The world is all abuzz with the good feelings radiating from the aftermath of the Trump victory. However, no matter how long the U.S. equity market rallies, be certain that Trump is not draining the swamp of Washington, D.C. He is proving to be a caretaker. Today’s pick of Elaine Chao for Transportation Secretary is just more of the same. Ms. Chao is certainly qualified. After all, she has an MBA from Harvard, but being a past member of the Bush Cabinet means we are using old, worn-out tires. The Transportation Secretary will be overseer of many of the INFRASTRUCTURE PROJECTS the Donald has promised to deliver. The pork barrel these projects will be dipped in will be beyond lucrative and the wife of Mitch McConnell ought not to have been given this role.
This is a very big country with many talented and capable people. Is the Washington, D.C.-to-New York swamp the only game in town? If Trump is only Hillary without the experience this will not end well as U.S. Treasury debt will not be the end-all of global portfolios. There are more Cabinet and senior policy appointments to come and let’s raise hopes about Trump saying CIAO to old line Washington power games. It seems like Donald just binge watched House of Cards. But the more relevant movies appear to be The Godfather and Serpico. (NOTE: As this was being written, news outlets reported the Donald is expected to pick Goldman Sachs alum Steve Mnuchin as Treasury Secretary. More of the same.)
Michael Corleone to Senator Geary: “We are both part of the same hypocrisy, Senator, but never think it applies to my family.”
Officer Captain Inspector McClain: “Frank, this department is as clean as a hound’s tooth.”
Trump will be playing a dangerous game if he turns his back on those who had greater hope for the draining of the swamp. There is a euphoria from the entrepreneurial class that tax reform and the lifting of some burdensome regulations will take place under Trump but a massive fiscal stimulus will have to be financed and rising interest rates will place a burden upon the budget plans being discussed. Even Druckenmiller was talking about robust growth fueling a rise in long-term rates. He noted a level of 6%. As previously discussed, DEBT will be the most important factor overhanging any Trump-inspired growth strategy.
The FOMC meeting in December will be interesting to see the forward guidance put in the statement about inflation expectations. The Tea Party Congressional members will find much to complain about if the Trump management team presents an enormous budget deficit. If the budget explodes and the current account deficit rapidly increases those twin deficits will have to be financed. There is no free lunch. Where Druckenmiller discusses NOMINAL RATES my focus will be on REAL RATES. At zero interest rates around the world, monetary policy has been in uncharted territory as central bankers sought to ease the burdens of a global balance sheet recession (Richard Koo). Getting back to interest rates as a signalling mechanism will restore classic fundamentals to a premier position in global macro analysis.
***There was a comments on last night’s post by The Bigman asking about the recent move by Prime Minister Modi of India to “rein in corruption” by forcing the redemption of large Indian rupee notes. The denominations of the notes to be redeemed are not large by global standards but India is not a wealthy country. The forced redemption is an effort by the government to collect taxes from many middle-class people who do not declare their earnings. India is an under-banked economy in which cash is a necessity because of a weak financial system. But the forced redemption is just the first step towards greater financial repression. Modi’s plan is similar to what the EU did by redeeming the 500 euro note. The ECB and Brussels maintained that most of the uses for the 500 euro notes was for illegal purposes.
Larry Summers and others in the U.S. have also maintained that the U.S. Treasury should force the $100 bill for redemption because drug sellers and arms dealers are its main benefactors. Professor Rogoff has theorized that getting rid of cash would result in a higher velocity for money supply as people would not hoard electronic money. When the authorities around the world are pursuing plans for a cashless society. Prime Minister Modi’s actions should make us weary. If it works in the Indian laboratory expect more of the policy makers to push for its adoption. Bigman wants to know if it is positive for gold and silver. Long-term it must as my cash is representative of my liberty and liberty is a value I hold dear. India is already a place of GOLD hoarders and the recent moves have seen the Indian gold market experience a premium for the metal as people seek a haven replacement.
The point of a cashless society has been raised by Larry Summers as a way to deal with his beloved theory of secular stagnation. In a cashless society a central bank could impose NEGATIVE INTEREST RATES of say 3% and not worry about cash being hoarded. Only a fool would keep being charged on deposits and thus there would be a rush to spend every digital cent. So we will continue to monitor the financial repression in India. Interesting that this took place after Raghuram Rajan was replaced as the Governor of the Indian Central Bank.
***Thank you, Mario Draghi for you helped make Notes From Underground even more relevant. The ECB announced this morning that they would be ready to purchase Italian debt in large amounts as Reuters reported, “… that ECB policy makers are ready to temporarily accelerate their purchases of Italian government debt.” The statement prompted a 15 BASIS POINT DROP IN YIELDS ON 10-YEAR BTPs. If Renzi indeed “loses” the referendum vote the ECB will be doing everything possible to support the Italian debt markets. If the referendum passes it will be important to see how much further the 10-year yields decline after the fact for the problems of the Italian banking system and the economy will not be removed. Yes, Renzi will have more power over the Italian Legislature but the 18 percent of nonperforming loans will still be an enormous burden.
Again, it will be better for Renzi if the referendum fails because the ECB and Brussels will have to provide more support to the Italian economy. It’s the classic case of LESS is MORE. The ECB just jawboned the yields lower today but it exhibits the high level of concern that Mario Draghi has for his native country. Let me remind you that the ECB has enormous intervention power in December because they announced it would be a holiday-shortened month and they would finish their 80 billion euro QE program by December 22. The buying will be consolidated into three weeks. Today was an example of the power of the ECB’s printing press so beloved by policy makers the world over. Trade the European and all debt markets with caution. A more interesting play on Italy may be the EWI, the index of Italian corporations, which is down 26% on the year. As always, I advise doing your work and finding the lowest risk entry points on any trade. How far will Brussels go to keep the EU together for as we know? We will always have Paris in the springtime.