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.
Tags: BTPs, Debt, ECB, FOMC, Gold, infrastructure, Italian referendum, Mario Draghi, nominal rates, QE, real rates, Renzi, Trump
November 29, 2016 at 8:50 pm |
Good call and warning to Trump. He of all people should know that at least half the country is awake, and will keep his feet to the fire. If he goes with Romney, it will be very interesting to see how deplorable the deplorables become.
India is certainly not the only desperate country trying to eliminate cash to increase tax collection, prevent bank runs, and impose financial repression through negative rates. Australia has also launched their trial globalist balloon, and they will not be the last – http://www.smh.com.au/business/banking-and-finance/reserve-bank-says-australian-dollars-could-come-in-digital-form-in-future-20160223-gn0zxx.html.
We know there are no limits or depths the establish won’t go to maintain their perks and power, so why would anyone think their gold is safe, or any securities in Street Name, for that matter? While it almost never happens, free people should be aggressively fighting against their establishments at every opportunity, while they still can.
November 29, 2016 at 11:23 pm |
First, big fan of your blog. Have been following for 2 yrs +. So please excuse the following rant (if you think that is what it is)
I grow weary of explaining to people who do not live in India or do not understand India that Demonitisation is not financial repression. Its REPLACEMENT of old notes (500/1000 rupee notes) with new ones (500/2000 rupee notes) with multiple aims. Didn’t Germany do the same post Unification? Are brown people not allowed to do something similar for different aims?
I should know since I own all kinds of assets in India and have been law abiding tax paying citizen for 20 years (even the years I stayed in your country) – I am paying 0% tax for any cash deposits (unlike some terrorists, corrupt, drug money that is getting taxed at 50-60% along with undeclared, untaxed illegal money). For example did you know since Nov 8, nearly 600 terrorists (called naxalites) have surrendered or schools in Kashmir are back to normal as terrorists have no money? And all this is a 2.5 year process where the govt has given multiple chances for all to declare/come clean on their unaccounted money & pay taxes (such a scheme closed on Sept 30th)
This is a risk. Poor implementation can hurt. So far implementation is good but not faultless. But rewards outweigh the risks. If done successfully, it can cut 20 years of India’s development cycle. But please help, by understanding the issue or at least not spreading incorrect information.
You say holding cash is a liberty that you want to exercise. Agree completely. But its legal money, that you have earned, declared and paid/not paid taxes, right? In India the problem is of bribe money, drug money, terrorist, counterfeit, undeclared money ~ a problem that at 10% of economy or $200 billion, a poor country like ours cannot afford by your own logic.
And for your information, this exercise was started and planned 6-9 months ago during the reign of Rajan, with his full approval. He was one of the 6-7 people in India with full knowledge of this planned move and his successor (who was the deputy CB governor) only came to know about it when he became the new RBI governor.
November 30, 2016 at 12:19 am |
Yra- You have said that this blog is not political. But pre-judging policy on the basis of some cabinet picks I think displays a bias, and the first response above with the adjective he uses confirms that judgment. There have also been some non-political appointees but more important are the policies that are put in place after January 20 and not their political affiliations. I for one am very optimistic.
Regarding Indian currency, I had dinner with an Indian businessman last week. The cancellation of the 500 and 1000 rupee to be REPLACED by a New Series of 500 and 2000 rupee notes is due to the largely black money economy and corruption that exists in India. This especially affects the building industry and those owning this black money have been in a panic.
Moves to a cashless society may be attempted in the future, but Modi and India are not in the Rogoff camp with this move.
November 30, 2016 at 6:59 am |
Asherz–thanks for the further confirmation supplied by AA.Very useful but as you can probably guess I watch for the camel’s nose as a lover of free thought and action.As to prejudging I am not doing that but just raising the issue about a return to all the old familiar faces—the land is rich with thinkers and doers and reaching outside the traditional sources was what my main point was and will be.As one of my first questions posed to me upon meeting the wonderful people from LSC in New York was —are you sure you are not from New York?There are many fine minds that exist outside the eastern megalopolis –that was my point
November 30, 2016 at 12:33 am |
Have a follow up point on your right to hold cash. NOBODY in India is telling you to NOT hold cash. IF you want to hold 100% of your assets in cash, this govt is NOT stopping you as long as you clearly declare it in your ITR. This is a move for LESS CASH not CASHLESS. It is not possible as you said in India to go 100% digital. Govt aim is to move cash % from 12% of GDP to 4-5%of GDP over 5-7 years. Thanks for reading.
November 30, 2016 at 6:53 am |
AA–great post as you filled in some of the knowledge I missed in fully comprehending the tax justification of the move and certainly respect you noting that one of my favorites Rajan was on board with this—nowhere in my prior research was this specified—but I will be watching this as an active model for the mature developed economies—thank you for your wonderful work and glad to hear from “boots on the ground” as this is hopefully a true global brand for genuine worldwide discourse—for as I often repeat—-dialectic not validation is what I seek.Mission accomplished!
November 30, 2016 at 12:35 am |
I’m pretty sure BOJ owns a printing press as well, these guys are employees of Davos elite.
I’d gladly give up growth for a draining of the swamp, we’ve grown accustom to living without it.
November 30, 2016 at 8:17 am |
So, What Can Trump Get Done In His First 100 Days…
November 30, 2016 at 10:23 am |
MSM isn’t the place to obtain clarity.
November 30, 2016 at 8:47 am |
Thanks AA It never made sense to me that India would be going cashless. I guess the question is how soon will the new notes become “black” money. this move must be just a part of a bigger campaign against corruption. Currency (cash) is the manifestation of a nation’s worth. Without a currency there is no nation as citizens of the EU monetary union are realizing.
December 1, 2016 at 1:47 am |
Thanks Bigman/Yra. Happy to add some value to your thinking. A very small repayment to the value you add to my thinking every week. I think you are right to be concerned about outlawing of cash in developed markets like Euro/US ; however in India we are more concerned about getting people especially rural/poor to open bank accounts and start using them (To his credit, Modi’s first act on this issue was to focus on financial inclusion and open nearly 250 million bank accounts in less than a year (we are a big country!). We may no doubt have similar concerns about governments usurping cash but thats probably 10 years down the road. Thanks again for reading.
November 30, 2016 at 11:59 am |
Many a leader with “good intentions” suffered from unintended consequences that led to Hell. I don’t know Modi’s true intentions, but it doesn’t matter, as he appears to be making the same mistake as other bureaucrats that believe they are Gods that can manipulate people, the business cycle, and mother nature with laws, instead of letting the free market work.
Why are people willing to take on so much risk (i.e. drug trade)? Maybe taxes should not be so high and the bogus war on drugs halted. I do know two things, govt never admits their mistakes, and will oppose real reforms (even if it requires sacrificing their citizens in a distractive war).
Consider searching “India” on Armstrong’s site. Here is the latest – https://www.armstrongeconomics.com/international-news/india/india-economic-falls-into-chaos-dollar-rise-in-huge-demand/.
November 30, 2016 at 3:29 pm |
Larry Jeddeloh via Barron’s http://www.barrons.com/articles/bullish-on-the-trump-market-1480137198
December 3, 2016 at 7:21 pm |
WOW . . . Some will never accept the ideals and values of ‘capitalism’ . . . having free markets with currencies backed not by the ‘faith’ of bankrupt sovereign countries but by gold / silver.
As though the path of globalization for the sake of concentrating world power was such a good thing . . . which will take quite a while to turn around . . . and, once again, embracing the natural laws of economics.