (or aware of) what Cohen was doing. What do you think?
Second, this smash-mouth move by the FBI raises the likelihood that Trump will not cooperate with the Russia probe; we always thought it was unlikely that he would subject himself to a deposition. More importantly, could he fire Robert Mueller? Can't rule this out, although we suspect Jeff Sessions and/or Rod Rosenstein are more likely to get the boot.
COULD THIS LEAD TO A CRISIS? Any firing by Trump would ratchet up calls for impeachment, but we're sticking with our view that there aren't 67 votes in the Senate to convict. But Trump could explode; many of his advisers who have warned the president against over-reacting are now gone or have diminished influence. While we think Trump can avoid removal, a besieged Chief Executive, railing against his own Justice Department, will simply increase the volatility and headline risk for the markets.
OTHER BLOCKBUSTERS: We expect massive airstrikes against Syria, coordinated by the U.S. and France, at any minute. But Trump has already voiced a desire to get out of the region, and one day of bombing will not deter Bashar Al-Assad. . . . Mark Zuckerberg, well-coached and contrite, will survive his flogging, but Facebook's biggest problem isn't Washington – it's the erosion of trust from the firm's users . . . and the horrible new budget projections will produce hand-wringing and calls for fiscal restraint but will have no impact on the markets – for now.
LOTS OF MOVING PARTS THIS MORNING, but to reiterate – the biggest story for markets comes from President Xi, who quite clearly wants to cut a trade deal.
April 9, 2018
Could NAFTA Progress Ease Trade War Fears?
STUNNED BY THE STOCK MARKET REACTION to a potential trade war, Trump Administration officials eased up on the rhetoric this weekend, emphasizing that there's plenty of time to negotiate a deal with China. But with tensions still high, they need a more visible sign of progress on trade – and they may get one, soon, on NAFTA.
THERE ARE STILL ISSUES TO BE RESOLVED and the U.S. will not get everything Trump wants on issues such as a dispute resolution mechanism and agribusiness subsidies, but sources continue to believe that an agreement in principle could be unveiled in the next few weeks, especially since all sides apparently have agreed on auto content rules.
IT'S PROBABLY TOO MUCH TO EXPECT the outlines of a deal can be announced when the U.S., Canadian and Mexican leaders meet at the Summit of the Americas conference in Peru on April 13-14, but they could make it clear that a deal is imminent, with details to be ironed out in the next few weeks.
EVEN THE ROUGH OUTLINES OF A NAFTA DEAL would be a welcome sign for the markets, which are worried about an escalation of a tit-for-tat dispute with China. Many Republican lawmakers fear the electoral implications of a China dispute in the U.S. farm belt, and supply-siders – including Larry Kudlow – fear the dollar amount of potential tariffs could negate some of the impact of tax cuts, even though the overall GDP impact of the trade dispute still looks modest – for now.
ONE THING SEEMS LIKELY: Worries about a trade war will not dominate the news this week, because other stories will get more ink. The U.S. almost certainly has to respond to the gassing of innocent Syrians; a military strike against the Assad government could come soon, with a major role likely from France. Domestically, the big story probably will be the public flogging Congress is preparing for Mark Zuckerberg in hearings on Tuesday and Wednesday.
A STRIKE AGAINST SYRIA AND A ZUCKEBERG FLOGGING are widely expected by investors, which could allow the oversold markets to focus on another big issue – first quarter earnings, which should be solid.
EVEN IF THE TRADE CRISIS EASES, this strikes us as a far more volatile period than anything investors faced in 2017. The headline risk is significant – this morning there's speculation that the Chinese might devalue the yuan; there's the ongoing Trump war against Amazon; and now the Middle East is heating up.
IS IT ANY WONDER THAT TREASURY BOND yields are stubbornly low? They'll be tested this week by inflation data on Tuesday and Wednesday, and by new Congressional Budget Office deficit projections, scheduled for tomorrow, that will show red ink of over $1 trillion for as far as the eye can see. But yields don't seem likely to rise much until the markets can be absolutely, positively certain that the first quarter economic slowdown was a weather-related aberration.
BOTTOM LINE: Amid all of these moving parts, the markets need some good news. It probably will come from earnings – and from signs next weekend of progress on a NAFTA deal. That would raise hopes that if the U.S. can agree with Canada and Mexico, the U.S. also can agree with China.
April 6, 2018
Playing With Fire on Trade
THE "HEADLINE RISK" PRESIDENT has stunned Washington – and it takes a lot to stun Washington these days – with his bold suggestion that the U.S. should consider an extra $100 billion in tariffs against China. We still think a trade war can be avoided, but our confidence has been shaken; Donald Trump is itching for a fight and the Chinese will not tolerate public bullying from him.
TRUMP OBVIOUSLY WANTS TO TURN UP THE PRESSURE on China, but officials in Beijing are famously concerned about appearances – and even if Trump succeeds in winning concessions, "You don't humiliate the Chinese in public," a trade expert told us last night; he thinks Trump's threats will stiffen Beijing's resolve.
IRONICALLY, CHINESE OFFICIALS HAVE CONCEDED PRIVATELY that trade concessions are necessary, especially on intellectual property and auto tariffs, but this new tough talk from Trump could make China less likely to deal.
A GOP SOURCE WE TALKED WITH LAST NIGHT believes the growing risk of major soybean tariffs will hurt Republicans in the U.S. farm belt this fall and beyond. "There goes Iowa," he said. Trump suggested that U.S. farmers could win new subsidies from Washington, but that would provoke a firestorm among the world's soybean producers, who would demand equal assistance or penalties on the U.S.
WHAT MUST LARRY THINK? Fears of a trade war subsided yesterday because of soothing comments from Larry Kudlow, but that was yesterday. Trump's impulsive suggestion that another $100 billion in tariffs might be required surely must have stunned Kudlow, and we have to wonder – did Larry take a long-term lease on his Washington apartment? He and Trump may be too far apart on trade to co-exist.
PERHAPS THE MARKETS CAN SHRUG THIS OFF, perhaps a good jobs report at 8:30 a.m. ET will dwarf the trade dispute. And there's a positive story coming soon – an agreement in principle on NAFTA. But this "headline risk" president is so hell-bent on punishing China that he apparently doesn't care about volatility in the markets – or in the Farm Belt.
IN THE MEANTIME, the only positive aspect of this story in the near-term is a continuation of remarkably low interest rates. How can Fed Chairman Jerome Powell aggressively raise rates in the face of a deepening trade dispute? Treasuries may be a logical safe haven until this storm passes.
WHAT TO WATCH FOR: President Xi Jinping of China is scheduled to give a major speech next Tuesday at an economic forum; he is expected to discuss China’s economic overhaul and liberalization – and he might offer a potential peace offering to the Trump administration, the New York Times reports. But concessions from this proud nation after Trump's blunt new threat?
BRINKMANSHIP BETWEEN TWO GLOBAL POWERS is an uncertainty that the markets will have to grapple with for many weeks to come, so a major theme for 2018 – volatility in the stock market – just intensified last night.
April 5, 2018
Larry Kudlow to the Rescue
JUST WHAT THE DOCTOR ORDERED: With the stock market plunging yesterday amid exaggerated fears of a "trade war," someone had to calm the furor. Sure enough, Trump economic adviser Larry Kudlow – who understands the markets better than anyone at the White House – came to the rescue.
THIS IS NOT A TRADE WAR, Larry said yesterday, and besides – the tariffs proposed by the U.S. and China are just opening shots in a process that now will give way to negotiations that could last for weeks, maybe longer. Larry made this point on Stuart Varney's Fox Business show (we'll be on the show today), and the markets instantly turned positive after a horrendous open.
KUDLOW CAN SPIN: Larry's argument is that a deal is possible, one that will be a plus for the U.S., and that China has to confront the issue of its theft of intellectual property. We think there can be a deal by summer, and we also think talks on NAFTA have progressed; an agreement in principle is possible in the next week or two. The key point from Kudlow: back-channel talks are progressing with China and on NAFTA.
KUDLOW HAS A LOT ON HIS PLATE: Like most people with Wall Street connections, he undoubtedly is aghast to see the President bash one of the great success stories in American business history – Amazon, owned by Trump's arch-enemy, Jeff Bezos. So there will be more headline risks to come that Kudlow will have to tamp down, and he can't criticize this famously temperamental president too aggressively.
AND KUDLOW MUST REALIZE that Congress is unlikely to advance the Trump agenda; the Democrats have enough votes to filibuster just about everything, as the fall elections approach. The House is aiming to pass a bill by mid-April that would make tax cuts permanent and grant more benefits to business but there's virtually no chance of that passing in the Senate. Kudlow is an ardent proponent of an infrastructure bill, which has a slightly better chance of advancing, perhaps after Labor Day.
FOR NOW, KUDLOW'S BIGGEST ROLE will be as horse whisperer to the markets. He's great on TV and can get messages from Wall Street to the president, and he can get Trump's messages to the markets. For now, the message – from the farm belt to Wall Street – is clear: cool it on the trade disputes, and for the next few weeks the temperature will drop.
April 4, 2018
Trump Turns Up the Heat; China Trade Dispute Deepens
GRUMBLING ON THE RIGHT: Donald Trump's base is famously loyal, but leading conservative activists suddenly are restive, and that will have an impact on a wide range of policies – ranging from the deepening trade dispute with China to sending troops to the Mexican border.
THE PRESIDENT GOT AN EARFUL last weekend at Mar-a-Lago from commentators like Sean Hannity who think Trump needs to do more to reduce deficits, secure the border, toughen up on China and slap Robert Mueller. These concerns are important, because if Trump doesn't respond aggressively the GOP may head into the fall elections without the passion that the left will surely bring.
SO TRUMP WILL RESPOND: Chief of Staff John Kelly, a moderating influence, was not at Mar-a-Lago, so the president returned from Florida determined to turn up the temperature on four issues:
Trade: The U.S. unveiled new tariffs late yesterday against China, and Beijing promptly retaliated. We still think this is posturing from both countries, designed to pressure negotiators on both sides. But the trade dispute has clearly worsened; we're not ready to use the phrase "trade war," but developments in the last 24 hours were deeply troubling for the markets. Trump's Rust Belt base is happy.
Spending: The budget pig-out in early February infuriated conservative activists, and as a result Trump and some House Republicans – led by Majority Leader Kevin McCarthy – are exploring "rescissions" that would kill what they consider excessive spending in the bill. Chances are slim that the Senate would agree – or reconsider a line-item veto – but Trump can tell GOP activists that he's trying to curb spending. He's running against Congress on this issue.
Immigration: Ann Coulter and Laura Ingraham have been scathing over Trump's inability to get funding for a wall. He has been stung by the criticism, and responded by vowing to send the military to the border, even though the flow of illegal immigrants has been reduced to a trickle. Trump's call to deploy the military caught his Pentagon advisers off-guard, but no matter – the Fox commentators loved it.
Robert Mueller: A leak from the Washington Post confirms that the special counsel is preparing indictments; Trump himself may avoid criminal charges because Mueller reportedly believes he doesn't have the authority to indict him. Mueller may write a damning report about obstruction of justice, then leave it up to Congress to act. We still believe Trump will pardon those indicted or fire Mueller if Trump's business dealings – or his family members – are targeted. The crowd at Mar-a-lago urged him to boot Mueller.
THE MARKET IMPACT: Unlike 2017, when Trump seemingly could do no wrong for the markets, 2018 looks very different. The markets are uneasy over a trade war with China, and Trump appears to be unleashed on other issues – such as Amazon. Does he care what this is doing to the markets? Yes, of course, but he has an election to win, and a base to satisfy, so the markets may have to endure the volatility for months to come.
April 3, 2018
How Trump's Bluster Can Work – NAFTA is a Good Example
RISING IN THE POLLS, still popular in Middle America, Donald Trump has the political clout to play a clever game of bluster then compromise, and NAFTA may be a good example of what he can do.
NEWS SOURCES ARE REPORTING that the White House is pushing for the announcement of a framework of a NAFTA deal at the Summit of the Americas, which begins on April 13 in Peru. It's highly unlikely that a final deal could be announced by then, but an agreement in principle could ease market fears of an impasse – fears that intensified over the weekend when Trump threatened to pull out of the trade pact over immigration policies.
HIGH LEVEL TALKS between Mexican officials and Trump aides are underway, as the eighth round of negotiations are set to begin in Washington next week. Several issues have to be resolved, including automobile content rules, but the fact that talks are intensifying is a positive signal for the markets.
SIMILARLY, TALKS BETWEEN THE U.S. AND CHINA are continuing, amid signs that both countries want to avoid a trade war; the tariffs announced thus far by Beijing are mild, despite the market and media hysteria.
THIS FITS A TRUMP PATTERN: Begin with smash-mouth demands and hostile rhetoric, then negotiate a deal that can be spun as a victory. Could a trade war still erupt? Possibly, but our hunch is that Trump has gotten an earful from friends on Wall Street that the stock market – which is Trump's ultimate arbiter on the success or failure of his policies – wants him to cool it. So he will, eventually.
THIS STRATEGY MAY NOT WORK with Amazon, unfortunately. Whether Trump cares about shopping malls or the Post Office is debatable, but he definitely cares that the Washington Post, owned by Jeff Bezos, relentlessly mocks him. Trump has drawn blood, costing Bezos billions. The "headline risk" president may not relent on Amazon, one of the great business successes in American history.
IT'S ALL ABOUT VICTORIES for Trump; he's obviously not a detail guy. If he can get the outlines of a NAFTA deal and some Chinese trade concessions, he can spin that adroitly; if he can cost Bezos several billion dollars, that's a victory against a despised rival.
A PLUNGING STOCK MARKET is not a victory, and Trump must realize that he suddenly is vulnerable with investors. He also must know that progress on trade could help stabilize the stock market, which could keep his approval rating in the low-40s, an improvement from Trump's winter numbers. The economic fundamentals still look solid, and it's unlikely he would risk that with a trade war or a market disaster.
BUT THERE'S ALWAYS DRAMA WITH TRUMP, and soon the focus will shift to the next great crisis, which of course will come from Robert Mueller, most likely by the end of April.
April 2, 2018
Donald Trump, a Headline Risk For the Markets
COULD HAVE BEEN WORSE: The media is making a huge deal of Chinese tariffs that were announced yesterday, but in truth they were roughly the same as Beijing telegraphed in March – about $3 billion worth, largely targeting U.S. agricultural shipments. That's a drop in the proverbial bucket.
BUT THIS IS A SIGNAL that China is prepared to do more, since these tariffs were in response to U.S. steel and aluminum tariffs, not the $60 billion in other tariffs announced by the U.S. in response to widespread Chinese theft of U.S. intellectual property. Talks on this bigger issue are underway between the two countries; failure to make progress in these talks could lead to serious Chinese tariffs.
THE BIGGER TRADE CONCERN, in our opinion, is Trump's willingness to hold NAFTA hostage to an immigration bill. Trump's Easter rant about the Dreamers, apparently in response to a Fox TV piece that morning, was riddled with factual inaccuracies about the DACA program – but the bigger message is that he's willing to scrap NAFTA unless he gets an immigration deal – including a wall – from Congress.
CHECKMATED IN THE SENATE: Any kind of bill on the Dreamers has no chance in the Senate, which is content to wait for a ruling from the Supreme Court, probably this summer. Trump doesn't have the votes in the Senate, where a 60-vote filibuster rule won't change, despite his insistence that the Senate adopt a "nuclear option" that would abolish the 60-vote standard. Mitch McConnell won't agree to this, which will make him an eventual tweet target.
SO IT'S TRUMP ALONE, not consulting with his aides, as the outlook on crucial issues becomes confusing, dependent largely on Fox and his tweets – just the way he likes it. He stunned his aides by suggesting late last week that the U.S. would back out of Syria; he doesn't vet his tweets with anyone. Chief of Staff John Kelly seems to be much less influential, especially as Trump hints that he may not need a Chief of Staff.
DOES ANY OF THIS MATTER FOR THE MARKETS? This is the "headline risk" president. He clearly hates Amazon, and his tweets have hurt the company's share price – even though policy action against the firm seems unlikely. Who knows what he will tweet next – against drug companies? Against trade with Canada? It's anyone's guess. Jeff Bezos can strike back – his massive payments to the Post Office may give way to a new Amazon distribution system.
THE GOOD NEWS, OF COURSE, is that U.S. economic fundamentals still look solid; Friday's jobs report could show unemployment has ticked down to 4%. The great fundamentals – and the prospect of massive tax cuts – made 2017 a year to remember for the stock market, but it strikes us that this year will be far more volatile – as the President picks fights with companies and countries, posing a persistent headline risk that may keep investors on edge despite the excellent fundamentals.
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 www.horizoninvestments.com.