Notes From Underground: Trump Will Channel His Inner Nixon

In 1971, after President Nixon relieved the U.S. of the burden of the gold exchange-standard he paraphrased Milton Friedman by proudly proclaiming, “We are all Keynesians NOW.” In preparing for the 1972 election, Nixon realized that Keynes provided the ability for a sitting president to throw fiscal responsibility to the side and open up the spigots of fiscal stimulus in order to PUMP PRIME the economy. Keynes is focused on demand management.

In the wonderful book, “Nixon’s Economy,” Allen Matusow chronicled the Nixonian political/economic agenda that promoted the robust economic boom that elevated President Nixon. It was at this time that Nixon also browbeat Fed Chairman Arthur Burns to leave monetary policy in a stimulative position, providing the liquidity to assure a healthy economy heading into the November 1972 election. Before the “we are all Keynesians now” mantra, Nixon positioned himself as a fiscal conservative.

On Wednesday, the airwaves were populated with two discussions: 1. The split in Congress will result in gridlock which will prevent any type of legislative action and the budget will just proceed with ongoing continuing resolutions; and 2. Pelosi and other democrats are in search of an infrastructure program of at least $1 trillion in an effort to REBUILD AMERICA. Trump perceives himself as master builder of all things American–LaGuardia Airport is an example–and would be impressed with himself by repairing America’s crumbling infrastructure. There are deals to me made and the Greatest Showman on Earth is anxious to create a backdrop for his reelection campaign. The question, of course, is will the Democrats cooperate with Trump or will they wait until they control more of the government after 2020?

In discussing this concept with Mr. K McCarthy (one smart dude), we concluded that the backdrop is ideal and the Nixon/Trump share a stigma: They were both detested by the east coast establishment. (Shunned by the self-anointed elite). If my THEORY is correct the initial reaction of the bond market today will be proved wrong. I think those who believe in budget stagnation will be proven wrong, especially if the tariffs negatively impact the economy. There are those who will argue that there are not enough construction workers for a full-throttle massive infrastructure build. Don’t let the facts get in the way of great political concepts.

Trump is not nearly as intelligent on global matters but he certainly knows how to spend borrowed money to make a name for himself. Did today’s stock market rally signal it know has bought into the idea promoted in NOTES FROM UNDERGROUND last week. Fiscal austerity is dead and so passé. Japan, Europe, China, Brazil, Africa all heading into massive infrastructure programs. If I had a hammer and virtually unlimited funds … wow! Healthcare is a mere bargaining chip in these Trumpian times. The cherry on the top for Trump is that the Democratic control of the House emasculated the Freedom Caucus, which has been the last bastion of fiscal rectitude, even though they were repugnant in the way they presented their desires. As Trump will surely tweet, “We are all Keynesians now.”

***The FED will release its statement tomorrow and consensus is for NO CHANGE, leaving the FED funds rate in its current target range of 2 percent to 2.25 percent. I will agree with consensus as the FED will not disrupt the market’s present predilection to believe that a December FOMC rate rise is inevitable, based on current probability measures. The market will be attentive to the stridency of the Powell Fed’s language to identify any increasing fears over rising inflationary pressures. Oil prices have been soft as have other commodity prices so look for words about the TRANSITORY nature of low input prices. Wages have picked up a bit but nothing outside of the last five-year norm.

Also, let’s see if the FOMC raises any concerns over the new rate of shrinkage in the Fed’s balance sheet (though we might not see that until the minutes are released on November 29). Simon Potter, head of the Fed’s SOMA operation recently gave a speech and maintained that the current operation of $50 billion in balance sheet reduction coupled with the rising FED FUNDS rate is being well controlled with no major disruptions to the market. Some analysts are not as sanguine as Potter and believe the increased stock market volatility in October may have been a result of a massive decrease in fed reserves. Just advising that we be attentive to any sense of concern over declining velocity of money as bank reserves decline.

This afternoon the Reserve Bank of New Zealand left the Overnight Cash Rate (OCR) unchanged at 1.75 percent. The RBNZ made two key points in maintaining its present policy: 1. “Core CPI remains below our 2 percent target; and 2. The level of the New Zealand dollar exchange rate will support export earnings.” The idea of a 2 percent inflation target is a ridiculous reason to set interest rates as Paul Volcker has been recently been ubiquitously criticizing.

In a recent Bloomberg article Mr. Volcker noted, “The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets. Ironically, the “easy money,” striving for a “little inflation” as a means of forestalling deflation, could, in the end,be what brings it about.

Coupled with concerns about continuing a “little inflation,” it is important to note that RBNZ Governor Orr is honest in noting that present weakened state (my opinion) will provide support for export earnings. Paul Volcker is spot on in sounding the warnings over the continued use of the nebulous construct of a 2 percent inflation target. ECB President Draghi has built a monstrous balance sheet adhering to the precepts of a questionable theory. Will the Fed monetize the Keynesian desires of President Trump by maintaining ultra low rates? Piles of debt as fiscal austerity is cast asunder. There are trades to be built on this concept.

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16 Responses to “Notes From Underground: Trump Will Channel His Inner Nixon”

  1. Bellino Says:

    Yra, should Italy use the saskachewan ploy? What is it? When prime minister of Canada Mulroony signed NAFTA 1989, Canada suffered a massive deindustrialization, by the closing of hundreds of manufacturing branch plants. Mulroony pushed up interest rates sky high. To fight the subsequent inflation, said he. I made 400 percent on strip bonds, paying 12% over 29 years. Oh happy days! House prices collapsed. Those who bought high and lost their jobs were crushed like bugs. Ontario, the richest province, unemployment reached 12% plus welfare roles skyrocketed to 12% resulting to a
    home run total of 24% of the population without work! Glory Days for strip bonds, I should have bought more….lots. This depression lasted to 1988 when recovery took hold. At the height of misery the Canadian dollar reached 1.10 v. USA dollar. When full recovery began, interest rates collapsed and so did the dollar to 0.60 v USA dollar.
    The Premier of the busted and broke saskachewan, Roy Romano, called PM Mulroony asking for a freebee of 500 million to meet debt payments or Roy would be forced to declare bankruptcy. This would be supreme embrassment to Mulroony who no doubt thought of himself as The Great Helmsman of the canadian economic ship. Romano got the 500, and The Helmsman helmed on until the next election when the Progressive Conservative Party was destroyed ,losing all but 2 seats, therefore losing official party status. Subsequently to disappear completely.
    Italy is 12% GDP of the eurozone. It can’t be screwed like the Greeks who were less than 2%. If the Italian economy was destroyed in the Greek style, Germany would be pulled into the maelstrom.
    Italy says to Frau Merkel, give us such and such to stop my people’s misery or I will declare bankruptcy. What is “such and such”? Well the canadian style of “transfer payments” where rich provinces are taxed to more or less equalize the standard of living with the poor provinces. A boon to employment. I say Italy needs a True Romano.
    Russia declared bankruptcy, within 30 days money again flowed greedily back in ,all merrily forgotten, great profit to be made.
    Why should Italy like the proverbile frog be slowly cooked?

    • yraharris Says:

      Bellino–thanks for the pot and detailing out the Canadian trap.This is the concept I have been drawing to discuss why and how Draghi is trapped as the Italians can bring the global financial system to its knees–not a threat but the truth.It is Paul Volcker recent attempts to explain to central bankers that their policies are creating the situation they have been trying to avoid–it is financial calamities are provide the impetus for the deflation they fear.The longer they keep real yields negative the greater the risk builds in the system for investors will take on all types of ill-advised investments in an effort to generate real returns on capital.Draghi has screwed the Ger,mans in an effort to bail-out the debt burdened economies of Europe.The price is beginning to be paid but unfortunately the central bank models cannot be bothered to measure political risk created by poor policies–as Volcker states so well:”After all,those regression models calculated by staff trained in econometrics have to be fed numbers,not principles.”Here at Notes From Underground,i do the math and 2+2=5

  2. asherz Says:

    “We are all Keynesians NOW.” A little history. John Maynard Keynes promulgated his General Theory of Employment, Interest and Money in 1936. Keynes had the advantage of studying FDR’s New Deal which was put into practice from 1933 to 1936 when various government programs were created. How effective were these programs?

    In May 1939 Secretary of Treasury Henry Morgenthau Jr. said, “We have tried spending money. We are spending more than we have ever spent before and it does not work.” In fact unemployment was higher in 1939 than in 1931, the year before FDR was elected.

    Current trillion dollar annual deficits, means we are borrowing from the future to pay for today’s spending. All this in a hot economy. Unlike the 30’s, there are more jobs than workers. The 35% to 21% lowering of the corporate tax rate is part of the answer. Fiscal and monetary policy was been enormously stimulative. A probable successful legislative action where Congress and the White House will agree, is a trillion dollar infrastructure building program. It will be paid for by money we don’t have, and built by workers that aren’t available.

    Is there any bill that is coming some day? What differentiates us today from the FDR/ Morgenthau era? In 1932 the Debt/GDP ratio was 33%. In 1939 it was 43%. In 2018 it is 104% and going higher.

    Does this matter? With global interest rates rising and with QT progressing, debt service will become an ever rising part of the national budget. Yra, as you pointed out, the Freedom Caucus is going the way of the Tea Party. But the big PARTY goes on and everyone keeps dancing. And the Dow is up 545 points while the 10 year is at 3.23 and rising. Not to worry.

    • David Richards Says:

      I’m no economist but I understand that even the Keynesians didn’t advocate a debt-funded deficit spending spree like during this upswing in the business cycle, only during the downswing. It’s been reckless, even by Keynesian standards, and there shall be consequences. But I suspect I’m preaching to the choir here.

      Also, if we’re approaching the culmination of a debt *super* cycle, then Keynesian principles are inapplicable. Basically screwed.

      • yraharris Says:

        David–no economist but evidently play one on TV—-the end of QE also has unintended consequences so maybe Bernanke and yellen ain’t rocket scientists after all

      • yraharris Says:

        David–also you deal with two giants—Keynes and Kondratieff in one sentence–yes you are no economist.Let alone providing further heft to the Asherz detailing of the backbone of the Austrian based breakfast club–thanks

  3. Arthur Says:

    As you said before, “If real estate is location, location, location then finance is debt, debt, debt… but coming from the business of real estate development the president has never met a large debt that can’t be restructured.”

  4. Chicken Says:

    That drying paint must be color of red.

  5. Chicken Says:

    Oil is collapsing, something going wrong in China?

    • David Richards Says:

      Chicken, no not at all. Don’t believe that hype. Real estate over there is up 17% since summer and nobody there cares much about stock prices (capital is raised thru debt not shares, which are thinly owned). The mirror image of the US where real estate is down and almost everyone now monitors stock averages every waking day.

      Below is the alleged reason for the oil price collapse (and natgas rocket higher): hedge fund(s) forced into liquidation of their long crude short natgas trade of many years, kinda like what hit the years-long short vol tade (VIX) ten months ago. Plus the effect of lower market volume amplifying the move. Wait until bonds selloff more seriously sometime, as the market makers for bonds have largely disappeared and the daily trade volume/value is scarily low should more than a few sellers ever show up…Ka-boom! And wait, it could get worse. New house finance committee chairwoman Maxine Waters wants lots more regulation which will likely drive volumes down even further, and Europe is serious about creating a transaction/trading tax. So arguably, London will be better off with Brexit just on account of the latter.

      Anyway, I digress, but here’s your oil selloff explanation:

    • Chicken Says:

      I’m thankful to hear China is fine, I’ve been hearing a good percentage of the newer construction is dilapidating after just a few years thus becoming unlivable or salable.

      Hedge funds explanation is a great explanation, thanks for that as well..

      • David Richards Says:

        chicken, I believe the construction often tends to be shoddy throughout the whole region. So that’s a good point, as shoddy property would appear to be a poor investment, yet tangibles are the preferred investment vehicle, not financial products. Financial assets there were expected to take a big hit this year because for their big Oct 2017 wing-ding, policymakers there had pumped up asset prices by market manipulations, unlike what policymakers do back in the states & europe (lol). The closer you look, the more things seem the same. Human nature is apparently consistent.

  6. Chicken Says:

    Speaking of policymakers, I learned Maxine Waters will be in charge of bank oversight.

    Here we lose again, what a day.

  7. yraharris Says:

    To All–very strong posts—been traveling but now getting situated in the desert so will be back tomorrow night but these are very solid viewpoints–thanks for all of your input

    • Chicken Says:

      Do you believe Putin/SA were sucked into increasing oi production on the premise of Iranian sanctions?

      • yraharris Says:

        Chicken–no I don’t think so—I think the market was wrong footed with some crude/natty gas spreads as well as by the Trump waivers

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