The Trump 'Eclipse Bottom'
Last night the US stock market sold off on headlines that Trump had taken Gary Cohn’s name out of the running for the next Fed Chairman.
A senior administration official told CNBC that Trump is considering several candidates for Fed chair.
CNN reporter Jake Tapper tweeted that a source close to the White House told him that Cohn is “more likely to get electric chair than Fed Chair.”
I have been skeptical that Trump would give the nod to Gary. First of all, he’s a Democrat. Secondly, he’s got squid stench all over him. But most importantly, he ain’t going to do what Trump wants. Gary is way too much of his own man to appeal to Trump. Trump wants an Arthur Burns character that can be bossed around like Nixon did. No, Gary will stick around with the administration for his full year so he will be eligible for the tax deferral deal on his Goldman stock, and then he will quietly split.
And the prediction markets have correctly taken Cohn’s chances for Fed Chair down to almost 10%.
But many pundits believe eliminating Cohn somehow increases Yellen’s chances.
Yellen upticked on the news, but that’s also a pipe dream. Yellen doesn’t want the job, nor does Trump want Yellen.
No, Yellen will follow her Vice Chairman, Stanley Fischer’s lead, who abruptly resigned yesterday for “personal reasons.”
All of a sudden, Trump can pick more board members than anytime before the Fed was conceived in 1913.
Today, Kevin Warsh is one of the leading contenders. When I was discussing this development with the always entertaining Mark Spiegel, I expressed my view that Kevin Warsh was far too hawkish for Trump. To which Mark replied, “but Trump might not realize what Warsh really means until it is too late…” Yup, I can always count on Mark to make me smile. There is definitely a chance that Trump doesn’t bother to take the time to understand the implications of nominating Warsh, but I think the odds are slim.
Trump is the King of Debt. If there is one thing he is good at – it’s debt. And let’s not forget his comments about renegotiating the Federal debt. Obviously he can’t default like he did when he was a real estate developer, but he can do what governments throughout the ages have always done – inflate their way out.
Market strategists who toss around names for a new Fed Chair like Warsh and Taylor, both of who are now academics, are completely missing the boat. Trump will surprise us with the most unorthodox, easy money, lunatic you could ever dream up. The only conventional candidate that stands a chance is Neel Kashkari. He is currently on the FOMC board, is a Republican, and most importantly, is a huge dove. If not Chair, could he maybe take over as Vice Chairman when Fischer leaves?
Regardless of the exact composition of the FOMC, the correct bet is to assume it will become significantly easier in the years to come. I guess to some extent the market has already figured this out. Over the past month, gold has exploded higher and the US dollar sold off hard. I suspect it might be only the beginning.
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Today the market is panicking and bidding up fixed income across the board on news that ECB Chairman, Mario Draghi, was not prepared to announce the start of their tapering. And the reason for his reluctance to commence winding down Quantitative Easing? Inflation had not hit his target.
My favourite part? Mario said in no uncertain terms:
“NOTHING WILL DERAIL THE ECB’S WILL TO DELIVER INFLATION”
The head of a Central Bank says that come hell or high water, he will deliver inflation of 2%, so what do investors do? They buy long dated German bunds yielding 30 basis points, locking in a real loss of 170 basis points if he achieves his goal. Yeah, makes complete sense.
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I had to laugh this morning when Eurasia Group’s Ian Bremmer tweeted the following:
I can’t say I disagree. Trump seems to be sticking his foot in his mouth a lot less often these days.
And with the recent debt ceiling deal with the Democrats, you could almost say he is acting Presidential.
Dave Lutz, from JonesTrading, had a great observation regarding this change:
“…we could be on the cusp of a sea change here in D.C. Ryan and the Tea / Freedom Party shoved out of the picture, while Trump shows his true stripes and embraces the middle ground. If he’s cutting deals with the Dem leadership – he doesn’t need any of those cats. I wouldn’t short Trump at these prices.”
I couldn’t agree more. I think Trump staring at the Solar eclipse was the bottom for his Presidency.
After that bonehead move, it’s all uphill. Seriously, there is so little expected of him, he is bound to outperform.
And if that is indeed the case, have a look at this chart of Trump’s approval rating versus US 10 year yields.
I lagged the yield series by a couple of weeks, and I suspect that Trump’s recent performance might help slow down this bond rally.
Right now it seems like nothing can stop this bond move, but remember the market always looks best at the top. I still see all sorts of reasons to be skeptical of this squeeze into fixed income.
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Finally, I will write about this in a little more detail in the coming days, but I wanted to quickly review a potential trade for those who think Bank of Canada Governor Poloz just pulled a Trichet, and double hiked into a slowdown.
Earlier in the year, the difference between the front end of the US and Canadian money market curves had more than 3 more relative tightenings priced in for the US out to June 2019. With the recent flattening of the US curve, and the surprise hike by the Bank of Canada, this spread has spiked to a point where Canada is now priced to have 1.5 more tightenings than the US.
No way the highly levered Canadian economy can handle the increased rates and the massive strength of the Loonie.
I am buying June 2019 BAX’s and shorting the equivalent Eurodollar contract. I expect these two contracts to converge back to zero in the coming months.