Trump

• US Policy

Oct 4, 2019

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

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

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. 

• Your Weekly Roadmap

Aug 23, 2019

“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