Forget the Powell Put, what about a Trump Put?

I have been engaged in a running debate about the possibility of a Trump Put in the market. My friend believes that Trump is likely to pull back from a full-scale trade war with China, as it would tank the stock market and increase the likelihood of a recession. The Republicans lost the House in 2018 with the unemployment rate at 3.7%. A recession in 2019 or 2020 will not only lose them the White House, but probably both houses of Congress. Trump wants to avoid that scenario at all costs.

The WSJ reported that Trump has been glued to the stock market and therefore highly sensitive to price gyrations:

As the stock market churned this week, President Trump anxiously called advisers both inside and outside the White House looking to ensure that his talks with China were not driving the selloff.

Fresh off what he described as a historic weekend meeting with China’s President Xi Jinping, Mr. Trump has questioned why the markets weren’t reacting more positively to the news of the potential breakthrough with Beijing. In consulting with advisers, he remained convinced that the volatility wasn’t his own doing, but rather, the product of the Federal Reserve’s plan to raise the benchmark interest rate.

As the stock market churned this week, President Trump anxiously called advisers both inside and outside the White House looking to ensure that his talks with China were not driving the selloff…

Fresh off what he described as a historic weekend meeting with China’s President Xi Jinping, Mr. Trump has questioned why the markets weren’t reacting more positively to the news of the potential breakthrough with Beijing. In consulting with advisers, he remained convinced that the volatility wasn’t his own doing, but rather, the product of the Federal Reserve’s plan to raise the benchmark interest rate.

In short, the President’s daily mood seems to be sensitive to stock prices:

Wall Street analysts took note of the administration’s comments this week around the trade talks. Analysts at Morgan Stanley declared them indicative of the administration’s “markets-sensitive” approach to policy-making.

Nomura Securities said that it was yet “another indication that President Trump is sensitive to the market and economic disruptions that his trade policies can generate. That sensitivity may suggest that there are limits on how he will push those policies.”

Treasury Secretary Steven Mnuchin, speaking at The Wall Street Journal CEO Council in Washington on Tuesday, said that “the (stock) market is now in a wait and see” moment with regard to China: “Is there going to be a real deal at the end of 90 days or not?”

Is there a Trump Put in stock prices? If the market were to really tank, could a Trump change of heart on China turn the market around?
 

How NSS 2017 institutionalized America First

There is a tension between Trump’s focus on stock prices, and his core belief that America is being cheated by its trade partners, and by China in particular. It is unclear how this dynamic will play out.

I believe that that the die was cast in late 2017 when the National Security Strategy 2017 (NSS 2017) designated China as a strategic competitor (see Sleepwalking towards a possible trade war), and the Washington defense establishment widened the scope of the conflict. It is no longer just a trade dispute, but a struggle for strategic dominance.

Here is an evenhanded analysis of NSS 2017 by Peter Feaver in Foreign Policy from December 2017, which was described it as “America First all grown up”. He had five main takeaways:

1. Give the administration credit for some unusual achievements related to the NSS. This is the first Administration to publish the NSS in its inaugural year. Bill Clinton, George W. Bush, and Barack Obama all tried and failed to make that deadline.
2. Give the administration credit for an NSS that is, to a surprising degree, well within the bipartisan mainstream of American foreign policy.
3. Give the drafters credit for trying gamely to reform Trump’s problematic catch phrase label – “America first” – by reinterpreting it to mean something more benign. 
4. That said, this is a bleaker, less optimistic NSS than the last several – in that respect, something of a throwback to Bush’ 2002 NSS, which was written in the wake of the 9/11 attacks. The implicit theme of this NSS is competition – the word or its cognates appears nearly 75 times in the document. The NSS repeatedly reminds the reader how the United States faces competition and even exploitation from adversaries and partners alike. The NSS repeatedly reminds the reader how the United States faces competition and even exploitation from adversaries and partners alike.
5. The devil will be in the details of execution, which will require bridging gaps between the rhetoric of Trump’s NSS and the reality of the policies pursued thus far.

Here is a key quote of how NSS 2017 institutionalized “America First”:

The NSS advanced a concept that has not had wide currency until now: the “national security innovation base (NSIB),” referring to the “American network of knowledge, capabilities, and people—including academia, National Laboratories, and the private sector—that turns ideas into innovations, transforms discoveries into successful commercial products and companies, and protects and enhance the American way of life.” The NSS notes, rightly, that the efforts by China (and others) to steal U.S. intellectual property should be viewed not merely as an economic problem, but also fundamentally as a national security threat. I think the NSS misses a step here in failing to recognize that this is not merely an “American” network, but rather a globalized network with America as a critical node. Thus, steps that have the unintended effect of hobbling the flow of ideas and human capital into the United States might hurt the NSIB. But Trump deserves credit for raising the salience of this concern.

 

Trump’s Deep State Frankenstein?

I don’t mean to sound like some conspiracy theorist, but here is how the wheels of government works. Remember the Bloomberg story back in October that some Chinese spy chip had been discovered on the motherboard of servers used by Apple and Amazon? Both companies subsequently denied the story. The denial appeared to have been made at a technical level, rather than corporate lawyers (see this Medium article discussing the technical issues). Reuters reported that the denial was supported by the UK’s cyber security agency supporting the Apple position, and the denial was also supported by the US Department of Homeland Security.

Here is the conspiracy theory part. This incident is consistent with an effort by US intelligence agencies to discredit the Chinese and retard their sales overseas. The SCMP reported that entire incident is forcing American vendors to re-think their relationship with Chinese suppliers. Several allies have banned Chinese telecom 5G equipment from their networks. That`s how the Deep State works.

The Huawei affair is different. The arrest and subsequent extradition request was likely the case of the left hand of the US government did not know what the right hand was doing during the summit at Buenos Aires. Trump didn’t know, but NSC advisor John Bolton did. During her bail hearing, Huawei CFO Meng Wanzhou`s lawyer so much as admitted that Huawei busted sanctions by tricking American banks to send funds to Iran.

So this becomes a case of the dog that caught the car, what to do next?

The Huawei arrest is undoubtedly putting a chill on trade negotiations. Supposing that Trump wanted to use Meng Wanzhou as a bargaining chip to get some concessions from China and declare victory, such a course of action will not be without incurring significant political cost. Bloomberg reported that there is bipartisan support for holding Huawei to account, and any ZTE-like pardon will be met with a political fight.

After Huawei Chief Financial Officer Meng Wanzhou was arrested in Vancouver Dec. 1 at the behest of U.S. authorities for allegedly violating American sanctions on selling technology to Iran, Democrats and Republicans have quickly called on Trump to hold the Chinese company accountable.

The dilemma Trump could face on Huawei is partly of his own making. In May, his Commerce Secretary Wilbur Ross went after ZTE Corp., a rival Chinese telecoms equipment maker, with charges of violating sanctions agreements by selling U.S. technology to North Korea and Iran. When the administration eased the punishment at the request of Chinese President Xi Jinping, a bipartisan group of lawmakers criticized Trump for going soft on China.

“If @Huawei has been helping violate US sanctions by transferring US technology to Iran they should be barred from operating in the US or from purchasing US technology,” Senator Marco Rubio of Florida said Thursday on Twitter.

Senator Mark Warner, a Virginia Democrat, added to the criticism on Thursday “It has been clear for some time that Huawei, like ZTE, poses a threat to our national security.”

This is how bureaucratic infighting works. Put the President in a difficult situation in order to shape events in accordance to your own agenda.

Huawei has long been a concern for the U.S. government and lawmakers who believe Chinese technology companies are avenues for surveillance by the country’s intelligence agencies.

Now Trump is in a tough spot to navigate domestic political pressure with successful trade negotiations, said Derek Scissors, China expert at the American Enterprise Institute.

Fining Huawei or requiring personnel changes accomplishes nothing. If he lets Huawei off the hook, it may look like the ZTE fiasco, where he canceled tough action because “too many jobs in China lost,” Scissors said. “But serious steps against Huawei will effectively end this round of trade talks because the company — not its officials — is so important to the Communist Party.”

In conclusion, it will take a lot more than just a few Trump tweets to stop Cold War 2.0 between the US and China. At the same time, Trump’s focus on stock market movements may prompt presidential tweets that will spark temporary market rallies. Unless Trump takes actual institutional steps to reverse course, such as sidelining hardliners like Navarro, Lightizer, Bolton, along with any other NSC staffers who authored NSS 2017, don’t expect Trump to put a floor on stock prices.