June 2, 2019
Bear with me while I use this week’s note to directly address the Leader of the Free World (except trade).
Donald, DONALD! What the F are you doing? Why are you making all of this so hard? On us and on yourself. You and I have met. Twice. First when you were pitching your ultimately successful purchase and wholesale restoration of what is now Trump National Golf Course in Briarcliff Manor, NY (we were neighbors of sorts at that time; my house overlooked the 5th green). The second time was at the Concert for New York after 9/11. I pulled some of my world renown strings and had front row seats. You and your previous side piece sat right behind me. You bought my wife a drink and you double-fisted my handshake. Like I was some sort of big shot who you wished to know. You were wrong about that, and, probably, you don’t even remember either encounter.
Or maybe you do. And maybe you’re still mad at me for not voting for you. Sorry, But. I. Just. Couldn’t. Instead, I sat ‘16 out. I liked you better than your opponent, though, and I was glad you won. I want you to know that I’m still rooting for you (sort of). Mostly because if you exit, Stage Right, what emerges from the other wing frightens me to no end. When you pulled off your stunning upset, the ideological core of your opposition was embodied in one Bernie Sanders. I have recently commented that in order to take the honor of running against you in ’20, competitors in the field would have to out-Bernie Bernie.
And, 17 months out from the big show, they’ve already, improbably, accomplished this feat. Bernie’s policies are now by and large in the Center, relative to those of his competitors, in his (adopted) party. Most would turn this country into a redistributive mass of sludge; a land of bureaucratic circumlocution, where virtually nobody but The Chosen could thrive on the basis of merit and accomplishment. It’s a place where I won’t wish to reside. And I will have nowhere else to go.
The left turn of the Dems has heretofore pleased me, because I believed that it would ensure the defeat of its architects. They’ve been handing you another term. On a silver platter. And now, you’re doing a great deal to blow it. You’re making it increasingly difficult for those who wish you well to support you. And if you continue down this path, you might bitch it up, Hillary-style. Think about that for a moment.
I’m not gonna lie: your latest stunt has me truly hacked off. A tariff? On Mexico? Out of the blue? On immigration? When we’ve so many battles to fight – some too vexing to even contemplate?
I’m guessing that you’re still fuming about this whole Mueller thing: his 9-minute elegy to the dying embers of his credibility. Maybe this is why you’re acting out. But Big Guy, you won. Mueller lost. The Dems lost. Scowling Bobby took to the podium on Wednesday and punted the ball to the House, which, best case, can only call a fair catch. They’ve got nothing on you that would hold up in court. If they did go forward with impeachment you’d also be able to present a compelling case of their malfeasance. They know this, and don’t want to tangle with you. And Mueller made it harder for them to stand down. It’s time for you to take last week’s advice from this column and stop Pitching Past the W.
But instead you’re lashing out. And in the wrong directions. If I had one shred of wisdom to offer you, it’s this: the domestic and global economy is hanging by a thread. It risks collapse, and now, if it does implode, it’s on you. Wind the clock, if you will, back a month. Before you made your move against China. Had you held your fire then, had you not imposed those big tariffs, had you chosen a gentler course with Huawei, had you not decided to push your presidential powers in questionable manner against Mexico, oh what a strong position would you and the rest of us hold. The markets, I’m convinced, would be at all-time highs. The economy would be surging. Your political enemies would be painting themselves into an even tighter corner.
But instead, you’re out there tilting at windmills. And yes, you are our Donald Quixote, our Man of La Mancha or in your case, Mar a Lago), dreaming impossible dreams, fighting unbeatable foes, and running where the brave (as well as the wise) dare not to go. You claim the Mexico thing is a necessary response to a life-or-death border crisis. I disagree. The whole immigration saga looks increasingly like political sleight of hand to me, and, at any rate, responding by slapping duties on the source country because Congress won’t support you is hardly a constructive way to address the problem.
Because tariffs are just bad policy. Period. At times, they may be necessary, but this ain’t one of them. If you care to check their impact, maybe you could just dig up the carcass of Herbert Hoover, who signed the Smoot-Hawley Tariff Act into law on March 13, 1930, just six short months after the stock market crash. At the time, unemployment was at 8%. Within two years, it rose to 25%. It wasn’t, of course, all about the tariffs, but suffice to say they didn’t help matters. It took Franklin D. Roosevelt -- that great apostle of free enterprise, to bring a measure of rationality back into the realms of international trade. It was a step in the right direction, but arguably came too late. The global economy gasped and groaned its way through the remainder of the ‘30s, and we all know what happened after that.
But perhaps this is all merely a component of a broader strategy to accomplish a more central part of your agenda: the suppression of interest rates. After all, you’ve spent your whole life borrowing money (not always, if my information is correct, bothering to pay it back) and, as such, any interest rate above the bare minimum is gall and wormwood to you. You’re already on the public record, on multiple occasions, as complaining loudly that rates are too high. You have, in questionable judgment, actually called out the presumed-independent Chairman of the Federal Reserve Bank of the United States on this. Multiple times. This has troubled many (including me), and, on balance, I think Chair Pow (whatever other sins he may have committed) has handled your rhetoric with a laudable degree of professionalism.
So maybe you’re thinking: if I can’t get this Powell guy to do my bidding, I’ll find a different way to lower the vig. So, now, tariffs on China and Mexico, with a promise of more to come. Let’s, while we’re at it, also drop an antitrust investigation on the laps of Serge and Larry. Nobody will mind; they’re arrogant little drips that nobody likes. And the strategy appears to be working. In case you were too busy in the Oval Office to read my last note, I will favor you with an updated look at the Treasury Yield Curve:
Investors must now accept maturities out to around the year 2038 to achieve the same annualized yield available to them at the 3-month point on the curve. And yet they are still buying– mostly because they see no other rational alternative. The Gallant 500 is now 200 handles below its pre-tariff-circus peak. Somehow, and improbably, it has pierced from above its 200, 100 and 50-day Moving Averages, and this after spending months well above these thresholds.
Anyone wishing to dive into the equity complex is presumably aware that they’re going to need to strap on in. I think Equities may be cheap here, but with those tariff tweet missiles, poised on their Launch pads who knows?
But in Fixed Income, the opposite construct presents itself. The bond bid, if anything, has accelerated, and this on a global basis. Our 10-year yields (2.13%) are at 24-month lows. Germany’s are at -0.2%, Japan’s -0.1%, Switzerland? Negative 0.51%. Heck, as prophesied in these pages, even the otherwise dull as dishwater but generally clear thinking Dutch are now imposing about a 2 bp/year cost on their obligors.
So maybe this is what you’re all about, Trump. If so, I congratulate you on your short-term success. Perhaps you can even continue to draw from this well, as you have in the past, until it runs dry (and it will). Nothing of this sort would surprise me now.
Though I hesitate to even put the thought into your head, if you really want to nail the concept of receiving (rather than paying) interest on borrowed money (which first appears in the history of our species about 2,000 years Before Christ), you might consider a policy under which the United States imposes tariffs upon itself. This would truly be the coup de grace, particularly in light of the reality that 70% of our GDP is generated within our own borders. The duties would be enormous, and we all win. If we set these at appropriate levels, we might even be able to beat the Swiss at their own game.
But of course all of this is dangerous to an extreme. That the tariffs will suppress global economic activity is a matter of near-certainty. Frenzied buying of debt instruments, will increasingly, and as addressed last week, catalyze the misallocation of capital, crush savers, and exacerbate what many already consider an historic debt bubble. In light of current rate paradigms, rational borrowers should be spending the weekend in conference with their bankers, and, if the trend continues, should stalk them not only at their places of business, but also at their residences.
Again, I don’t necessarily see an economic reckoning fixed on the calendar just yet. But it’s coming. Meanwhile the political reckoning may be closer in the offing. And forgive me, if all of this serves us up a big dish of Liz Warren in 2021, I’m not showing appropriate gratitude. Fact is, I won’t be feeling much.
And now I have no choice but to warn my readers about possible regime shifts towards risk aversion in the month of June. May, lord knows, was bad enough for them. But now it’s possible that June will be even worse. It’s hard to put risk on the table when you’re going off half-cocked like this, and, on balance, I think the wiser course may be to reduce exposures On the other hand, maybe you’ll back off on your Mexican rhetoric (after all, nobody wants you to do this thing: not your advisors, not Congress, and not the public). Maybe it was all just rhetoric in the first place.
But it’s a hazardous game. For you and the rest of us. Your public persona suggests you like living on the edge, and all of the attendant attention this brings. But Donny-boy, you’re sucking all of the oxygen out of the room, out of the house, out of the planet, out of the friggin’ galaxy.
Give the rest of us some, won’t you? Your Sancho Panzas have been very loyal to you, and have taken more incoming heat for so being than you possibly can imagine. If you fail, it is we that will suffer the consequences. You’ll just head back to your La Mancha/Mar a Lago, while the rest of us take the blows sure to be issuing from a newly empowered progressive regime that will be out for our blood because we didn’t buy into their bourgeois at the point we were instructed to do so.
Maybe it’s an impossible dream on my part, but if you did back off just a bit, there’s just the chance for all of us to reach that unreachable star. If you need any further advice you know where to find me.
I’ll be at my post, dealing with all of the havoc you wreaked on my clients during the month of May.