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.

7 thoughts on “Forget the Powell Put, what about a Trump Put?

  1. Let me describe something that might explain political happenings and their timing going forward.

    The most predictably profitable cycle in investing has been the Presidential Election Cycle specifically from October 1, two years before the election date to January 1, of the election year. It has NEVER been down since the mid 1930’s. We’ve been in that period since October first and if history repeats, we’ll have a great, profitable stock market to the end of 2019.

    The reasoning from the researcher who found this sweet spot was that politicians need to get the economy into good momentum going into the election and since the economy responds so sluggishly to stimulus, the politicians must enact policies early, namely by the second half of the pre-election year.

    The job of President is the most important and powerful in the world and the party in power holds great power, almost unimaginably huge power with that office too. A great deal of thought will be going into how to claim victory of that greatest prize. Trump may be a wild card this cycle but his party and the Democrats will be doing tried and true methods over the next year.

    What does it mean now? I’d say, any bad news has to come sooner than later. By the election year, bad news that happens in late 2018 or early 2019 will be forgotten.

    So if Trump wants to shut down government by not signing a budget without getting his wall, he’ll do it in December. He will likely dig in his heels stubbornly until he gets it. He will likely offer the Democrats a surprisingly great deal on infrastructure spending they want in return for his wall to get a budget signed. Both the Dems and Trump will look like winners even if chaos occurs during the battle. This could be the beginning of a surprising romance with the new Democratic congress that will lead to an upbeat economic tone going into the 2020 election year for the Dems and Trump, again both winners.

    If Trump will shut down the Mueller investigation, he’ll do it now or soon, not later. If he is confident he can weather the completion of the probe, he may help in various ways to get it done and over as soon as possible.

    Both the budget fight and the Mueller probe could derail the stock market over the short term but if the Presidential Cycle is a key, it will lead to bottom soon and then a new bull market stretching to January 1, 2020 like all other cycles and from then hopefully to the November 2020 election day. By the way, the actual election year is normally positive but not as predictably as the sweet spot mentioned above.

    Remember the Democrats will want to do positive legislation to appear as a good alternative to the Republicans and Trump. They won’t just be a negative force hurting the economy and the stock market.

    The Election Cycle is something to think about as an undercurrent on events.

    1. Ken, This post from you sounds almost hopeful. Do you not think the market will continue down, or is what we’re getting likely to be the end of the downside ?

        1. Yes, I’m expecting stocks to be higher 1/1/2020 than they were on 10/1/2018 (S&P 500 at 2925) if history repeats as I expect. That’s about 11% higher than yesterday’s close. It could be a rough ride to get there. We could go down 10-15% into the first quarter and have an up market to the end of the year.

          One of the most volatile pre-election year was 1987 before the 1988 Presidential election of Bush Sr. The market was up over 40% from 10/1/1986 to the summer of 87. Then the 87 Crash wiped out that gain and then the late year rally to 1/1/1988 gave an overall gain of single digits from 10/1/1986 to 1/1/1988. Crazy but still a net gain to keep the pre-election record perfect.

          Note that even the year leading up to the 2008 GFC and Obama’s election was up about 11% (10/1/2006 to 1/1/2008) even though big trouble was brewing in the last half of 2007.

          This is a powerful force because the job of governing America is a powerful job.

  2. This is a very interesting post by Cam and brings up a number of questions:
    1. With estimated 6% GDP growth and no democratic elections does China have the strategic advantage in being able to outlast the US in a mutually painful exchange?
    2. Does the US trade deficit with China give it the strategic advantage as it can continue to increase tariffs, for which China has no answer?
    3. Given #2, does the US have the additional advantage of deciding a “slow bleed” strategy wherein the tariffs are lessor in amount, but designed to inflict pain over a long period of time while US manufactures look for additional sources of product?
    4. What would a serious trade war with China cost the US in terms of GDP?
    5. Would a trade war with the US pop the Chinese credit bubble?
    6. What would it cost in terms of time, inflation, and GDP for US manufactures to outsource (to other emerging markets) a substantial part of the US trade deficit to China?

    1. Answer to 4 from IMF:
      US: about 1% in GDP growth
      China:: 1.8%
      Most of Asia would get dragged down too. Left unsaid are the resource exporting countries that would get hurt: Australia, New Zealand, Canada, Brazil, South Africa, Russia, etc.

      1. Start working on another one or two Black Swan events. First is a messy Brexit that leads to a collapse of the EU. The EU IMHO is a joke, where a currency is backed up by all EU countries instead of one nation. Money policies are imposed on each other by mutual agreement, led by German fiscal discipline. We are seeing the results of this in France, as I write this. If not today, one day, EU is toast, with the Euro eventually loosing trust. See Cam’s graph in the previous article that shows how these countries are indebted to their central banks.
        The second black swan is an embattled US president.
        A third event on the forefront is a belligerent China that tells the US to take a hike.

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