Notes From Underground: The Economic Consequences of President Trump

(NOTE: The following post is not political in any sense, but just a criticism of a major ill-conceived POLICY.)

This is a story of two pivots.

The first is Federal Reserve Chairman Jerome Powell in January 2019. The second is President Donald Trump in May 2020.

Powell’s pivot away from interest rate increases and balance sheet shrinking created a significant rally in equity and asset prices. Trump’s pivot on the DOLLAR will have disastrous results that are manifested in the GLOBAL DEFLATION that central banks have been trying to prevent. What is the reasoning behind the President’s recent shift away from a weak dollar to promoting the positive outcomes of a strong currency?

This question is not rhetorical but essential to the discussion of central bank efforts to stem the onset of global deflation.

The weekend Financial Times had a story titled, “Why Covid-19 Sparked A Trump  U-Turn on the Dollar,” by Eva Szalay. The writer noted that for the past few years in office the president demanded that the FED cut interest and suggested the Treasury could INTERVENE in the market to weaken the dollar as a supplement to “the tariff wars.”

The Trump White House hosted round table discussions with U.S. CEOs spouting concerns about the overvalued dollar creating problems for U.S.-based manufacturers.In 2017, then-Ford CEO Mark Fields called other nations attempts to weaken their currencies, “the mother of all trade barriers.”

But in a new period of global economic stress there is a volte face by President Trump. In the FT story, Szalay cited Seema Shah from PGI. who said the reason for the shift to a strong dollar is a shift from “trade and competitiveness to financing ballooning deficits.” Shah went on to say, “It is of utmost importance that investors don’t lose faith in the US financial system and its ability to repay debt.Increasingly, it’s in Trump’s interest to … finally embrace the strong dollar policy.”

Mark McCormick, global head of currency strategy at TD Securities, referred to Trump using the strong dollar as a campaign issue to reflect how strong the U.S. is relative to the rest of the world.

An earlier Reuters story titled, “Trump Pivots to Embrace a Strong U.S. Dollar,” quoted the president: “It’s a great time to have a strong dollar … Everybody wants to be in the dollar because we kept it strong, I kept it strong.” This strong DOLLAR conversation is PURE NONSENSE and it is a FLAWED POLICY AT A VERY OMINOUS TIME for the global economy.

It undermines everything Powell is trying to accomplish in keeping DEFLATION away from an over-indebted financial system. Last week, Adam Posen of the Peterson Institute interviewed the chairman, where he asked the Powell about the DOLLAR and the global economy. The chairman noted that the DOLLAR is the WORLD’S RESERVE CURRENCY and its funding markets play a critical role for the U.S. economy.

Powell explained by the SWAP LINES were important in an effort to stem the flight to safety into the U.S. was creating DOLLAR ILLIQUIDITY. By opening up lines to numerous banks the FED was BUYING TIME as markets attempt to return to normalcy.”

In my opinion, a STRONG DOLLAR at this juncture would merely put more downward pressure on global prices as producers sell production at lower prices in an effort to generate needed dollars for debt financing. This would create DEFLATIONARY PRESSURES, or what central banks are trying to prevent.


It was president’s use of the fear of increased TARIFFS that pushed the Fed to end the interest rate hikes and balance sheet unwind that was blamed as a trigger of the equity markets’ devastation at the end of 2018 and rise in interest rates across the entire yield curve. President Trump is playing with fire. The DOLLAR is a financial instrument first and foremost NOW and in an effort to prevent deflation a weaker dollar is needed to stem the urgent need to raise dollars for fear of it going higher.

A classic example is Brazil’s massive sale of SOYABEANS to China as the Brazilian real has DEPRECIATED 43% since the beginning of the year. Wow, boast about a strong dollar that is putting more pressure on the American farmer. Bragging about the STRONG DOLLAR is the equivalent policy of Mr. Churchill putting Britain back on the GOLD STANDARD in 1925, causing a rise in unemployment in the U.K. and a deflationary spiral as wages fell dramatically to compensate for the stronger British pound.

President Trump needs to support the FED‘s effort to inflate the global system, not undermine the efforts of Powell, Lagarde and Kuroda by citing the benefits of a stronger dollar. Where are Kudlow, Mnuchin, Navarro and the ship of fools on this issue?

While the Powell pivot was not my favorite outcome, it did result in a more stable financial system. The TRUMP PIVOT is an error of enormous harm. If President Trump is correct on the DOLLAR POLICY why is GOLD ON A CONTINUOUS PATH HIGHER?

GOLD fears a deflationary spiral and to what extremes central banks and fiscal authorities will have to embark upon to break that path. The inflation narrative is premature at this time. Deflation is anathema to a debt plagued financial system (2+2=5 as we do the math at NOTES FROM UNDERGROUND). Inflation or DEFLATION depends on which rabbit hole you tumble down.


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17 Responses to “Notes From Underground: The Economic Consequences of President Trump”

  1. ShockedToFindGambling Says:

    Yra- Great article.

    IMO, Powell made a huge mistake when he pivoted away from higher interest rares and a smaller FED balance sheet.

    He was just perpetuating keeping the asset bubble inflated……the longer the Central Banks do that, the bigger the crash will be.

    The Central Banks should have backed off on QE, as soon as possible, after the 2008 recession.

    Now asset prices are so dependent on QE/ZIRP, it’s difficult to see a peaceful market resolution.

    Every time the stock market has broken heavily for a few days, the FED has panicked.

    As Adami on CNBC says, the FED’s new twin mandate has become SP 500 and NASDAQ.

  2. Judd Hirschberg Says:

    Great work Yra! Here is link to an in depth conversation about today’s Blog

  3. Michael Temple Says:

    So, what took you so long to come join me over on the “Dark Side” of the Force?

    USD is NOT going to break down given the backdrop.

    As much as Powell has done since March 22nd, it is still not enough.
    FF futures flirting with NEG
    T-bill rates also hit NEG at one point in April
    And a 2 yr yielding 15 bp implies FF should be at least 50 bp lower or NEG 35.

    Trump is an imbecile when it comes to economics/markets. He can’t see the consequences much beyond his nose. He might as well imbibe some financial bleach while he is at it.

    The mercantilist trade war he is pursuing just makes the market tighter for USD.

    Powell has told us he will stop at nothing to counteract the RISK OFF conditions that are still likely ahead. So, he will be a very busy man in the months to come, especially as Treasury issuance comes along in force.

    But, he is already behind the curve and Trump just makes it worse.

    Adding to the likely coming strength in the dollar is the potential
    existential question of the Euro (thank you Germany) as well as the more PROBABLE Hard Brexit which should cause further currency chaos.

    The Dollar will rule supreme as both Sterling and Euro sink much lower. And, if Trump has his way with China, any drop in CNY to something like 7.50 just adds more pressure on the rest of EM.

    Your friend, Lacy Hunt, basically foresees Powell likely embarking on yield curve pegging as his next policy choice, as he does not wish to institute actual NEG rates…But, the market will probably do it for him, especially if he starts pegging the yield curve.

    All roads lead to gold, and the ironic thing (to me) is that the game has just barely started.

    The millenials love their Bitcoin….And a quick survey of the Top 10 stocks purchased last month on Robinhood is a collection of mostly yesterday’s news with companies such as Ford, Delta, United and Carnival Cruise still in the Top Ten.

    Nobody seems to know/care that NEM and Barrick have posted 50%+ gains since the March crash lows, and that the miners are increasing dividends heftily.

    There will be no Plaza 2.0 with this POTUS. At least not until it explodes higher against EUR/CNY/Sterling when the damage will have already been done.

  4. Norbo Says:

    “Is President Trump using the STRONGER CURRENCY to push the FED to take INTEREST RATES NEGATIVE?”

    Yra I think you’re trying to ascribe method to madness. I’d be amazed if he understands the mechanism between rates and the dollar. To Donald Trump “strong” is good and “weak” is bad. He makes pronouncements based on his current (30 second) thought pattern. There is no planning, merely reactions. In one of those 30 second intervals the thought entered his mind that he might have a better chance at re-election if people see the U.S. and the dollar as “strong” and he merely wanted to take credit for the word association. He’s probably forgotten about it or changed his mind by now. President Trump understands interest rates ONLY to the extent that it’s a bill he has to pay every month on the liability side of his balance sheet. A balance sheet that he is desperately trying to keep hidden from public view. THAT’S why he’s pressured Powell to keep interest rates low. There is no thought given to the effects his pronouncements have on the economy or the American people. Five level chess? Please! He doesn’t remotely understand how the pieces move.

    • None Says:

      100%…Trump can’t control the dollar and neither can Powell. Yra knows this?? But why is he playing dumb now? TDS effecting everyone. Yra…Quit reading the NyTimes…It pollutes the mind.

    • TSG Says:

      This is all the analysis of his behavior you need. Many smart people get wound up trying to figure out hidden or ulterior motives, but his is nothing but a bunch of zeroth-order thinking. Strong is good and weak is bad, that’s all there is to it. It’s just a simple word association in the same way a dog is excited when it hears “outside,” or a child upon hearing “ice cream.”

      If one of those aforementioned smart people wanted to do some worthwhile analysis, they might ponder the long-term consequences of a population that has an obviously powerful affinity for the “strong good, weak bad” messaging.

  5. andrew perry Says:

    Yra, I agree with your summary, and Michaels comments I believe are spot On. Lacy Hunt recent Macro voices interview summed it up for me, it is all deflationary, unless the fed spends new money, and the junk buy was not new it was existing issuance. When the FED buys equities, that I understand is the ” new” money, and unlikely under Powell.. the next Gov maybe – but where is Goldby then, and look at GOLD CNH/CNY made a new contract high on Friday. Negative rates and a higher dollar here we come! Long gold short dow, the best way to play the deflationary equity trade

  6. kevinwaspi Says:

    Powell is on 60 Minutes tonight.

  7. Arthur Says:

    President Daily Brief 101: Is a Strong Dollar Better than a Weak Dollar? Winners and losers

  8. Trading Perspectives from Yra - May 18, 2020 - The Cedar Portfolio Says:

    […] FROM UNDERGROUND). Inflation or DEFLATION depends on which rabbit hole you tumble down.” LINK HERE to the Blog Post Bookmark the […]

  9. The Bigman Says:

    Everyone here enjoy the takedown of gold this AM by the guys in the back room? Long time currency trader Chuck Butler throws in the towel on all currencies today:

  10. Pierre C Says:

    Just a couple of thoughts to throw out into the ring
    Pertaining to the recent rise in silver and gold, esp silver. I thought it was the market finally pricing in the real possibility of negative nominal interest rates.
    The strong dollar would force the the Chinese to appreciate the yuan, it being peg to the dollar. Correct?
    This could finally break the peg and along with the Yuan all the EM’s that follow them.
    I can’t discount this. Is in my view, above all else, Trump is a “disruptor”.
    Look at Isreal and the moving the embassy, trips to North Korea, the dismantling of the Bush and Clinton legacy.
    I listen when Yra says this is the nuclear option. At the same time, it does occur to me.

    • Pierre C Says:

      Hope I didn’t get political, I know the rules on this blog.

      • andrew perry Says:

        Question for Yra or any of his readers, I am moving from Bloomberg to CQG, professional trader – what is the vest CQG to use for trading and charts, integrated client or q trader?

  11. Judd Hirschberg Says:

    Andrew, it you’re looking to have up the risk spreads and all the relationship indicators Yra and I use, you’ll need integrated client. q trader is stripped down. You’ll want all historical life of contract data.

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