Notes From Underground: Trump Moves Markets Without Moving His Fingers

The noise just keep on coming and each are disrupting the markets in its own way and the president. Monday’s headlines from the financial press had large impacts on GOLD, COPPER, EQUITIES, and, of course, CURRENCY markets. Let’s look at the substance of the comments.

The first piece of news were reports emanating from a private Republican fundraiser, where Trump criticized the FED and his appointed Fed Chairman Jerome Powell. Readers of this blog are well aware that two months ago I wrote about the risk of President Trump attacking the FED for its policy of tightening liquidity and raising interest rates. The president has not disappointed as he continually directs venom at the FED as it continues to raise borrowing costs in an effort to offset the impact of the Trump tax cuts and fiscal profligacy.

Many quality, apolitical economists warned against the White House actions to stimulate an economy already at very strong employment. It backed Powell into a no-win situation in which the FOMC would have to raise rates in an attempt to meet its DUAL MANDATE. Now I believe that the FED OUGHT to have raised rates August 1 in an effort to push away from the politics of raising rates September 26, six weeks before the mid-term elections.

But Powell chose the safe path and followed the FED‘s design of raising based on its self-defined forward guidance. Powell didn’t wish to surprise the markets by veering off its guidance even though the strong data certainly provided cover for the FED to exert its independence over the market. But Powell stuck to the script and now has helped to politicize the FED as voters head to the polls in November.

On Wednesday, we get a look at the FOMC MINUTES so hopefully we’ll get a sense about how much concern was raised about the Trump tariffs, the strong DOLLAR and rising stress in the emerging markets. (This was all before the collapse in the Turkish lira and weakening in the Chinese yuan.) I have argued that the FED has a triple mandate as it is the central banker for the world’s reserve currency.

Peter Boockvar, Jim Bianco and the former Bank of India Governor Raghuram Rajan have all raised concerns about the FED raising rates while shrinking its balance sheet. This is leading to a rapid rise in borrowing costs for emerging market economies that have high levels of DOLLAR-denominated debt. The FOMC minutes will reveal if any of the FED members raised this issue of global dollar funding as a caution flag. If so, markets will put a dovish spin on the August meeting even though U.S. data remains strong.

Once the MINUTES are released attention will turn to the Jackson Hole Kansas City Fed Conference that begins Thursday evening and Powell speaking on Friday. Jackson Hole has risen in status as the world’s top central bankers, finance ministers and academics gather to discuss current issues in monetary policy. Sometimes, the markets are given a window into the thinking of the FED Chair. The most significant was Alan Greenspan, followed by Ben Bernanke, who, in 2010 laid out his plan for QE,which was cloaked in THE PORTFOLIO BALANCE CHANNEL.

The theory was that the PORTFOLIO BALANCE CHANNEL would lower interest rates to a low enough level that would force money out of passive investments and into seeking riskier assets in an effort to arouse Keynesian animal spirits. Unfortunately, for the emerging market economies the Bernanke plan resulted in a massive build-up of debt financed by ZERO /or NEGATIVE interest rates forcing developed market investors seeking a higher return on capital. Now that the FOMC is raising rates the servicing costs for the low-priced debt are on the rise. As Milton Friedman would suggest: There is no free lunch. Will Chairman Powell raise any concerns about the increased financial burdens for the global financial system? It’s doubtful, but the markets await any hint.

The second piece of information concerned Russia and raised the point that NOTES FROM UNDER GROUND suggested in previous blog posts. Trump hinted that the Russians could get sanction relief if, “Russia were to take steps to work with the U.S. on issues like Syria and Ukraine.” Now we have a sense of what Vladimir and the Donald discussed in Helsinki. The Russians want relief from the U.S. sanctions that prevent use of the SWIFT codes for international wire transfers. If Trump wants to be instrumental in curbing the violence and chaos in the Mideast (and curtail the influences of Iran and Turkey), he has to use the “good offices” of President Putin.

Putin is a wily international actor and knows he has a strong bargaining hand. Trump wants to succeed in bringing an end to the perpetual violence in Syria and other states. Nothing will happen without the Russians. The flawed policies of the Obama administration elevated the status of Russia in Syria and made them a key player in dealing with Iran.

Putin now has genuine leverage in aiding Trump in his desire to achieve some type of peace in the Middle East, a fragile arena where NARCISSISTS dare to tread. Such is the world we live in but from a financial standpoint it will make me add to my previous plan to be bullish on Russia investments. Watch RSX and the ROUBLE for confirmation, and, as I always advise do your work and find your loss points before embarking on any trade. Know where you are wrong before being correct. Sanction relief for Russia would bring in very needed investment. Are Trump and Putin trying to affect the U.S. elections in a more acceptable manner?

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11 Responses to “Notes From Underground: Trump Moves Markets Without Moving His Fingers”

  1. kevinwaspi Says:

    I believe Putin remembers 1998 better than most, and also knows that whether it’s the Thai Baht, or Turkish Lira, Russian oil revenues do not make for a diversified economy able to withstand global storms. It makes sense that he should trade that comfort for a little freedom, and play nice on Syria. Meanwhile, the trumper hopes to get help out of Afghanistan, now with seventeen years of toil, and nothing to show for it. No one remembers the great success (NOT) Alexander the Great had in the Khyber Pass, and how he warned generations of generals to come about trying to control that hell-hole.
    Switching channels to educational TV, we see retreating to the mountains of Wyoming, the ‘great intellectuals’ of the Davos Crowd. Following their own brilliant syllabus, they will comfortably solve for equilibrium in N dimensions simultaneously, using mathematical precision understood by fewer than 1000 souls on the face of this planet to confidently produce the perfect policy for what ails us….. as they always do. This time is not different.

    • yraharris Says:

      Professor–as Bismarck may have said–the whole of Afghanistan is not worth the life of one Pomeranian grenadier

  2. Publius Says:

    I was admonished for bringing *politics* to this website.

    • yraharris Says:

      Publius—criticizing the President for his policies is not political.When the President has taken a stance taht we agree are the right policy I say that–the operative theme remains –very much in the realm of Deng –don’t care if the cat is white or black as long as it catches mice.If the word narcissist bothers I am sorry but I would apply it to any with grandiose expectations —especially with the various actors who reside in the arena –very similar to the history of Afghanistan—-the flawed policies of Obama is a consistent stand so where you find politics please step back and measure.

  3. asherz Says:

    Yra-Of course there is a free lunch! Just look at the all time high in the S&P 500 while the music keeps playing on, fueled by the $60 trillion plus created in the last decade ex nihilo. The smooth talking bunch who enjoy a Davos ski holiday in January and summer mountain hiking in Jackson Hole can keep congratulating each other on their great successes as they sip their Tequilas. Nary a Jeremiad is heard among them.
    They will have great fun at a future cruise vacation, rearranging the deck chairs on the Titanic ship they will be sailing.
    Borrowing our grandchildren’s future to pay for our bills today has never been a good idea. This will not be an exception.
    What will a future Pecora Commission decide? One possibility is that the 1913 Federal Reserve Act was a mistake.

    • Yra Says:

      Asherz—in mirroring Buffet[Warren not Jimmy] everyone knows that TEQUILA makes your clothes fall off. We will find out who has indeed been swimming naked.

  4. Pierre Chapuis Says:

    Correct me if I’m wrong. I thought the reason we’re in Afghanistan is to prevent an oil pipeline from Iran to China. This country sits perfectly between both these countries.

    • yraharris Says:

      Pierre–I don’t believe that is the reason .Afghan has been a graveyard for global hegemons and if we are to go back to 2001 the U.S. went into the quagmire to pursue Al Qeda and crush the Taliban who had harbored and abetted Bin Laden.But Afghan has been a part of the great game for a couple of centuries and that was my point.

      • Chicken Says:

        In my limited imagination, military spending is a great explanation for why the conflict schedule will persist.

  5. Chicken Says:

    It’s still coming to me………

  6. Dan DeRose Jr Says:

    Yra, are the intelligentsia capable of giving Trump credit for the opportunity to get rates off the zero bound? What happened to the concern that rates wouldn’t be high enough to provide a cushion before the next recession? Love him or hate him but at least he’s abiding by the lesson of 1937 and the asymmetry of rates at the zero bound. And shame on EM for not preparing for the eventual rolling out of the tide. If only a finance minister would have seen something like this coming and sounded the alarm… oh wait…

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