Notes From Underground: Larry Kudlow, White House Eunuch

Make no mistake, Larry Kudlow is worthless as a source of financial wisdom because he wishes to be everybody’s friend. That prevents him from having a discussion about serious financial concerns. The Kudlow mantra is: Pay attention to the growth coming from the tax and regulatory reforms put in place by the Trump administration. I agree with the great need for regulatory reform, but the Kudlow mantra of “don’t worry about budget deficits because growth will take care of it” is RUBBISH. The Trump administration has increased spending while cutting taxes, which in my opinion has merely resulted in INTERTEMPORAL MISALLOCATION. The TRUMP White House has merely brought forth demand from the near future with no genuine way to pay for it. This is of course right out of the Nixon play book in which “we are all Keynesians now.”

After Kudlow was finished dancing with the talking heads on Monday afternoon, President Trump fulfilled his promise of placing tariffs on another $200 billion in Chinese exports to the U.S. The significance for Trump, Kudlow and Lighthizer is that the increased pressure on the Chinese is resulting in further weakening in the YUAN, which will be the onset of GLOBAL DISINFLATION. The depreciating YUAN will ENABLE the Chinese corporations to sell massive amount of goods around the globe in an effort to maintain market share.

This is what the Japanese did times of economic stress. Excess capacity dumped upon the global markets will keep prices under pressure, and, of course wages low as the world attempts to counteract the onslaught of “cheap” goods. Low profit margins fostered by a weaken YUAN, plus rising interest costs to service large debt loads is potentially a toxic combination.

The U.S. dollar has appreciated against a basket of emerging market currencies but has remained steady versus other developed currencies–YEN, EURO, POUND, SWISS–while gaining a small amount versus the Aussie, Canada and Kiwi, which are all commodity-linked units of value. Commodity prices are struggling in the short-term as producers rush to secure market share. Soyabeans are the poster child of U.S. tariffs as Brazilian producers are dumping beans into China in an effort to secure an increased share of the Chinese demand for sources of protein.

The weak Brazilian REAL is cushioning South American farmers against multi-year low prices in SOYABEANS as the bean/real spread resides well above the 200-week moving averages. Global headwinds are rising due to the threat of prices declining in an effort to secure market share out of fear of having to finance massive amounts of excess capacity. Is there any concern from the White House to the FED? Who knows what lurks in the prescience of the flattening yield curve. Maybe the shadow banking system does?

***At times I will post stocks that interest me in an effort to get feedback from my highly regarded readers and respondents. I am not a bottom-up analyst but top-down global macro. I offer this idea: If we think that volatility is on the rise as political and economic uncertainty increases, is VIRTU financial a hedge? It pays a 4.4% dividend and has fallen 50% in value as the VIX has declined from the first-quarter tumult. As always, I caution to do your technical analysis to establish a comfortable risk profile for each investor. Something to contemplate as I await feedback.

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19 Responses to “Notes From Underground: Larry Kudlow, White House Eunuch”

  1. raymack1999 Says:

    Right on Yra! great post

  2. Judd Says:

    Conceptually liked the Virtu idea when you posited it.
    Was not comfortable defining the risk. Still not sure what the max risk is after today’s ORL. I’d give it a go against 54.70 with a very tight leash

  3. Publius Says:

    Kudlow has digressed into an obsequious Trumpkin. Problem is, 9-5ers whose world-view is formed by watching TV and listening to talk radio buy in to all things political, economic from these people. In three years we’ve witnessed *conservative* movement morph into advocates of tariffs, administration picking winners and losers, and executive orders.

    Steven Moore had to tear up his own textbooks to shill for this crew.

    What the hell do people think goes on BEHIND the scene?

  4. massivedeplorable Says:

    Would not the decreasing costs of Chinese goods be filtered to US consumers by tariffs?

    Implicit in your thesis is the danger of what you call Disinflation. Why exactly is disinflation a bad thing? I do not agree that inflation is a good thing- it is IMO almost never constructive to the individual.

    Furthermore, it is not the USA’s responsibility to stabilize world markets. It is, however, the USA’s job to enable a robust economy here at home, strengthen our balance sheet and empower the American Citizen with opportunity, the dignity of risk and safety from bad actors- be they economic, political, or physical.

    • Yra Says:

      Massive deplorable—as the world’s central banks have warned –disinflation is a massive danger in an over indebted economy–see the global system—-for falling profits become stressful on the ability to repay loans.Let me ask you a corollary question—how did 2% become the mandate for inflation?In my understanding of the world of credit ,falling prices are a tremendous threat threat to global financials.I agree with your outlook on inflation as did the greatest central banker–paul Volcker– for it destroys the middle class through monetary illusion.For your final point—I agree until the U.S. accepted the burden of a reserve currency especially after the end of Bretton Woods and the GOLD EXCHANGE SYSTEM—a fiat currency system is built upon the foundation of fiscal and monetary responsibility–your turn

      • yraharris Says:

        Massive –i apologize if I seem rude–wasn’t met to be but one thing I have stressed in this blog for nine years is that central authorities always and everywhere try to inflate away debt—-so many examples but one recently discussed was the book –American Default—-inflating away debt is recommended in Rogoff and Roemers recent book–This Time Is Different

  5. Rob Syp Says:

    Since Virtu is down 50% then how can the CME be up 17% on the year? What gives?

  6. Dan DeRose Jr Says:

    Yra, Couldn’t agree more on Virtu. Virtu and Flow Traders have been on my watchlist for the last year as a pure play on market intermediaries. Both performed admirably during the January/February drama and are languishing as VIX does the same. I think they’re worth an allocation but beware the downside as neither is back to pre-Jan/Feb levels. Not to get too esoteric, but I’ve wondered if call options could fit the tail hedge needs of a portfolio better than downside protection in SPX with near record skew here.

  7. margo ranger Says:

    Terrific post, Yra — keep ’em cominig!

  8. Guy Williams Says:

    Outstanding Yra. You are a provocative and witty writer.  I like the “only the shadow knows” reference.  Stay healthy and thanks for including me in your posts.   Your Bears are looking good!  Guy

  9. Stephanie Says:

    The usually self assured somewhat cocky Larry Kudlow was a very different man in the interview with Becky Quick. I thought I heard him say ” I was the adult in the room and thought I could sway the President to my way of thinking . . . but the train has left the tracks and now I’m not sure how all this is going to end.”
    This morning NPR interviewed Peter Navarro regarding the impact of tariffs on trade. His response was one lie after another. When confronted with the truth – he would tell another lie using expressions such as ” of course as you know and all of your listeners know ……
    Expressions like this make people who don’t know believe he is telling the truth. The non-readers want to be part of the powerful insiders club, so they believe Peter Navarro and his lies.
    Larry Kudlow’s body language was correct. This is a mess!

  10. Arthur Says:

    Forget share prices, interest rates and GDP. A better measure of the severity of a financial crisis is WHO IS PAYING ATTENTION. If only financiers are watching, it is probably a manageable blip. When politicians start to notice, it is time to be concerned. When artists become interested, panic. (Via The Economist)

  11. the bigman Says:

    Yra- interesting idea the VIRT looking back at the ^VIX spike in early February Virt went from 19 to 28 immediately but then continue to rise after the ViX began to fall VIRT peaked 37.4 on 4/20. My point is that you may miss the initial rise but can still make money by buying immediately after the event. This may be better than gambling now on a black swan event which by definition is not predictable but as you point out you get paid 4.4% to wait. Eyeballing the plot of ViX vs Virt I don’t see much correlation prior to this year has anyone statistically looked at this?

    • Dan DeRose Jr Says:

      bigman – the beta is .95 over 1y, .99 over 2y and .45 over 5y. R^2 is .34, .27, and .15 respectively… or so says Bloomberg. Mark Cuban actually bought a big stake (or revealed one) after the drama earlier this year and I wonder if some followers helped keep the stock up for a bit.

  12. hedges Says:

    VIRTU or ticker VIRT is a holding company and a financial market maker, that leverages tech and data from global markets. Current price $21.90, IV 35.53, iv% 23.41

    From an options trade perspective it seems to have little equity volume (169K shares traded so far today) and illiquid options due to limited open interest.

    It has been in the news for all the wrong reasons. The company was seen as a play on increased volatility and trading volumes in the first quarter. But their own CEO has said
    “Our second quarter results reflect an operating environment for our core wholesale market making operation that was markedly worse than the robust conditions we saw in the first quarter. In addition to declining volatility we saw reduced retail participation in the market.”

    And as volatility is expected to remain low it seems their margins will be reduced. I do not see any changes in the low volatility ahead and would not trade the stock. Even a covered call has a 57% probability of success. It is possible to play the earnings volatility but then the liquidity becomes the issue.

    So to summarize, a low priced and low volume equity, with limited open interest in options. Maybe a play at an extreme (see the first quarter!)

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