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The House is expected to pass President Biden’s $1.9T Covid Relief Bill tonight. The bill is being considered under the Budget Reconciliation process in order to make it possible to be considered by the Senate under rules that prohibit a filibuster by Republicans. Last night the Senate Parliamentarian gave an advisory opinion that under the so-called Byrd Rule that governs Reconciliation in the Senate the provision to raise the minimum wage to $15.00 an hour would not be in order. As a Senate aide when the Reconciliation process was being developed it seemed to me that increasing the minimum wage was beyond the scope of Reconciliation. The process was developed to make it easier to make budget decisions on an expedited process, and in the Senate avoid filibusters. To be eligible for Reconciliation a matter had to have a direct budget impact either with changes to spending levels or revenue. President Biden, a Senate veteran, had hinted that while he favored the increase he had doubts if it would be ruled eligible under Reconciliation. The removal of the minimum wage increase from the Senate version of the bill creates a legislative complication in that the House will pass its version tonight with the $15.00 an hour provision, and it will not be in the Senate version to be worked on next week. The next big question in the process will be whether or not the Senate adds or deletes any other provision to the Senate version of the bill. One idea that is being actively considered by Senator Sanders and others is placing a penalty tax on employers who don’t pay their workers at least $15.00 an hour. While the details are still being worked on, one idea would be to place a 5% surcharge on payrolls for non-compliant employers. Since it’s a revenue measure it should pass the scrutiny of the Senate Parliamentarian. The Senate is expected to start working on the House passed bill next week. After the Senate completes action the House will need to decide whether or not they can accept the Senate version of the bill. The goal remains to get the legislation to the President for his signature prior to the March 14 unemployment cliff when federal unemployment programs expire. Pelosi, Schumer and the White House should all be in close communication next week so as to assure House acceptance of any changes made by the Senate. Obviously, the Senate removal of the minimum wage increase will be a tough pill for the House progressives to swallow, but the benefits of the large package seems to outweigh the goal of a $15.00 minimum wage. If the Senate does add the penalty payroll tax that might make the final bill more acceptable to House Democrats. But in any event the idea of increasing the minimum wage is not dead and will come back again this year. Trump at CPAC Former President Donald Trump will speak on Sunday at the conservative Republican gathering in Orlando. The CPAC annual meeting has long been a launching pad for Republican Presidential candidates and many who are thinking of running in 2024 are lined up to speak. In fact private citizen Donald Trump gave his first major political speech at CPAC in 2011, it set the tone for the campaign he would launch in 2015. Trump thrives in front of large, friendly crowds and that is what will greet him on Sunday. While he reportedly has a scripted speech, he hates reading from the teleprompter and will likely give the freewheeling train of thought speech. Reports from the Trump camp say that the former President will get up close to the line of announcing a 2024 candidacy but will stop just short of formally becoming a candidate. However, it is hard to predict what he will do when greeted by his loyal followers. The strength that Trump brings to a potential run was seen this past week when Senate Leader McConnell, who laid into Trump’s role in the 01/06 insurrection at the Capitol, said that he would “absolutely” support Trump if he is the 2024 nominee. In my view it is a very important speech as without doubt Trump is the titular head of the Republican Party. While McConnell and McCarthy may hold the senior elected positions, their role is minor compared to the former President, and Trump relishes the spotlight that he will carefully nurture for the next few years. The future strategy for Trump starts with the Sunday speech.

Covid Relief Moves Forward, Trump to Re-Emerge
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  • US Policy
Jan 31, 2020

Iowa Primary Could Winnow Democratic Field; SOTU Up Next

While the coronavirus grabs all the headlines, it’s going to be a big week for politics and policy, and it will pay for investors to pay attention. Next week has two events that are the opening of the 2020 election year: first votes cast in the Iowa Caucuses and the President’s State of the Union address. Iowa On Monday, Feb. 3, Democratic voters in Iowa will vote in the primary. At this point there seem to be up to five candidates: former vice-president Joseph Biden, Senator Bernie Sanders, Senator Elizabeth Warren, Pete Buttigieg, and Senator Amy Klobuchar grouped at the top. What I will be looking for? First, is the showdown between Sanders and Warren to be the candidate of the progressive wing of the party. All polling appears to indicate that Sanders has gained momentum and is well ahead of Warren. If he handily defeats her it is hard to see where her campaign goes from there. Second is a test for Biden to see if he is indeed on his way to the nomination. While he doesn’t need to win he does needs a strong showing. Thirdly, do Buttigieg and Klobuchar have a chance to stay competitive in the race should Biden falter. Both have a lot on the line and a high finish would energize their campaign as the candidates move on to New Hampshire. State of the Union In all likelihood by Tuesday night President Donald Trump will go before a joint session of Congress cleared of the impeachment indictment. The question is: Will he gloat or try to be presidential and talk of his accomplishment, lay out some issues for the coming year and address the nation on the coronavirus. There is apparently a push in the White House by his aides try to get the President to talk about what he has done, suggest more tax cuts and lower prescription drug prices, and have some calming words on the coronavirus outbreak. It seems like “Mission Impossible” to stop the President from some gratuitous comments when he sees his Democratic prosecution team sitting in front of him. The coronavirus could be a defining moment for the President as it provides both the opportunity to be seen as the national leadership at a critical time, but it also runs the risk of showing the side of the President where he can seem incapable of empathy or able to articulate a complex issue. We’ll soon see. Figure: Top Trump Tweets Working closely with China and others on Coronavirus outbreak. Only 5 people in U.S., all in good recovery.— Donald J. Trump (@realDonaldTrump) January 30, 2020 BIGGEST TRADE DEAL EVER MADE, the USMCA, was signed yesterday and the Fake News Media barely mentioned it. They never thought it could be done. They have zero credibility!— Donald J. Trump (@realDonaldTrump) January 30, 2020

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  • US Policy
Jan 31, 2020

Iowa Primary Could Winnow Democratic Field; SOTU Up Next

While the coronavirus grabs all the headlines, it’s going to be a big week for politics and policy, and it will pay for investors to pay attention. Next week has two events that are the opening of the 2020 election year: first votes cast in the Iowa Caucuses and the President’s State of the Union address. Iowa On Monday, Feb. 3, Democratic voters in Iowa will vote in the primary. At this point there seem to be up to five candidates: former vice-president Joseph Biden, Senator Bernie Sanders, Senator Elizabeth Warren, Pete Buttigieg, and Senator Amy Klobuchar grouped at the top. What I will be looking for? First, is the showdown between Sanders and Warren to be the candidate of the progressive wing of the party. All polling appears to indicate that Sanders has gained momentum and is well ahead of Warren. If he handily defeats her it is hard to see where her campaign goes from there. Second is a test for Biden to see if he is indeed on his way to the nomination. While he doesn’t need to win he does needs a strong showing. Thirdly, do Buttigieg and Klobuchar have a chance to stay competitive in the race should Biden falter. Both have a lot on the line and a high finish would energize their campaign as the candidates move on to New Hampshire. State of the Union In all likelihood by Tuesday night President Donald Trump will go before a joint session of Congress cleared of the impeachment indictment. The question is: Will he gloat or try to be presidential and talk of his accomplishment, lay out some issues for the coming year and address the nation on the coronavirus. There is apparently a push in the White House by his aides try to get the President to talk about what he has done, suggest more tax cuts and lower prescription drug prices, and have some calming words on the coronavirus outbreak. It seems like “Mission Impossible” to stop the President from some gratuitous comments when he sees his Democratic prosecution team sitting in front of him. The coronavirus could be a defining moment for the President as it provides both the opportunity to be seen as the national leadership at a critical time, but it also runs the risk of showing the side of the President where he can seem incapable of empathy or able to articulate a complex issue. We’ll soon see. Figure: Top Trump Tweets Working closely with China and others on Coronavirus outbreak. Only 5 people in U.S., all in good recovery.— Donald J. Trump (@realDonaldTrump) January 30, 2020 BIGGEST TRADE DEAL EVER MADE, the USMCA, was signed yesterday and the Fake News Media barely mentioned it. They never thought it could be done. They have zero credibility!— Donald J. Trump (@realDonaldTrump) January 30, 2020

  • US Policy
Jan 24, 2020

Impeachment Saga Again Dominates Policy and Politics in DC

With the ongoing impeachment trial and minute by minute news headlines, it is hard for investors to break through to the other important issues, which are sidelined while the House managers argue their case to the Senate. Given the GOP numbers in the Senate and a needed 2/3 majority for conviction, it’s a Kabuki play, more showmanship than content. The only real question is whether or not the process will be dragged on for weeks with the calling of witnesses, a move that only requires a 50% majority. The White House appears ready to argue executive privilege to try and stop former National Security Adviser John Bolton and others from testifying. In my view, Senate Majority Leader Mitch McConnell knows that while the Republican majority will dismiss the charges, an extended trial will hurt the handful of Republican senators who are running in competitive races this year. It is his view that the sooner the process comes to an end the better. The simple Senate math is that Republicans currently have a three seat majority and are likely to pick up a seat in Alabama giving them a four vote cushion. However, in Maine and Colorado they are defending seats in states Clinton won in 2016, Arizona has gone from red to purple and last year elected a Democratic senator and the Democrats have a strong Senate candidate. In Kansas with Secretary of State Mike Pompeo’s decision not to run for the Senate, Republicans are stuck with a weak candidate who lost to the Democrat for governor in 2018. If Republicans would lose these seats, and the Democrat wins the White House, the new Democratic Vice President would cast the tie breaking vote to give control to Senator Chuck Schumer and the Democrats. Senator McConnell is committed to prevent that outcome! Among the crucial issues that impeachment has drowned out are the growing concerns about the deadly outbreak of coronavirus in China; efforts by both Republicans and Democrats to deal with prescription drug prices; the threat posed by Iran ,and even the Iowa Caucuses with Senators Bernie Sanders, Elizabeth Warren and Amy Klobuchar sitting at their seats each day of the trial. The end of the trial, sooner than later, might be the best outcome for both parties. Figure: Top Trump Tweets The United States looks forward to welcoming Prime Minister @Netanyahu & Blue & White Chairman @Gantzbe to the @WhiteHouse next week. Reports about details and timing of our closely-held peace plan are purely speculative.— Donald J. Trump (@realDonaldTrump) January 23, 2020 One of the many great things about our just signed giant Trade Deal with China is that it will bring both the USA & China closer together in so many other ways. Terrific working with President Xi, a man who truly loves his country. Much more to come!— Donald J. Trump (@realDonaldTrump) January 22, 2020

  • US Policy
Nov 15, 2019

Congress Expected to Pass Temporary Budget by Nov. 21

Thursday, November 21, is the deadline for Congress to pass legislation to ensure that there is no government shutdown. It is widely expected that Congress will pass another Continuing Resolution (CR) to keep funding at current spending levels. As is often the case in Washington under President Trump, there is always some level of uncertainty as the President views unpredictability as an important management tool. Secretary of Treasury Mnuchin has had talks this past week with all the key players on Capitol Hill and has stated that the President is ready to pass a “clean” CR that has no policy riders. With respect to all budget issues, including the upcoming CR, the President’s desire to build the wall on the Southern border is always part of the conversation. The general assumption is that the CR will be silent on the wall thus allowing the Administration’s current funding plans to continue. December 20 is the anticipated new deadline for government spending that is expected to be set in the legislation to be passed next week. Meanwhile, the impeachment process rattles on. Speaker of the House Nance Pelosi is trying to find some issues where the House Democrats can demonstrate that they can work on bipartisan basis even with the friction caused by impeachment. This past week there seemed to be movement on the idea that Congress could act on the revised NAFTA treaty, the so-called USMCA. US Trade Representative Robert Lighthizer has been actively negotiating with House Democrats and there appears to be movement which would allow for a vote this year. It is a great issue to find compromise as the President is fully committed to the treaty and his desire to get it passed might overcome his building enmity towards the Democrats over impeachment. In order to support the treaty Democrats need to shore up support from their allies in labor, but few dispute that the renegotiated treaty is better than the existing one. Walmart announces great numbers. No impact from Tariffs (which are contributing $Billions to our Treasury). Inflation low (do you hear that Powell?)!— Donald J. Trump (@realDonaldTrump) November 14, 2019 “The Chinese say (about Trump’s Trade War & Tariffs), ‘he brought us to the table.’ This is the most prosperous economy the world has ever seen, and it’s going to be a very prosperous economy.” Jamie Dimon on @60Minutes Thank you President Trump & the Republican Party!— Donald J. Trump (@realDonaldTrump) November 11, 2019

  • US Policy
Oct 18, 2019

Impeachment House Distraction May be Good News for Trump

The potential impeachment of President Donald Trump and the ongoing military conflict in Syria continue to dominate the headlines, with little else able to generate interest. Ironically, this could be good news for the President, as the Democrats’ 2018 gains were due to Americans’ concern with health insurance, prescription drugs, and climate change. But these Democratic issues have been pushed aside in the headlong dive into impeachment. Indeed, the Democratic debate got little attention in this environment. Nevertheless, Mick Mulvaney, the acting chief of staff, seems to have dug the hole deeper for President in the House of Representatives, when Mulvaney admitted in a press conference that a Ukrainian military aide was held hostage to political agenda. It seems hard to see how Mulvaney can survive as Trump is likely to look for scapegoat for political mess the chief of staff created, or how he can walk back a comment said at the White House briefing room and taped by all the media outlets. With the troubles in Syria, China trade talks, and impeachment imbroglio, President Trump will need some help to manage the issues, and it will be a tough time to look for a fourth chief of staff. Though the trade talks with China apparently have taken a back seat to impeachment and Syria, negotiations have continued to finalize language on the agreement announced by the President last week. It appears that whatever finally emerges will be formally adopted by both countries at the APEC meeting in Chile on November 16-17. However, with the meeting nearly a month away, issues ranging from Hong Kong protests to a change of heart by a mercurial president could cause problems for the deal and see a renewal of tariff hikes. The market won’t like that. On the budget front, the Senate fell well short of the margin needed to override a Presidential veto of legislation that would void a funds transfer to border wall building from the military budget. While ten Republicans supported the override it would require 20 Republicans to get to the 2/3rds majority. Last year it was a deadlock over the wall that cause the government shutdown, and the same issue could emerge as a deal breaker next month as the new deadline of November 21 approaches. The President will need to weigh the benefit of the crisis environment he seems to relish versus the pain that can be caused by a government shutdown. Across the Atlantic, this weekend all eyes will be on London where the Parliament is scheduled to vote on Saturday on the Brexit agreement Prime Minister Boris Johnson reached with the EU. It appears the Northern Ireland Unionists are not willing to vote with the Conservatives, meaning Johnson will have to find some support among independents, Labor or Liberal Democrats to break with their party and support the Brexit plan. There are nearly 20 Labor members who represent districts that voted for Brexit and they are the likely targets of last-minute bargaining in the House of Commons. Figure: Top Trump Tweets Guatemala, Honduras & El Salvador have all signed historic Asylum Cooperation Agreements and are working to end the scourge of human smuggling. To further accelerate this progress, the U.S. will shortly be approving targeted assistance in the areas of law enforcement & security.— Donald J. Trump (@realDonaldTrump) October 16, 2019 Just out: MEDIAN HOUSEHOLD INCOME IS AT THE HIGHEST POINT EVER, EVER, EVER! How about saying it this way, IN THE HISTORY OF OUR COUNTRY! Also, MORE PEOPLE WORKING TODAY IN THE USA THAN AT ANY TIME IN HISTORY! Tough numbers for the Radical Left Democrats to beat! Impeach the Pres.— Donald J. Trump (@realDonaldTrump) October 15, 2019

  • US Policy
Oct 11, 2019

It's All Impeachment, US-China Trade All the Time

Unless you were sitting under a rock somewhere, you know that the potential impeachment of President Donald Trump dominated the news last week, kind of like the New England Patriots and football. That’s likely to continue for a while. Anyway, while the House of Representatives might indeed approve articles of impeachment against him, investors need to focus on the fact that there remains little support among Senate Republicans to convict him. For those of you who don’t remember your high school civics class, the effect of impeachment alone is limited. An impeachment is equivalent to an indictment in criminal law, and only the statement of charges against an official. While a House vote to impeach only requires a majority, which the Democrats have, a conviction in the Senate requires a 2/3rds majority, which the Democrats don’t. It’s far out of reach today. As noted in the piece by my colleague Tom Lee on page 3, investors need to look more deeply into situations the market is evaluating. And ironically, impeachment may actually help the President next year, as the political conversation ahead of 2020 Federal elections moves from issues such as health insurance, prescription drugs, and climate change to talks between two leaders and whether or not the President may have violated campaign finance rules during the conversation. Remember, the Democrats captured control of the House because of the issues that impact voters, not campaign finance issues. More fallout from this also hits former Vice President Joseph Biden, who’s been hurt by the talks of the role he played with respect to his son’s activities both in Ukraine and China. The talk of Biden in this negative light could help Senator Elizabeth Warren as she continues to climb in the early polls. And here’s another thing: President Trump has shown he is street brawler who will fight hard to be re-elected. Trade took second place last week in the market’s sights. For more on this see page 1. China and the U.S. have announced a new round of trade talks in Washington, D.C. to occur October 10-11. The Chinese seemingly have shown goodwill by permitting the purchase of soybeans and pork from the U.S. ahead of the talks. While a big comprehensive deal isn’t in the cards, a smaller agreement could be reached in the coming months. An agreement would likely have Chinese agricultural purchases and the US permitting export licenses to be given to American companies that supply Huawei. The Congress avoided a federal government shutdown next week by approving a Continuing Resolution postponing spending decisions to Nov. 19. Kick the can down the road. Figure: Top Trump Tweets The President of Ukraine said that he was NOT pressured by me to do anything wrong. Can’t have better testimony than that! As V.P., Biden had his son, on the other hand, take out millions of dollars by strong arming the Ukrainian President. Also looted millions from China. Bad!— Donald J. Trump (@realDonaldTrump) September 26, 2019 Sounding more and more like the so-called Whistleblower isn’t a Whistleblower at all. In addition, all second hand information that proved to be so inaccurate that there may not have even been somebody else, a leaker or spy, feeding it to him or her? A partisan operative?— Donald J. Trump (@realDonaldTrump) September 27, 2019

  • US Policy
Oct 4, 2019

Impeachment Fever, Trade Talks; DC In Full Circus Mode

Impeachment fever has taken over Washington, D.C., but the business of governing is attempting to proceed around town. The big news next week will be the arrival of a high-level Chinese trade negotiating team. Figure the market will hang on every word, sorry, make that tweet, that comes either from the President or the Chinese delegation. The latter is less adept at tweeting— so far, of course. However, the unrest in Hong Kong poses a wild card risk to the talks as it will be hard for the U.S. to stay mum if protesters there start to be hurt or killed. The Chinese are highly unlikely to help Trump with trade talks if he interferes in what they consider a domestic matter. That said, both sides have incentives to reach a mini-deal that could help President Trump secure his support in rural America with some Chinese purchases of agricultural products and the US giving needed licenses to Chinese technology giant Huawei Technologies. Talks are scheduled for next Thursday and Friday. Also on the trade front, the World Trade Organization handed down a final ruling favoring the U.S. in its complaints against the European Union over subsidies to Airbus (EADSY). The decision allows the US to place tariffs on EU imports and, surprise, surprise, the tariff-happy Trump Administration responded with over $7 billion of tariffs on EU goods ranging from clothing to cheese. The EU is expecting a similar ruling in their favor by the WTO focused on aid by state governments to help Boeing (BA). The EU has threatened to impose retaliatory tariffs on U.S. products. Both sides will start talks in the coming months to try to tamp down the tensions. And the tariff beat goes on. An interesting side story to watch in the coming weeks is whether or not the Trump Administration has any interest in working with Congressional Democrats to demonstrate that government business can be conducted during the impeachment investigation. Two areas have been the focus of some initial discussions: approval of NAFTA 2, or USMCA as it is now known, and action aimed at lowering the price of prescription drugs. Time will tell if the passion of impeachment blocks all other business. Congress and the President will need to take some action on government spending prior to the next deadline of November 19. Finally, the weak ISM data that came out this week likely points to another 25bps cut by the Fed at their end of the month meeting. For more see pages 1 and 6. Figure: Top Trump Tweets The U.S. won a $7.5 Billion award from the World Trade Organization against the European Union, who has for many years treated the USA very badly on Trade due to Tariffs, Trade Barriers, and more. This case going on for years, a nice victory!— Donald J. Trump (@realDonaldTrump) October 3, 2019 Massive sections of The Wall are being built at our Southern Border. It is going up rapidly, and built to the highest standards and specifications of the Border Patrol experts. It is actually an amazing structure! Our U.S. Military is doing a GREAT job.— Donald J. Trump (@realDonaldTrump) October 2, 2019

  • US Policy
Sep 13, 2019

China trade war sees some sunlight, eyes on the Fed, and federal budget deadline approaches

There were some small positive signs this week that the US and China might be moving towards some progress in the current trade war battles. The Chinese requested that the Trump Administration delay for two weeks, purportedly because of a national holiday, the implementation of the next round of tariffs. The President agreed to delay the next round of scheduled increases from October 1 to October 15. This would give the two sides time to have a face to face meeting which is scheduled to happen in DC in early October. On Friday the Chinese responded to the two-week delay by agreeing not to impose their reciprocal tariff increases on October 15. Knowing that the farm vote is front and center in the President’s thinking, the Chinese actions will apply to pork and soybean products. While the Chinese action is a solid goodwill gesture it does not rollback the tariffs that they have already applied to both pork and soybeans. However, this does create a better atmosphere for some more meaningful action in October. On the Fed front all attention will be on next week’s FMOC meeting. While the President continues to jawbone the Fed to dramatically lower rates, the general expectation is that the Fed will lower the Funds rate by 25 bps. What will be closely watched is the Chairman’s comments about future actions. The inappropriate statement a few weeks ago by former NY Fed President Bill Dudley will give the President ammunition to attack any action or statement by the Fed that looks like a partisan posture aimed at the President. In my view Dudley weakened Chairman Powell’s position. The Congress only has two weeks to pass appropriations to fund the government past the October 1 beginning of the new fiscal year. While the House has acted on the major departments the Senate has become ensnared in the regular issues of the border wall and abortion. However, there seems to be a consensus across party lines that the Congress will pass a Continuing Resolution (CR) before midnight on September 30 to keep the government open. While President Trump is always a wild card, and the CR won’t deal with his desire to expand his authority to build the border wall, the general expectation is that he will sign a CR that doesn’t have any other hot political issues and there will be no government shutdown. Figure: Top Trump Tweets The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet…..— Donald J. Trump (@realDonaldTrump) September 11, 2019 …. The USA should always be paying the the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of “Boneheads.”— Donald J. Trump (@realDonaldTrump) September 11, 2019

  • Signal from Noise
Aug 29, 2019

Soybeans Won't Cost Trump in 2020, but Auto Tariffs Might

By Vito J. Racanelli, August 29, 2019 There’s a narrative in markets—fueled by headlines—that soybean farmers could cost President Donald Trump the 2020 election. I beg to differ. He might indeed lose the election, but it won’t be the beans. In trade wars and headlines, facts sometimes get in the way of the story. A reasonable review of the agricultural and electoral data, as we’ll see below, suggests the likelihood of Trump losing a meaningful portion of the farm state vote that he won in 2016 is a low percentage bet. Simply stated, in the most important soybean states that went for Trump in 2016, they did so in such a big way that it would have to get very bad to cause a switch of allegiances.  In 2020, the reversal necessary to cost him electoral votes—remember that’s what elects presidents—is going to be a tall order for the Democratic candidate, whoever he or she is. Trump’s average margin of victory in the soybean states he won was over 20%.   It’s true that some farmers are hurting, hit by a double whammy of reduced soybean sales to China and lower commodity prices. According to the USDA, U.S. total soybean exports this year at August 1, 2019, were 42.0 million tons, down 11.3 million from the year ago period. Much of that was due to exports to China, 10.6 million tons, down from 16.9 million in the same period of 2018. (See table.)  The second whammy is price: Outside the U.S. soybean prices are down 14%. In calendar 2018, the U.S. imported a record $539.5 billion in goods from China and sent $120.3 billion there, for a trade deficit of nearly $420 billion.  That’s why Trump is seeing red.  I’m not going to discuss the U.S long term structural deficit with China nor the likely poor efficacy of tariffs and trade wars, but suffice to say I think they are bad for the U.S., bad for China, and bad for the world. I understand the frustration with China, but given that the U.S. is a democracy and China is totalitarian, it’s more likely that China can tough it out than the President be re-elected. The 2018 U.S. exports to the Middle Kingdom ($120.3 billion) were down from about $130 billion in 2017, and almost the entire difference was soybean and corn. The U.S. is a net importer from China in most market segments such as consumer electronics, apparel, furniture and industrial supplies. The one major exception: agriculture. Soybeans made up a big chunk of the U.S.’s worsening 2018 trade deficit with China. If you want a superficial assessment, it’s that soybeans will cost Trump the 2020 election. But let’s look at the big soybean states that went for Trump and by how much. (See table below.) According to a study done last year by the Federal Reserve Bank of St. Louis, the top 10 soybean producing states (2018 data) made up nearly 80% of U.S. soybean production. Trump won 8 of them by significantly large margins, and lost one, Minnesota, by a small amount. Given those “yuge” winning margins in the eight states, it would take a rather large voter U-turn there to cost him the electoral votes. Could it happen? Sure, but how likely is that?  For example, even if he lost the two states with his smallest margins of victory, Ohio and Iowa, but repeated in the other six, that would still leave Trump with 282 electoral votes. That assumes he repeated victory in all the other states he won in 2016.  It might be a narrow victory, to be sure, and other factors could still cost him. Here’s another reason why soybeans aren’t scary for Trump. Despite the pain to farmers and consumers, Americans like his tough line in general, according to a recent story by The Wall Street Journal. Top Congressional Democrats and Republicans have applauded his aggressive line and polls show mistrust of China is growing across party lines, the newspaper reported. China takes about 7%-8% of the U.S. total of exports. The US Trade Representative Office notes the other top export categories to China last year were aircraft ($18 billion), machinery ($14 billion), electrical machinery ($13 billion), optical/medical instruments ($9.8 billion), and vehicles ($9.4 billion). Aerospace is concentrated in two states, California and Washington, which are lost causes for Trump. Remember, the states that gave Trump the electoral victory were Michigan, Wisconsin and Pennsylvania, where he had a total of only about 100,000 votes more than Hilary Clinton, out of 130 million cast. He has the status of incumbent, and short of a recession—given the Democratic opponents so far don’t seem capable of appealing to voters beyond the party’s left leaning base—the 2020 electoral college vote might be closer but the numbers still favor Trump. I’m not endorsing all his policies, just looking at the data. A more plausible path of a Trump defeat next year is a loss in the toss-up states he won. For example, Michigan (16 electoral votes, $3.6 billion to China), is a big automotive state, and Wisconsin (10, $1.7 billion), has a sizeable oilseed and aerospace exports to China. Who knew? Pennsylvania (20, $2.6 billion) exports tend to be resources. An interesting study was done recently by DataTrek about where the next recession might begin. Using data from previous recessions concerning the labor markets in states with particularly cyclical economies and with lower-than-average education attainment, DataTrek concluded that one 3-state area could be the recession vector: Michigan, Ohio and Indiana. Pennsylvania and Wisconsin are right next door. My colleague and resident D.C. expert Tom Block says if he had to pick one important state it’s Ohio, sometimes overlooked as a soybean state. In recent years, no Republican has been elected without it. Where could I be wrong? The trade wars could worsen to the point that the global economic slowdown turns into a recession. Of course, there are many political and economic unknowns that could materialize between now and November 2020. Bottom Line: Short of a recession in the next six to 12 months, which isn’t my view, don’t look for soybeans to trip up Trump. 

Stocks Rocked By Trump Tweets; Down Over 2% Friday

“The market is hereby ordered to go up and STAY UP!” Did you miss that tweet by President Donald Trump on Friday after his—and the market’s—frustrations with the Federal Reserve Board’s inability to heed his demands and also with China’s hard-to-understand policy of retaliating on his trade tariffs? OK, I’m being facetious. Trump didn’t order the market to rise (I’m thinking he wishes he could), but he did say this in a tweet: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA….” Firstly, short of war Trump cannot unilaterally order companies to do that without Congressional approval, so stand down. Yet market action Friday suggests investors are likely finding his tweet tantrums tedious at this point, despite the good work he’s done loosening overbearing business retarding regulations and cutting corporate taxes. (The latter was of course marred by the fact that he didn’t recover the lost taxes elsewhere and the federal budget is busting.) There stocks were cruising along nicely during the week, with the market up over 1% by Thursday and seemingly set to break the string of three down weeks. Then came the whirlwind named Trump. Investors weren’t thrilled by a Friday speech given by Fed chair Powell, who effectively said “we’ll wait and see” about future rate cuts. (For more go to page 6.) Yet the market reaction to his mild chat was muted compared to the volatility that ensued after China announced new retaliatory tariffs and after President Trump went ballistic in his threatening tweets against both Powell and China. I think the markets, with good reason, found his tweet storm a bit unnerving. The Standard & Poor’s 500 index was down over 2% Friday and fell 1.2% on the week. Though up double-digits percent this year, it is now little changed from levels first reached in January 2018. I will note that trading volumes for the week were of the traditionally low late August sort, so I don’t see a lot of conviction here, which is a plus. Government bonds rallied after China’s finance ministry on Friday said it would impose tariffs on $75 billion of U.S. goods, in two stages. The first batch would kick in Sept. 1, with the second coming Dec. 15. Let’s talk about the yield inversion of the 10-year-two-year U.S. Treasury note spread. I’ve noted before that it isn’t a particularly reliable signal. And my colleague Tom Lee produces a good refutation of the inversion signal, beginning on page 3. But here’s a recent take on this from our friends at Cumberland Advisors: “Most pundits are using the inversion of the yield curve as a forecast of a slowdown. But as we have noted in other pieces, economic slowdowns are far from synchronous with inversions. Growth continued for a year and a half after the yield curve inverted in 2006. Looking at recent economic data, it’s pretty hard to find the slowdown: – Retail sales advanced 0.7% month-over-month in July, versus an expectation of 0.3%. – The Empire Manufacturing Index (New York survey of business conditions) advanced 4.8% versus an expectation of 2.0%. – Core CPI is 2.2 % over the trailing 12-month level – right where it was at the end of December when the 10-year bond yield stood at 2.685% and the 30-year bond yield was 3.01%. – The S&P 500 and the Dow Jones are still up double digits this year – even after this week’s turmoil. – Second-quarter non-farm productivity is at 2.3% vs. a 1.4% expectation. Cumberland goes on to say: “This does not look like an economy that is rolling over. Nor is it. This is a bond market that has been buffeted by a number of factors that are not US-related.” I don’t disagree with this trenchant analysis. Even Europe isn’t completely dead. Several eurozone purchasing managers surveys suggested the eurozone economy may have stabilized in the third quarter. The eurozone economy may have started to steady in recent weeks after the flash composite Markit purchasing managers index for the eurozone rose to 51.8 in August, from a previous reading of 51.5. Over 50 suggests expansion. The eurozone service sector PMI hit a two-month high of 53.4, up from 53.2, and the manufacturing sector PMI recovered to 47.0 from 46.3, continuing to contract but at a slower pace. With all the bad news we’ve seen, I still think this looks like market resilience. Quote of the Week: You can look for Trump tweets—too much to fit here—this week on page 11. Looking Questions? Contact Vito J. Racanelli at vito. racanelli@fsinsight. com or 212 293 7137. Or go to

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