Tuesday, March 20, 2018

This Week Message: The Fed and the Market -- And -- The President and the Market

I recall early in my career growing frustrated over what I viewed as Alan Greenspan's obsession with the stock market. I remember thinking that it wasn't the Fed's responsibility to hold the market's hand through volatile times; that its members should just focus on their mandate, which makes no mention of the stock market, and let equity prices react accordingly. 

I've since come to understand why the Fed's board members, whether they totally admit it or not, see the equity market as more than simply a reflection of economic health and wealth. They see it as being critically intertwined with the greater economy; itself a catalyst that can ultimately usher things along in one direction or the other. Thus, they feel they must factor the potential immediate market impact into their policy decisions and, perhaps more importantly, into how they couch them. 

So, make no mistake, yesterday's 2% intraday decline in U.S. equities -- not to mention the Dow's sharp 475 point selloff on February 21st upon the release of their January policy meeting's minutes -- has the board's attention. And while we believe that the Fed will make good tomorrow on the sufficiently signaled quarter-point policy rate increase, we agree with Bloomberg Economics that it's the messaging, or the massaging if you will, that may move the market needle:

"A rate hike is broadly anticipated, and therefore unlikely to stir markets. However, other elements of the meeting will be closely scrutinized by market participants — namely the tone of the statement..."
We think odds favor a statement sufficiently soft so as to not roil the markets tomorrow. "Problem" (quotes because we don't see volatility by itself as inherently problematic) being, the market's in the mood for some roiling. Which, if that's indeed the case, and if you're rattled by volatility, means the rest of this week's message might make you nervous.

Again, like it or not, the Fed is seriously considering how tomorrow's message will play in the stock market. Washington, on the other hand, one could argue has notably lacked focus of late on how its messages read to financial markets. 

From the get go we have voiced our concerns herein on the risk of the President making good on his protectionist threats. Frankly, our position here is empirical, and very easy to grasp; raise the prices of consumer goods in a consumer-driven economy and, well, need I continue? 

For the most part, 2017 seemed to confirm what many were thinking going in, that, like so many of his predecessors, candidate Trump -- with his threats to tariff everything made under the Chinese sun -- leveraged the voter at large's lack of understanding of how capital flows in the modern world, and curried favor from politically powerful groups that would ostensibly benefit from such nonsense, but that he's too savvy to actually go there. I recall Washington's newest economic appointee, Larry Kudlow, stating over and over again back in late '16, early '17, when asked about the President's tariff threats, that it's all show, and that there's no way he goes there.

Well, alas, as we've recently discovered, the President was definitely planning to go there; smack in the face of intense pushback from the economic community, from business at large, from many policymakers on his own side of the aisle, from our allies, and, last but not least, from the financial markets.

We've maintained all along that the latter is likely to be the economy's saving grace; recall that Mr. Trump has publicly assumed ownership of the present bull market in stocks. I mean, we didn't have to be rocket scientists to predict in our year-end letter and multiple other places that the market -- despite a strongly bullish macro backdrop -- is going to like tariffs like you and I like migraine headaches. And, thus, a President willing to credit himself with all things good in the market will of course back off of certain acts when they appear to produce contrary results, right?

Well, we'll see very soon if there's been -- to this point -- enough negative market feedback to get the President to back off of the protectionism and back on to, among other things, the potential benefits of tax reform, and the pressing need for some infrastructure investment:

Presumably, we're within days of hearing the details of a study of the extent to which some Chinese actors steal the intellectual property of some U.S. actors, and from what we gather it ain't small. The White House has been floating in the press a plan to impose as much as $60 billion worth of tariffs on Chinese imports in response. And while we passionately agree that such acts must be dealt with, we more than passionately disagree with the notion that hitting the pockets/freedoms of U.S. consumers, the earnings of U.S. exporters and the portfolios of U.S. investors through the imposition of punitive tariffs is anything remotely akin to a legitimate solution. 

As for China's potential response to such measures, The Economist spells out some of the possibilities:
....if America imposes stiff penalties in the intellectual-property case—along with stinging tariffs, it might also place new restrictions on Chinese investment and travel visas—China will take a much harder line. A government adviser in Beijing says that regardless of the economic consequences, Xi Jinping, China’s president, will want to show that he is no pushover. Counter-measures will be varied, says David Dollar, America’s former treasury representative in Beijing. China will buy more soyabeans from Brazil instead of from America. It will buy more Airbus planes instead of Boeings. It will tell its students and tourists to go to other countries. It will drag its feet on approvals for American companies in China.
So then, if indeed the market hasn't yet finished its job of quelling the White House's protectionist ambitions, and, say, this Friday a new China-focused tariff scheme is unveiled, it may have done enough to at least inspire something less than across the board measures (not that it matters, mind you): I believe I read somewhere yesterday that Washington may focus specifically on China-produced technology -- which I don't suspect will provide much solace for the market, particularly the tech sector.

The President's trade adviser Peter Navarro disagrees with that last sentence:
“I don’t think there’s anybody on Wall Street that will oppose cracking down on China’s theft of our intellectual property.”
Wanna bet, Peter? 

Have a nice week!

1 comment:

  1. Who knows what the "loose cannon" in the White House will do????