Notes From Underground: The President Trumps Powell

On Thursday Fed Chairman Powell sat through another day of Congressional interrogation as the Senate had its turn at playing the role of Grand Jury. The legislators tried to portray the Fed as either the greatest economic actor ever or the scapegoat for every social ill in the United States. Chairman Powell was very measured in his responses as he reminded the inquisitors that the FED does not have jurisdiction over many of the problems related to the issue of wage inequalities. The White House had scheduled a morning announcement on trade policy but because it related to tariffs it was canceled for fear of having it become an issue at the Senate hearing. Regardless, several Senators from both parties tried to elicit a response from Powell on trade issues but the Fed chairman was too wise to fall into the trap of “when did you stop beating your wife.” If the hearings told us anything, it’s that there are too many mediocre lawyers in Congress.

The White House, which had canceled the announcement about tariffs on aluminum and steel, ended up releasing the statement after Powell’s testimony ended. The equity markets, which had initially rallied on the news of the announcement cancellation, began selling off as soon as the announcement was made. How this plays out will take some time but right now it is setting up as a confrontation between Wall Street and Main Street. President Trump and his posse of Wilbur Ross and Peter Navarro are portraying the tariffs as a “jobs for America” action. It seems that many corporations are reacting to the imposition of tariffs as a potential job killer as raw material price increases will harm U.S. production. One of the biggest losers in the DOW was Boeing because of its dependence on aluminum. The auto manufacturers also weighed in against increased steel prices as so much steel is used in the production of cars. The Trump team is making this action on tariffs an issue of national defense because of the need to protect domestic based producers of two of the key metals are needed in times of war.

I SAY THIS IS NONSENSE AS THE U.S. HAS CAPACITY TO MEET ANY TYPE OF MODERN WARFARE NEEDS AS WELL AS THE CAPACITY OF ITS ALLIES, SUCH AS CANADA. Raising the issue of national defense is a redo of what was termed the anti-communist impulse in an effort to justify any government program that counteracted the perceived red menace. Raising the national defense issue is right out of that playbook. This tariff issue is plain politics as establishes Trump as acting against the interests of Wall Street. The impact from tariffs is always price increases as domestic producers will seek profits rather than market share. This will be another problem for the Fed as it seeks to understand the inflationary impact from the transitory nature of tariffs.

One issue that Chair Powell raised today to which i applaud was his raising the issue of capacity outside the U.S. This was a DOVISH perspective on interest rates as it understands that wages can be affected by global issues. It is the issue as Powell stated that SLACK in the labor pool can be a global problem. This is why I have argued that the FOMC has been too reliant on the Phillips Curve, which is a model based on DOMESTIC variables and devoid of global concerns. Huzzah for Chairman Powell raising this as an issue to be considered. In a world of global mobile capital, money can follow the cheapest labor in an effort to sustain Tomas Piketty’s R>G. If global capacity can keep wages suppressed the FED has to be very careful in its concern for wage inflation.

It is a measure of Powell’s more pragmatism that is to be respected instead of any doctrinaire model-induced policy. But the impact of global money flows is what makes the Trump tariffs such a problem for Wall Street. As Rick Santelli and I have discussed for years, it is NEHRU not NAIRU as 500 million Indian workers enter the global work force.

***I am posting a Santelli hit recorded on February 20. I’m sorry for the delay but Rick’s wonderful producer Lesley was on vacation so the hit was never posted on the CNBC website and we just retrieved it. Remember, it was recorded nine days ago.

(Click on the image to watch me and Rick discuss negative interest rates.)

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15 Responses to “Notes From Underground: The President Trumps Powell”

  1. asherz Says:

    Economists and Central Bankers have been brought up to view inflation primarily through the eyes of PPI and CPI. Global capacity has and continues to keep a lid on those numbers with occasional hiccups due to tax reform and tariff impositions which affect pricing. But what they see but doesn’t register in importance with them is the inflation we have had in the last 9 years, ASSET INFLATION. The danger of this aspect is that the other side of the ledger that created this was the buildup of debt. The image is of a starving, emaciated man in March 2009 who has been given high calorie foods without limit, now looks like a Sumo wrestler.
    With interest rates rising and QT beginning, the food supply (or punch bowl) will begin to diminish. Trillion dollar annual budget deficits are at the same time looming ahead. With a 320% global debt/GDP, watch that Sumo guy begin to lose weight, and quickly.
    Keeping both eyes on the Phillips curve and not on the wrestler’s curves will go down in history as the huge error of these classroom economists who kept their foot on the pedal for years beyond what was needed.

  2. GreenAB Says:

    Great piece, thanks Yra!

    The EU is now looking into tarriffs on

    -US motorcycles (Harley – Wisconsin – Paul Ryan)
    -Whiskey (Kentucky – Mitch Mcconnell)
    -California Orange Juice

  3. Al13 Says:

    A few thoughts on these tariffs, particularly for aluminum although the same logic can probably be extended to steel:

    1. There is actually a valid argument for a tariff, although I do not recall anyone in the media ever mentioning it as it probably goes over most people’s heads. Most of the aluminum manufacturing industry operates in just-in-time fashion, like any manufacturing business worth its salt today. The US downstream aluminum sector is the largest in the world ex-China. Supply chains for any unwrought product beyond commodity grade aluminum are very tight and often rely on only one or two smelters across the US and Canada.

    To take a real life example, a Canadian smelter (ABI), focused on value added products, had to curtail two-thirds of its production capacity due to a labor dispute earlier this year. If not for the remaining US production capacity, downstream manufacturers would have been relying on imports from Russia and the Middle East, a turnaround that could take 2 to 3 months at the very least. That kind of a supply disruption would hurt the downstream industry and consumers a whole lot more than a 10% tariff, and applies to much more than just defense.

    2. There are a great deal of hysterics coming from European, Canadian, and Chinese governments right now. Ultimately though, an across the board tariff changes little to nothing in the economics of exporting to the U.S. for them. The US is in a supply deficit so the units will have to come from somewhere. While US producers benefit from the tariff, the calculus for everyone else is unchanged, save perhaps that demand will decrease slightly due to higher pricing.

    3. Rick Santelli had it right yesterday. China’s production capacity, while now very high-tech, is built on over a decade of power subsidies and covert bailouts. There is a fat chance that Middle eastern aluminum producers are buying their power at market rates. And Europe’s steel industry is a textbook case for industrial bailouts. The U.S. has done very little to stop this under a thin veneer of laissez-faire, but the result has been closer to market failure like that listed in point 1. than it has been a greater share of the pie for everyone.

    The real bogeyman for the economy is interest rates. Running a business in an environment where rates could be up a full 2 percentage points in the next two years is a daunting prospect given the norm of the last 10 years. Luckily for us, the President has yet to really Trump Powell.

    • yra harris Says:

      Al13–very good post and your point about interest rates is very much of what has been discussed at this site—the FRA podcast of Boockvar,bianco and harris certainly discussed interest rates and their coming impact.Peter Boockvar has been beating the drums about the huge amount of floating debt on the books of corporate America let alone the fact that the U.S. Treasury is loading up on short term borrowing

  4. Stefan Jovanovich Says:

    “Whose currency is it?” was the question that Yra left CNBC’s viewers with. After thinking about it this morning and reading Yra’s and Mr. Santelli’s witty comment about Indian political economy, I realized that I need far more study time than I have right now to begin to understand what these clever men from Chicago are saying. I was able to start by pulling out my battered hardback copy of Abba Lerner’s book Flation. (The fact that it does not have a single review in Amazon says volumes about our general level of ignorance.) Perhaps, in a week, I will have something to say that is intelligent enough to begin to match the subtle wisdom our host and his friend gave us for free. Perhaps not.

    • Stefan Jovanovich Says:

      It took much more than a week to be able to produce even this meager follow-on. Lerner seems to me to have had three powerful ideas:

      (1) that inflation/deflation had become code words for whether or not the right prices were not changing and the wrong prices were. Was the extraordinary rise in the nominal prices of common stocks after WW II “inflation”? The answer, Lerner pointed out, was “yes” if you were concerned about the distribution of wealth and income and “no” if you believed in the fairy godmother of pure “capitalism”. But, in neither case, did the answers or the question itself lead to any further understanding of how price changes could be managed.

      (2) that, in spite of the truth of (1), the social goal should be a steady 2% annual rise in the consumer prices and a greater than 2% rise in wages.

      (3) that the government itself should be an aggressive counter-trader in FX to achieve (2).

      Idea (1) got no acceptance at all. Ideas (2) and (3) have become pure gospel for all central bankers. The man was an extraordinary figure who deserves far more attention than academia will ever give him. Unlike almost everyone else in economics, Lerner kept thinking. He did not follow the Buffett rule of academic success – choose an idea in your early 30s and then build a moat around it to protect it from all examination and/or criticism.

      P.S. I may have given Yra and Mr. Santelli credit for an idea that is not theirs. I thought the comment about NAIRU and Nehru was intended to point out how much the matter of India’s FX remained unexamined.

  5. jdogdog Says:

    Hi Yra,
    Can you expand on NEHRU? I understand NAIRU. Thank you in advance.

    • yra harris Says:

      jdogdog–Nehru is my attempt at humor.Nairu is the non-accelerating inflation rate of unemployment but as I have argued for years it is flawed because it is domestic in its modeling.Nehru represents the coming into the global system of 500 million Indian workers who will work at low wages and keep downward pressure on wages all around the world where capital and trade is allowed to flow with very little impediments.It is based on my sarcastic attempt to challenge the stridency of the Phillip curve modelers—

  6. Chicken Says:

    I’m doning my prism bifocals.

  7. GreenAB Says:

    Ladies and Gentlemen – Germany finally has a new (old) government. The SPD members voted 66% in favor of another Grand Coalition.

  8. Arthur Says:

    Ray Dalio: Draghi “should be congratulated” for steering Europe through the financial crisis, Dalio said Tuesday, adding that Europe has been through a “beautiful deleveraging.”

    • yra harris Says:

      Arthur–all in the eyes of the asset holder—Draghi is a disaster waiting in the wings—Dalio views history through his balance sheet.As a trader Draghi is great but for everyone else please explain the recent European elections,even the germans where the economy is reported to be booming by every pundit in the main stream media .And then why has Dalio proclaimed to be so short of Italy if Draghi has done such a great job.I have listened to Craemer and others proclaim how great European banks are for an investment.That noise has echoed in my ears for three years—sorry Ray but I ain’t buying what you are selling.

    • Chicken Says:

      I was going to ask if Dalio is credible, really haven’t followed him closely enough to have a feeling but I do know some of those guys actually talk stuff up they’re in the process of selling.

  9. Asherz Says:

    Ray Dalio has been riding the Draghi gravy train successfully and further enriched his already massive wealth. Such an encomium to one of his enablers is a response of gratitude. Somehow it brings to mind another Guru of Times past, Irving Fisher, who nine days before the 1929 crash exclaimed that the “market had reached a permanent plateau”. History has not been kind to some of our greatest soothsayers and prognosticators. Let us see if a comparison will be made someday of the 1921 to 1929 period to what may turn out to be even more impactful, the 2009 to 2017 eight year period.

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