After the dismissal of the White House communications director Anthony Scaramucci, there are two possible interpretations of the political situation in the U.S. executive branch:
- Either Scaramuci’s dismissal after 10 days in the job is a signal of strength and order being imposed, or
- It is a signal of chaos and disorder existing in the White House on a scale not soon since the first inauguration of President Jackson that took place on March 4, 1829.
The market reaction will be very different depending on the interpretation taken.
Perhaps in the end it will all depend, not on who controls access to the President, but on who controls access to the Trump twitter feed. By the way, the Trump twitter feed was remarkable quiet yesterday.
In the round of policy, the U.S. cabinet meeting yesterday did not spend time praising President Trump, but instead spent time discussing fiscal policy. This is something markets will like as a sign that Trumpcare has at least been moved to the back-burner and tax reform is possible, even if it is in a limited form.
However, there are also reports in the Chinese media that the United States is to start retaliatory trade measures on steel imports against China.
This has always been a fear of economists since last November. If President Trump was not capable of getting a legislative agenda through Congress, the easier path of pursuing policy where executive privilege rules would seem to be obvious. The President has considerable personal authority over trade policy.
The result of all that is that the dollar has continued to weaken.
U.S. domestic investors may choose to believe in their President, but the U.S. domestic investor base is not really relevant to the value of the dollar.
The United States is a current account deficit country and as such it is beholden to international investors. Indeed, it is beholden to the tune of 2.8 billion dollars every day of required capital inflow.
International investors are more likely to react with incredulity to U.S. politics because, inevitably, international investors do not understand U.S. politics as well as domestic investors do.
Fundamentally, the dollar is still an overvalued currency.
So, in the pure world of economics, there is nothing wrong with the dollar adjusting lower.
The politics is a catalyst for the dollar weakness, but the politics should not be a basis for long-term dollar forecasting, unless, of course, the politics become so bad as to change perceptions of the longer-term U.S. economic outlook.
Besides all that, today’s calendar is dominated by manufacturing sentiment surveys. The correlation of sentiment surveys to economic reality, both in headline and in detail, has fallen significantly in many economies in recent years. People don’t fill in surveys anymore and those who volunteer to participate in panels on sentiment must be considered to be weird or something like that.
Nevertheless, markets remain stuck in the past. In the past, these surveys had a better correlation with economic reality and investors long for the certainty for those bygone days. They don’t exist anymore.
The risk here is that the recent surveys were wildly optimistic earlier this year and so their correction back to more realistic readings might be taken by markets as a signal of economic slowdown rather than being viewed as a signal of the poor predictive power of the surveys.
Finally, former Federal Reserve Chairman Alan Greenspan gave investors food for thought when he told Bloomberg: “By any measure, real long-term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace” while adding “The real problem is that when the bond-market bubble collapses, long-term interest rates will rise. That is not good for asset prices. Stocks, in particular, will suffer with bonds, as surging real interest rates will challenge one of the few remaining valuation cases that looks more gently upon U.S. equity prices.”
In simple words, what Mr. Greenspan is saying is that as an investor it could be not such a bad idea to start considering cashing in profits in bonds as well as in equities in a progressive way and wait for when trouble comes, which could be associated with some form of panic, which is of course not a sure thing to happen, but if that should happen, then to start buying back, but also in a progressive way.
Please take care. That’s easier said than done.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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