This Week's Message: The Troubling Rumbling!

As we suggested yesterday, and in our year-end letter, the most troubling rumbling amid the presently bullish macro setup is the threat of U.S.-led protectionism. 

The fact that commentary sympathetic to our position is beginning to pop up frequently is a very good thing. The more market professionals who begin beating this drum the better!

Here are select excerpts from yesterday's CNBC article on the subject:

Trump's trade tactics are becoming a bigger worry for markets

• Stories about NAFTA falling apart and China retaliating on trade through its Treasury market purchases caused a flurry in financial markets Wednesday, highlighting an increasing sensitivity to Trump trade policy.
• Trade worries top the list for some analysts, and the market is increasingly concerned that the Trump administration could kill the North American Free Trade Agreement and take protectionist actions against other countries.
• BlackRock is tracking news stories and broker reports about trade and finds risks are rising, according to its proprietary index.

"People got immune to the idea of political risk influencing the markets in 2017 simply because it didn't, and so from that perspective, we just think people have overly discounted the inability of political risks to move stock prices," said Julian Emanuel, chief equity and derivative strategist at BTIG.

"The biggest threat to the economy and market right now is somehow finding ourselves in a trade war, because that's a war nobody wins," said Art Hogan, chief market strategist at B. Riley FBR. "You have an administration that feels emboldened by their ability to pass tax reform. They feel like they can go on the defensive, and when that happens, mistakes can be made."'

Jens Nordvig, CEO of Exante Data, said NAFTA is by far the biggest risk on the trade front and the Trump administration could actually hurt the U.S. dollar if it pulls out. The Mexican peso could decline another 5 to 10 percent, and the Canadian dollar would also fall, but the greenback could see its value erode against the euro and yen, he said.

If the U.S. takes even more extreme protectionist measures, the dollar could begin to be less appealing as a reserve currency over the long term.

"It's not something that's going to be an on/off switch, but even the tiniest doubts" could ultimately impact the dollar, he said.

As you've no doubt noticed, the President is taking full political advantage of the present state of the U.S. economy and the record run in stock prices. That has us thinking that Citigroup's Dana Peterson is on the right track:

"I think if markets start reacting negatively to the possibility of NAFTA disappearing and also industries are really getting up in arms and kicking on the doors of their representatives, I imagine the administration would take notice. I don't think they would want to risk causing a disruption in markets," said Dana Peterson, U.S. and Canada economist at Citigroup.

And if ultimately the President's penchant for a positive stock market, not to mention economy, prevails, our 2018 stronger dollar thesis begins to make some sense.

Have a nice weekend!
Marty