Notes From Underground: Kudlow’s Dilemma, Tariffs Versus King Dollar

The newswires were flushed with either praise about the appointment of Larry Kudlow to lead the National Economic Council, or concerns about his past dalliances with drugs and supply-side economics. This BLOG doesn’t care about one’s past human foibles as we all have failings. But the addiction to supply-side economics is and will be an issue of concern as the White House attempts to push forward with a coherent policy. The great showpiece of last week’s media frenzy over Kudlow was the transparency of what I have referred to as the mainstream media’s desire for access versus genuine discourse. CNBC was giddy over the idea that one of the network’s talking heads was going to be a key figure in forthcoming economic discussions and old loyalty OUGHT to provide greater ACCESS. The questions for the consumers of financial news will be who abuses the relationship more. But enough editorializing.

***The Kudlow Dilemma: Larry Kudlow was castigating the Trump administration for its promoting the steel and aluminum tariffs as they are solely a tax on U.S. business and consumers. The great voice of THEORETICAL FREE MARKET CAPITALISM opposes anything that undermines the free flow of goods and services in the global system. But Kudlow did say on CNBC that he would bend his free market principles by moving to “subsidizing industries to fix imbalances in trade.” In an effort to forestall a “trade war” it is better and cheaper to aid certain firms if it appears to be under the guise of national security. Okay, so theoretical capitalism is just a philosophical construct found in the textbooks of Econ 101. But the dilemma for Kudlow is this: If you are opposed to tariffs can you be opposed to USING A SOFT DOLLAR to impact the desires of the Trump administration for a rebalancing of international trade? It becomes more apparent that what Secretaries Mnuchin and Ross said at Davos is the real policy of the Trump administration. There is a trade war going on everyday and a weak dollar is sometimes a beneficial weapon in an effort to fight that war. Secretary Ross referred to it as a policy of finally sending “troops to the ramparts.”

Now that Gary Cohn is gone it is seems that the team of Wilbur Ross/Peter Navarro are the authors of President Trump’s effort to correct the massive trade imbalances that have fueled the Bretton Woods System put in place in 1944. In a 17-minute interview with Rick Santelli on CNBC, Navarro revealed more of what Commerce Secretary Wilbur Ross discussed in the previous week: There will be NO TRADE WAR. The U.S. trading partners know they have gotten a GREAT DEAL all these years and will be willing to compromise in correcting some of the more obscene imbalances through negotiations. The Trump White House seems to have done a cost-benefit of trade and concluded that sanity will push for a more balanced approach from allies and foes alike. Secretary Ross stated that the Chinese will not cut off U.S. agricultural imports because at the end of the day there are few places to acquire the massive amount of soyabeans they need to feed their population. Boeing makes the best planes in the world and China needs planes so therefore no negative effects.

Unlike Kudlow, it appears that Navarro/Ross are highly charged to depreciate the dollar in order to get the world to rebalance trade. Remember how ECB President Draghi attacked Treasury Secretary Mnuchin for his comments on the DOLLAR in Davos, just a day before the ECB’S January meeting? He said, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” How will Kudlow, who said on CNBC, upon his announced appointment, “I would buy KING DOLLAR and I would sell GOLD.” Kudlow has been a consistent promoter of KING DOLLAR through his years of opining on economics but the White House Kudlow is entering is not a bastion of strong DOLLAR designs. I refer back to then-CEO Mark Fields’ comment. (After a meeting at the White House in February 2017, Fields referred to currency manipulation as the “MOTHER OF ALL TRADE BARRIERS.”) It is from that time on that the U.S. dollar began to weaken.

When Draghi attacked Secretary Mnuchin for talking about a WEAK DOLLAR can be beneficial, the attack was based on the U.S. abrogating past G-20 and other international agreements. This is of course nonsense because the Trump Administration prides itself on flipping the tables of Pax Americana for those rules were written and imposed at a time of vastly different international order. Thus Kudlow’s KING DOLLAR MANTRA ought to be based on sound economic policy not on the theoretical constructs of free market capitalism.

If I was asking Kudlow a question it would be this: Ronald Reagan is always mentioned being your political paradigm. WERE YOU IN SUPPORT OF THE PLAZA ACCORD? (In 1985 the G-7 nations convened to weaken the overly strong dollar that was plaguing the U.S. economy and started the hollowing out of the industrial heartland.) In the current climate of fierce international competition maybe the Ross/Navarro/Mnuchin team have it right. The dollar is a mere tool in the clandestine global trade wars. So that may make Kudlow’s KING DOLLAR a dilemma?

To support the issue of currency manipulation, the SNB released their policy statement Thursday, which was very transparent about basing their monetary decisions on the valuation of the Swiss franc. The release said:

“The SNB will remain active in the foreign exchange market as necessary while taking the overall currency situation into consideration. Since the last monetary assessment in December, the Swiss franc has appreciated slightly overall on the back of the weaker U.S. dollar. The Swiss franc remains highly valued. The situation in the foreign exchange market is still fragile and monetary conditions may change rapidly. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential. This keeps the attractiveness of Swiss franc investments low and eases pressure on the currency.”

While the SNB is the most open about currency manipulation, most of the G-20 central banks regularly note their currency’s relative valuation when announcing monetary policy. The Federal Reserve boasts of its independence when setting Monetary Policy, but if the FED‘s current stance of shrinking its balance sheet while raising short-term rates eventually rally the DOLLAR will the Fed’s independence come under attack from an administration seeking to alter the present imbalances in the global financial system.

Will a stronger dollar promote increased utilization of tariffs? The FED will also have to be attuned to the rising rhetoric of trade protection as it determines how high to raise rates? Maybe the flattening U.S. yield curve is warning about potential impediments to global trade as the Trump team seeks to foster some global rebalancing. There are lots of questions, few answers producing the rise of dilemmas. When politics and theoretical economics collide the outcomes are very uncertain. 2+2=5 is no small thing at Notes From Underground. But I wouldn’t be shorting gold as the dilemmas unfold.

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9 Responses to “Notes From Underground: Kudlow’s Dilemma, Tariffs Versus King Dollar”

  1. Joel Dee Says:

    He has been on the wrong side of most issues so either he
    finally gets lucky and we jump on board or we continue to
    speculate against him. I vote we watch as the economy will
    quickly reflect his leadership acumen. Good luck Larry.

  2. Stefan Jovanovich Says:

    The current Treasury has no reason to stretch maturities as long as that increases the net interest burden of the public debt. Looking out to next year’s budget, they may even be willing to see rates invert so that domestic private savers – individuals and organizations – receive more immediate returns on their thrift. Or, if you like, they may wish to see rates invert so that more of the new buyers in the Treasury market are domestic. As for Mr. Kudlow, the President and Secretary Mnuchin are happy to have a professional talking head take responsibility for doing the daily stand-up routine.
    In the discussions of war and trade, it might be helpful to refer back to the time when countries sent warships and soldiers as debt collectors. The Mexican Civil War of Reform – which began shortly before our own – provoked Britain, Spain, and France to do so – all in the name of free trade.

  3. Bob Zimmerman Says:

    The QT of the MBS will be the Eve of Destruction.

  4. Chicken Says:

    “Inflation is just around the corner.” – Yellen

    Does TIP ETF represent wage inflation? Seems like cash flow growth disappears elsewhere.

    Commodities, IMO, have a tough road ahead.

  5. Quentin Says:

    Sir, during uncertain situations like these, do you greatly reduce portfolio exposure and go to cash until the facts clear up?

    And would you try to buy gold if technicals prove appealing? (before facts clear up)

    Do you use intraday charts (1 hour, 4 hour) for trade execution or analysis?

    Thank you.

    • yra harris Says:

      Quentin–as I continually advise–the technicals are important for trade location and even more importantly risk parameters—presently the GOLD technicals are a very mixed bag .I will be willing to short gold if short term interest rates rise high enough to generate a positive real yield of 50 basis point or more .More importantly is the GOLD versus currencies other then the dollar because real yields on a global basis are very negative in real terms

  6. sarjoy12 Says:

    Speaking of the SNB, remember when Hildebrand had to resign because of his wife Kashya’s currency trades? People in a position of authority are beyond the pale.

    • yra harris Says:

      Sarjoy–written of it many times.It was an act of “infamia”—but also when the SNB removed the 1.20 peg IMF Christine Lagarde voiced her displeasure at not being informed ahead of time–I wonder why?

      • David Richards (@djwrichards) Says:

        And her co-national Sarkozy is in custody now for allegedly getting millions illegally from Libya’s Gaddaffi (not the first time). Why is Lagarde still at IMF? DSK was falsely framed by who-knows (but we can guess) for raping an African hotel maid while on IMF business in NYC, and when it was seen to have been a fabricated set-up, he should have been reinstated, whether you like him or not, just out of principle.

        How times change. Back then they’d go to any lengths to defend dollar hegemony; now Mnuchin and Trump want to trash it and probably would like DSK back at the IMF to help them do so. Christine better watch her back; she might get framed for raping the bus boy if she visits the States, lol.

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