Notes From Underground: The Importance of Being Lighthizer

The plot thickens as the media is filled with one leak after another in regards to tariffs or threats to embark on a road to perfidy by invoking section 232 of the 1962 Trade Act: Using the broad cover of national security to justify increased import duties on autos. [In a hat tip to A. Limey] It is time to acknowledge that the “brain” of President Trump’s trade team is Robert Lighthizer.

Lighthizer was the deputy U.S. trade representative during the Reagan Administration. In fact, he was an active adviser in the famed 1985 Plaza Accord when the U.S. met with the G-7 members to orchestrate a major weakening of the DOLLAR. The greenback had been super strong due to the fiscal stimulus of Reagan tax cuts and the monetary policy of the Volcker Fed. The currency strength resulted in an outflow of U.S. capital as American corporations established overseas companies to be rid of the strong dollar’s negative effects. Under the guidance of Treasury Secretary James Baker, Lighthizer produced a policy to weaken the dollar while also placing quotas on Japanese imports, invoking international trade rules and threatening sanctions.

We have been focused on Mnuchin, Ross, Navarro and Kudlow but it would be wise to watch Lighthizer as he has the history to be the key man for Trump’s trade policy.In an op-ed Lighthizer wrote for the New York Times in March 2008, he attacks the Republican Presidential nominee for his designation as an ardent free trader. Lighthizer provides a superficial history of Republicans as free traders but notes that Reagan was no pure free trader theoretician.

“Reagan often broke with free-trade dogma. He arranged for voluntary restraint agreements to limit imports of automobiles and steel [an industry whose interests, by the way, I have represented]. He provided temporary import relief for Harley-Davidson. He limited imports of sugar and textiles. His administration pushed for the ‘Plaza Accord’ of 1985, an agreement that made Japanese imports more expensive by raising the value of the yen.”

It is Lighthizer we need to watch as the U.S. bobs and weaves in an effort to craft a fair trade policy. Always keep in mind the various tools that  Lighthizer has at his command.

***A long-time reader, Arthur, posted a comment that cited a piece by Stanley Druckenmiller about his fears of a coming DEFLATIONARY threat because many zombie companies have been feeding on the ultra-low interest rates introduced by the global central banks. As interest rates rise in the U.S., the inability of some fragile corporations to meet rising interest costs may set many bankruptcies in motion. This is the fear of being unable to service debt loads. In response to the Druckenmiller piece Arthur posted, I responded with an article of my own, this one from John Authers at the Financial Times.

Mr. Authers is one of the best journalists at the FT so I cite his column out of respect. Authers is concerned that with all of the risks weighing on global markets, including rising inflation, GOLD has not been able to rally. The article quotes Simon Derrick of Bank of New York, who said the weakness in GOLD “has gone hand in hand with the rise in oil price and US government bond yields.” Derrick fears that higher oil and yields act to prevent growth and therefore lead to economic slowdown. More importantly, Authers picks up on the theme that higher bond yields result in HIGHER REAL YIELDS, which curb demand for GOLD.

But here is where I disagree that deflation weighs on gold. First, 10-year yields are not the instrument to affect gold prices. Short term real yields are much more of a determining factor for gold prices. Currently, short-term real yields are still a bit NEGATIVE. Second, my argument is that GOLD prices are much more affected by deflationary fears because if Druckenmiller’s fears are realized then the FED, ECB and BOJ will panic. And, as they readily admit, there is little firepower remaining to counteract an economic downturn. Deflation in a FIAT CURRENCY WORLD WILL BE COUNTERACTED BY A POLICY OF “WHATEVER IT TAKES” to keep prices from collapsing. The whatever it takes will be met a hyperactive central banks with the full arsenal of monetary stimulus.

If the deflationary conversation accelerates, I would buy GOLD against all fiat money. The asymmetric nature of central banks is to combat inflation by raising rates. However, the rush to prevent deflation leads central banks to cut rates quickly while also ramping up the QE programs. But objectivity is subjective.

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12 Responses to “Notes From Underground: The Importance of Being Lighthizer”

  1. Stefan Jovanovich Says:

    There are 2 assumptions that have become dogma. The first is that lowering the interest rates on bank reserves somehow “stimulates” retail spending by wage earners. The second is that sovereign legal tenders are “fiat” currencies and, therefore, implicitly inferior to “real” money – i.e. gold. No one who has ever tried to buy a cup of coffee at Horton’s with a Maple Leaf believes the 2nd, and no auto lease finance company has yet to tie its cap rates directly to the B of C’s discount rate changes.

    Gold has its market, which includes sovereign buyers; but it long ago ceased to be legal tender. Currencies exist because countries and currency blocs need units of account for their pricing of sales and loans. When people begin to fear for the future value of their money, they keep less and sell more by buying everything from stocks to art to survival food to real estate. What they choose to buy will depend on taste, habit, and current fashion and will be essentially unpredictable. When enough people become frghtened enough, the sellers will overwhelm the buyers; and the market for that currency will become a fantasy. The government will still quote an official exchange rate, but there will be no foreign exchange trades, only barter.

    If, by deflation, Mr Druckenmiller means that U.S. bank depositors will finally be earning enough interest to consider adding to their cash savings, his fears are well-justified. Thrift may be making a comeback; after all, the Cubs did win the World Series and the Eagles are NFL champios and the Stanley Cup is a lock for having the winner be an historical anomaly. Now, if we can only get rid of direct taxes….

  2. Asherz Says:

    Yra- You are correct in assessing gold’s trajectory in a deflationary period…or inflationary.We all know the reason for the latter. But QE on steroids will be implemented in a severe deflation. The Global Debt/GDP ratio in a time of rising interest rates is incendiary.Massive Fiat currency creation ex nihilo will follow. Gold should be viewed primarily as the touchstone currency as it has for millennia. And that is why I have maintained that its artificial price suppression explains why it has not participated in the almost decade asset inflationary period. A rise in gold price exposes paper for what it is, a trust misplaced in the wisdom of the central bankers. My great fear is that it may spell doom for the best economic system devised by man, Capitalism, when the blame should be leveled at the elves who are running the show.

    • David Richards (@djwrichards) Says:

      Indeed. And the millennial generation, at least in the West though not the East, has been schooled that capitalism is inherently flawed, inequitable and inferior to socialism. So they’re likely to learn in the 21st century from the school of hard knocks what the East and others learned about socialism last century. From each according to his ability, to each according to his needs. Great in theory but devastating in reality, due to human nature which is the same everywhere and doesn’t change.

      Position yourself accordingly as the biggest global-order paradigm shift in centuries is all but inevitable and already underway.

  3. Mike Temple Says:

    The case for a pause in Fed hiking cycle is literally playing out in real time as the Italian problem May soon be joined by Spain.

    If this summer brings market setbacks and chaos as Europe faces existential questions, you are most decidedly right that global CBs will do “whatever it takes” to combat deflationary “risk off” markets.

    QE to Infinity will crush interest rates, especially in US front end. Pick a number for gold’s upside, but I think a run to its 2011 high of$1900 could easily be reached within the next 18 months.

    Enjoy your holiday weekend

    • yraharris Says:

      Mike—you see ahead very well –the threat of a global credit default is getting more real every day.The Italians are like cool hand luke–sometimes nothing is a pretty good hand

  4. Michael A Temple Says:

    One more comment. Here, I will point to an actual marketplace development and not my comments or the cogent thoughts of somebody else. After all, markets are the best storyteller if you just watch and listen.

    As an expert, you know that the Eurodollar futures “pit” is one of the biggest and most liquid financial futures product there is.

    Take a gander at the “red” Dec 2019/March 2020 futures price action this week. On very little “news”, those deferreds have outpaced the front month June 2018 contract by 12 bps!! Up a total of 14 tics for the week.

    “Everybody” is laser focused every day (and, perhaps, rightly so) on the 2/10 curve and offers up commentary when the spread moves 2 bp in a day.

    As I said, “Mr Market” has decided to fade the viewpoint that Fed tightening is in play all the way out to Dec 2019/Mar 2020.

    What happens to those futures contracts if/when Fed ever actually says, “Given current market turmoil, we are going to pause our tightening intentions while we monitor global conditions/developments.”

    I daresay those “red” futures will SOAR.

    Enjoy your holiday weekend.

    • yraharris Says:

      Mike–as my daughter at Bloomberg Alexandra wrote about this and it has a great deal with the decision about IOER rates relative to the fed funds–this is /was the dovish aspect of the minutes–check out her articles on bloomberg news

  5. Michael A Temple Says:

    I had not focused much on the technical tinkering as outlined in your daughter’s article. Nevertheless, the potential energy that could be released into kinetic energy in those “red” futures is awesome if the Fed ever is forced by Drunkenmiller’s deflationary forces to be the “lender of last resort” to markets that go “tilt” in the future

    Enjoy your weekend. Go Cubs

  6. Mike Temple Says:

    What Could Possibly Go Wrong.

    Rev your engines.

    Am sure everybody will enjoy their long weekend,

  7. silverbug2155 Says:

    Yra, was wondering if today the Govt were to use accounting measures and matrixes of yesteryear would the headlines and Gold be where it is at? Cartoon accounting only last for so long. Gold has not rallied cause of corruption at the Crimex. The constant chatter like all is well is deafening. Interest expenditure is forever increasing on everyone in debt. Which includes the biggest elephant in the room the US Govt. Gold is a no brainer at these prices.

  8. Michael A Temple Says:

    Good Morning

    Am sure Mario has everything under control. Spain and Portugal now on simmer while the Italian pot is boiling.

    Capital flows still not going into gold because of US interest rate dynamics…But, gold becomes increasingly more valuable each day as credit conditions worsen in the EU.

    It is going to be a very hot summer.

    Happy Memorial Day to All.

    • yraharris Says:

      Michael–those who have followed this blog are well aware of the situation and not getting caught but making money as it is just beginning to set the stage.I am having to wonder what Draghi does–does he let things run wild in an effort to punish the lega and five star group–that is an important question

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