Powell, Tariffs And Trump: A Friday Tragicomedy

by: The Heisenberg


Summary
 
- On Friday morning, China retaliated against forthcoming tariffs from the Trump administration, throwing equities and risk assets for a loop.

- Jerome Powell's Jackson Hole speech was acceptable, and briefly stabilized things.

- Then, President Trump weighed in on Twitter, chancing a conflagration in "tinderbox" markets.



Here's a quick take, including a brief recap of why this is a dangerous setup.
 
On Thursday afternoon, in a somewhat cautious post for this platform, I gently suggested that one of the major risks headed into Jerome Powell's closely-watched speech at Jackson Hole was that the Fed Chair wouldn't come across as dovish enough to satisfy President Trump, setting the stage for a scenario in which the White House refuses to accept the implicit pushback, instead opting to escalate the trade war further in a bid to test Powell's mettle.
 
As I write these lines, we're still hours away from the closing bell on Wall Street, but it's been an eventful day. China announced retaliatory tariffs on $75 billion in US goods, including new 5% levies on soybeans and oil from September 1, and the reinstatement of 25% duties on autos starting on December 15.
 
That news sent equity futures tumbling, but fortunately, Powell's Jackson Hole speech was replete with references to the darkening global growth outlook and allusions to geopolitical turmoil. He specifically mentioned weakness in the data out of China and the worsening situation in Germany, and he checked all the boxes when it comes to letting the market know he's apprised of the potential for political frictions to boil over, with negative ramifications for investors. To wit, from the speech:
We have seen further evidence of a global slowdown, notably in Germany and China. Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government.

Crucially, Powell said the Fed's "assessment of the implications of these developments" will inform the effort to sustain the expansion. Although not overtly "dovish", per se, that was most assuredly a sign that the Fed will assign a heavier weight than they otherwise might to international developments when deciding how best to ensure that the longest US expansion on record gets even longer.
US equities (and risk assets in general) recovered most of their morning swoon as traders digested Powell's remarks.
 
And then the president started tweeting. I don't think I have to quote directly from Trump's tweets (nor do I want to), but suffice to say he took his irritation with China's retaliatory measures out on Powell, who he explicitly called an "enemy" on par with "Chairman Xi". The President also said he would "respond" soon to China's retaliatory tariffs.
 
Irrespective of what form that response ends up taking, the fact of the matter is that Powell delivered what could reasonably be expected of him, especially in light of the hawkish setup from regional Fed presidents as discussed in the linked post above.

That is, there was every indication that Powell's remarks in Jackson Hole would lean overtly hawkish, betraying a desire for the Fed to stick to the "mid-cycle adjustment" script, but instead, we got a Fed chair who emphasized the myriad international developments weighing on growth and investor sentiment. That market-friendly lean was reflected in the bounce off the morning lows.
 
Have a look at this chart:
 
  (Heisenberg)
 
 
Powell did his job. He stabilized both equities and the yuan. Trump wanted more, although as I noted elsewhere, it's not entirely clear what the President expected. It's not as though Powell could re-write his speech an hour ahead of the public release and he certainly can't just cut rates from the podium in Wyoming.
 
In any event, that chart says it all, and the only saving grace as of lunchtime on Friday in New York is that the curve bull steepened a bit as the market still seems to think that trade escalations will be enough to force a Fed relent, especially in light of Powell's internationally-focused comments.

The dollar came off pretty sharply as well, and all else equal, that's a positive development for risk assets, but right now it doesn't matter - markets are spooked.
 
Barring a turnaround (which is possible depending on what the President says later), this will be the fourth consecutive week of losses for US equities. The last time that happened was, of course, in May, when Trump's decision to break the Buenos Aires trade truce threw stocks for a loop after Powell engineered a mammoth four-month rally.
 
(Heisenberg)
 
 
Far be it from me to question the White House's trade policies, but I would suggest that the administration is wading into dangerous waters with markets. As Nomura's Charlie McElligott wrote on Friday morning, we'll be dealing with "still-weak post-summer holiday volumes [and] depth of book" along with "tight liquidity and VaR constraints from dealers" for weeks to come. Market depth has dried up in both rates and equities at various intervals in August, exacerbating the price action.
 
Dealers' gamma profile now looks to have flipped negative again (see visual below) and on some models, we're back near de-leveraging levels for some trend-following strats.
 
(Nomura)
 
 
If the White House doesn't exercise some restraint, we good see equities careen through key levels and strikes, triggering systematic flows (both from trend-follower de-leveraging and dealer hedging) into a thin, August market.

At the same time, any further rally in bonds could bring more hedging flow, catalyzing another forced duration grab, which could push long-end yields even lower, sending a further risk-off signal to the market and, if the short-end can't keep up, inverting the 2s10s again, only this time sustainably.
 
This is something of a tragicomedy. China's retaliation was expected and, as alluded to above, Powell's speech in Jackson Hole was generally fine. Friday's drama was wholly unnecessary, and entirely dangerous when markets are, as I described them here a few days ago, a "tinderbox."

Legality is not the problem with parallel currencies

Critics of Italy’s mini-BOT identify the threat in the wrong place

Izabella Kaminska


Claudio Borghi, economics spokesman for Italy's League party. The government wants to use mini-BOTs to help deal with its debt © Getty


For a while now the Italian government has been toying with the idea of introducing mini bills of treasury — so-called mini-BOTs — to help it pay debts to private sector businesses. A parliamentary vote in May which endorsed the proposal helped give the idea further credence.

But there are many who have not taken the idea seriously. This is an error. Some wrongly believe that because the securities would be considered a parallel currency they would be deemed illegal in the eurozone.

This is because European Central Bank members are obliged to hold the euro as legal tender in their respective sovereign states. Thus, the scheme would be impossible to implement unless Italy was prepared to leave the euro. It is rightly assumed that Italy is not prepared to do that.

When asked about the mini-BOT plan, ECB president Mario Draghi did not hold back. He noted: “They are either money and then they are illegal, or they are debt and then that stock goes up.”

But this view overlooks the fact that parallel currencies can circulate without legal tender status. It also fails to acknowledge that parallel currencies have always been with us, and that in most western economies there is no prohibition on settling commercial debts in other forms of mutually agreed securities or assets. Not even in the eurozone.

Legal tender status helps in establishing and popularising a currency, but it is not essential. The system as it stands features a plethora of parallel currencies, none of which are legal tender, but which all seamlessly interact with each other without any legal contradiction.

As the Bank of England points out, cheques, debit cards and contactless payments don’t constitute legal tender. They too are a form of parallel currency.

The reason we have possibly forgotten the extent and breadth of the pre-existing parallel currency network — which features everything from store-issued points, bank money to the eurodollar market — is because in recent years it has been overshadowed by the emergence of cryptocurrencies. These differ from traditional parallel currencies in that they have no overt issuer or guarantor.

But it is this wider context that makes Mr Draghi’s stance on mini-BOTs disingenuous. He should recognise that in being issued by a national treasury and capable of being accepted as payment for taxes, mini-BOTs have a better chance of succeeding as a highly liquid currency than most other rival parallel systems (certainly more so than Facebook’s proposed cryptocurrency, Libra).

As the economist Willem Buiter noted last month in a research note, if mini-BOTs do acquire the property of moneyness, they have the potential to make a real difference by transforming illiquid government liabilities (arrears) into liquid ones. Indeed, once the private sector becomes willing to hold zero interest mini-BOTs, despite there being other risk-free assets with positive interest rates, the market begins to view them as “fiscal money”.

This in turn allows the state to use that liquidity to raise public spending on real goods and services. According to Mr Buiter, in an economy with slack, output and employment could rise leading to an increase in tax receipts.

There are certainly other examples where such fiscal monetary exercises have paid dividends.

Consider the IOUs California began issuing in 2009. These helped to inject enough liquidity to spare the state from bankruptcy. Those IOUs were a form of debt, which also worked like a currency with very positive impact.

Clearly, the eurozone is far more fragile than the dollar system ever was. So the analogy with California is not perfect. Another possible parallel is with the other famous state that used monetary fragmentation to tackle growing imbalances: the Soviet Union.

The original goal there was to create a system that transferred value so seamlessly that money itself would, in theory, no longer be needed. Except, as imbalances built up, the state was forced to issue three different types of money, with varying usability profiles. Unfortunately, the managed nature of these currencies, plus the lack of slack in the system, inhibited growth. A system-wide economic collapse with inflationary consequences followed.

With precedents like that, it is unsurprising that Mr Draghi was inclined to talk down the mini-BOT plan: it could genuinely undermine the euro. The legality question, however, is a distraction — something that Mr Draghi’s successor Christine Lagarde, a former lawyer, will be aware of.


Fed’s Warning: We Can’t Solve Everything

As China tensions mount and President Trump fumes, Fed chairman reminds world of limits to monetary policy

By Justin Lahart



Federal Reserve Chairman Jerome  Powell probably wishes his job was as easy as not talking about the elephant in the room.

Elephants, while large, aren’t vocal critics of Fed policy. One could reasonably talk about the natural rate of unemployment while a staffer quietly handed the elephant peanuts.

But the Fed chairman has to contend with PresidentTrump,who has been berating the central bank and calling for lower interest rates for over a year. And who clearly wants the Fed to clean up any damage to the economy from trade tensions, which escalated Friday as China said it would impose tariffs on $75 billion worth of U.S. goods.



The Fed’s shift from tightening to easing has been a balm for a stock market that might otherwise be a lot lower as a result of the trade fight. And Mr. Powell, in his remarks in Jackson Hole, Wyo., on Friday made it clear that the Fed is ready to respond with more cuts if trade tensions worsen the economic Outlook.

But Mr. Powell also said that when it comes to trade, there are limits to what the Fed can accomplish, and investors should be mindful of that. President Trump didn’t seem to take that well, wondering publicly on Twitter whether Mr. Powell is a greater threat to the U.S. than Chinese President Xi Jinping.

Part of the problem is that the Fed has no real sense of how it should proceed, Mr. Powell noted. So far this year, for example, employment and consumer spending have continued to do well even as business confidence has eroded, making it unclear how much easing the economy actually needs. For the Fed to keep cutting rates beyond next month, it might need a clearer indication that the job market and consumer spending are at risk.

Moreover, if trade uncertainty does spill over into the broader economy, the Fed’s ability to counteract the damage may be limited. First, there is the simple matter that with rates already low, the Fed only has so many rate cuts to give. But there may also be limits to what monetary policy can do to offset trade troubles.

The Fed’s safety net might be flimsier than investors believe.

America Needs an Independent Fed

The economy functions best when the central bank is free of short-term political pressures.

This article is signed by Paul Volcker, Alan Greenspan, Ben Bernanke and Janet Yellen.



As former chairs of the board of governors of the Federal Reserve System, we are united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons.

Collectively, we served our nation across nearly 40 years and were appointed and reappointed by six presidents, both Republican and Democratic. Each of us had to make difficult decisions to help guide the economy toward the Fed’s legislated goals of maximum employment and stable prices. In retrospect, not all our choices were perfect. But we believe those decisions were better for being the product of nonpartisan, nonpolitical assessments based on analysis of the longer-run economic interests of U.S. citizens rather than being motivated by short-term political advantage.





Photo: Getty Images/iStockphoto


The Fed’s nonpartisan status doesn’t mean it is unaccountable. Congress sets the Fed’s powers and charges it with maximizing employment and promoting stable prices. The chair and other Fed leaders testify before Congress and speak regularly in public, explaining their views of the economy and how they plan to meet their mandates. Presidents, members of Congress, financial-market participants, pundits and many private citizens advocate that the Federal Reserve make particular monetary policy decisions. In our system of government, that is the right and privilege of every person, one we don’t question. The Fed welcomes open dialogue, as evinced by the “Fed Listens” program, in which Fed leaders have engaged with the public about possible changes to the Fed’s policy framework. A robust public debate helps make monetary policy better.

History, both here and abroad, has shown repeatedly, however, that an economy is strongest and functions best when the central bank acts independently of short-term political pressures and relies solely on sound economic principles and data. Examples abound of political leaders calling for the central bank to implement a monetary policy that provides a short-term boost to the economy around election time. But research has shown that monetary policy based on the political (rather than economic) needs of the moment leads to worse economic performance in the long run, including higher inflation and slower growth. Even the perception that monetary-policy decisions are politically motivated, or influenced by threats that policy makers won’t be able to serve out their terms of office, can undermine public confidence that the central bank is acting in the best interest of the economy. That can lead to unstable financial markets and worse economic outcomes.

Because nonpartisan, independent monetary policy is so important, Congress wisely established the Federal Reserve as an independent agency with regional participation and safeguards against political manipulation. Among these safeguards are 14-year terms for Federal Reserve Board members (four years for the chair and vice chairs) and the provision that Fed governors, including the chair and vice chairs, may be removed only for a cause related to violations of law or similar misbehavior, and not for policy differences with political leaders. This system of fixed terms is designed to ensure that the Fed makes decisions that best serve the economy—and all of us—regardless of short-term political considerations.

Elections have consequences. That certainly applies to the Federal Reserve as well as to other government agencies. When the current chair’s four-year term ends, the president will have the opportunity to reappoint him or choose someone new. That nomination will have to be ratified by the Senate. We hope that when that decision is made, the choice will be based on the prospective nominee’s competence and integrity, not on political allegiance or activism. It is critical to preserve the Federal Reserve’s ability to make decisions based on the best interests of the nation, not the interests of a small group of politicians.

The Race Card in America

Donald Trump has racialized American politics more than any US president in living memory, and many are blaming him for acts of racist violence, like the recent mass shooting in El Paso. But, given that what makes politics in the United States so complicated is the conflation of race, class, and culture, his opponents should not follow his example.

Ian Buruma


buruma150_MARKRALSTONAFPGettyImages_elpasovigilwomancandle


LONDON – The recent mass shooting in El Paso, Texas, carried out by a young white man who had posted a hate-filled anti-immigrant screed shortly beforehand, has called attention to US President Donald Trump’s own rhetorical affinity for white supremacy. Trump has consistently insulted Mexicans, African Americans, and other people of color. He referred to Haitian and African immigrants as coming from “shithole countries.”

Last month, he told four new members of Congress, Alexandria Ocasio-Cortez, Rashida Tlaib, Ayanna Pressley, and Ilhan Omar, to “go back” to where they came from. All four Congresswomen are, of course, American citizens. All but one (Omar) were born in the United States.

Trump’s Republican supporters deny that he is a racist. Who knows? But he is clearly appealing to his followers’ darkest instincts, which are angry, vengeful, bigoted, and prejudiced in ways that can only be described as racist. By stirring up hatred, Trump hopes to mobilize enough voters to be reelected next year.

The president is careful not to incite people openly to commit violence. But many violent people feel licensed by his words to do so. This makes Trump’s behavior dangerous and contemptible, and he must be held to account for it. He deserves to be called a racist. Some of his critics go further than that. They argue that race should be the central issue of the 2020 elections.

Because Trump relies on angry white voters, diversity, anti-racism, and the elevation of people of color should be the counterstrategy.

This course would be morally justified. The question is whether it would be the most effective way to vote the scoundrel out, which should be the main aim of anyone who sees Trump as a danger to the republic, let alone to people who are targeted by angry racists. There is room for doubt.

Some people don’t actually mind being called racists. At a rally of the French National Front in 2018, Trump’s former advisor Steve Bannon told the crowd to wear the word “racist” as a badge of honor. But many Trump supporters don’t think of themselves as racists and resent the allegation. Quite a number of these people, often from the white working class, voted twice for Barack Obama. The Democrats need to get some of these voters back into their fold, especially in pivotal Midwestern states.

But fear of offending Trump supporters who don’t regard themselves as bigots is not the only reason to be careful about racializing politics even more than it already is. The fact that Trump plays that game is no reason for his opponents to follow his example. What makes politics in the US so complicated is the conflation of race, class, and culture.

Senator Lindsey Graham of South Carolina criticized Trump for getting too personal in his hostile comments about the four congresswomen. But it was all too typical of a particular way of thinking to call them “a bunch of communists,” as Graham did. The women are left-wing by most American standards, but certainly not communists. Communism, or even socialism, is regarded in certain right-wing circles as “un-American” by definition. That was the thinking in the early 1950s, when Senator Joe McCarthy was on the prowl for un-American “communists” – often ruining the lives of people who were merely on the left.

By the same token, writers, professors, or lawyers who favor reproductive freedom, or who don’t believe in God, or argue in favor of equal rights for people of all genders and sexual orientations, or support universal health care for all, are often accused of being more like namby-pamby godless Europeans.

Leftist or secular views cannot be associated with any particular race. If anything, highly educated white people are likely to espouse them. And those who believe that a coalition of non-white minorities is best placed to oppose Trump’s white chauvinism should be wary. A significant number of African Americans and Latinos are religious and socially conservative.

Of course, race plays an important part in the American culture wars. And the concept of “white privilege” is not invalid. But to see the country’s political, social, and cultural fissures in terms of a racial divide is, well, too black and white. To make opposition to white privilege the main platform in the fight against Trump not only risks alienating people the Democrats need on their side, but could also set Democrats against one another.

Former Vice President Joe Biden is far from an ideal candidate for the Democrats. He is too old and not quick enough on his feet. But to attack him, and even demand an apology from him, because he said he was once able to work with colleagues whose racial prejudices he clearly didn’t share, is a mistake. Working with people with whom you disagree, or actually abhor, is the stuff of politics.

Trump has managed to push the Democratic Party further to the left than it was under Obama. This suits him well. He would like to make the four congresswomen into the face of his political enemies.

Biden, who is proud to associate himself with the Obama years, is criticized by his younger rivals for being out of step with our more racially sensitive times. The second night of last week’s Democratic debates was marked by a spirit of antagonism toward the Obama administration. Biden found this “bizarre.”

He had a point. Obama managed to be successful precisely because he minimized race in his politics. He didn’t ignore it. Some of his best speeches were about it. But he carefully avoided making race into the main issue. He didn’t have to. His election made the point for him. And he is still more popular than any other politician alive.

Biden, alas, is no Obama. But the fact that he has more support among black voters than any of his competitors, even those who are black, should tell us something. If the Democrats want to beat Trump, they attack his flawed but infinitely better predecessor at their peril.

Ian Buruma is the author of numerous books, including Murder in Amsterdam: The Death of Theo Van Gogh and the Limits of Tolerance, Year Zero: A History of 1945, and, most recently, A Tokyo Romance: A Memoir.