The casino was ripping again this morning on still another Wall Street Journal headline about progress on the China Trade Deal, which story actually only said that more meetings were scheduled on both sides of the Pacific.
Still, when at mid-day the Donald let loose of a discordant note that should have been obvious all along, the algos barfed their breakfast.
That these machines are dumber than the proverbial post goes without saying, but did anyone really think Trump was going to give up his tariffs before China delivered on its side of the putative bargain—when that has been the subtext all along?
“…..We’re not talking about removing [tariffs], we’re talking about leaving them for a substantial period of time, because we have to make sure that if we do the deal with China that China lives by the deal”
Self-evidently, them is fighting words and the very reason why the summit keeps getting delayed. The Red Emperor is not about to welcome US companies to roam around his Ponzi freely if his exports are still being heavily taxed by the barbarians from the east.
Consistent with our recency bias theme, of course, this all happened–the rip and the dip—within three hours or so, but even we are starting to get vertigo from the speed by which one recency meme morphs into the next.
That is to say, promptly on the FOMC meeting statement release two hours later, the algos reversed field on a dime, going vertical because the Fed confirmed what they have purportedly been pricing in for weeks: Namely, that it is done raising rates for this cycle and that the money market will remain an interest-free playground until the algos and day traders finally blow themselves up in a final spree of blind speculation and greed.
The ostensible reason for what can now be referred to as the 3P (Powell’s Permanent Pause) is that inflation has been disappointing of late–even as the US economy is “in a good place”.
So, apparently, there is nothing for Powell and his posse to do but slip on their Maytag repairman uniforms, put their feet up on the big mahogany table in the Eccles Building and wait for the machines to act up. To hear Powell tell it, he has actually ushered in the Second Coming of the Great Moderation.
Except, it took three years for Bernanke’s original March 2004 malapropism to catch-up with him. We’d bet the 3P is going to have a much shorter shelf life.
After all, there is no reason to believe that the US economy is in a “good place” unless you are gazing at the 19 useless labor market monitors that Yellen left behind; or believe that the last thirty days of seasonally maladjusted inflation readings are the only thing which counts.
As to the latter, here’s the smoothed CPI without the bother of food or energy. When we heard a talking head from Jeffries chirping about how Powell did exactly the right thing because inflation has dropped to 1.5%, we knew that the boys and girls on Wall Street have truly gone all-in on the recency bias.
Yes, the rate of price gain to the fifth decimal place during the globally warmed 28-day icebox of February multiplied times 12 did compute to 1.32492%.
Then again, the 3-month average (relaxing to the second decimal place) was 2.12%, the 6-month average was 2.24% and the 9-month trend was 2.10%. Also, the 12-month, 15-month, and 18-month averages were 2.06%, 2.21%, 2.19%, respectively.
We’d say that’s about as close to the 2.00% target as can be achieved in this world or even the next. And we’d also say that it’s exactly the wrong 2% to be obsessing about.
The real skunk in the woodpile is that permanently pausing the money market rate at 2.4% implies just 20-30 basis points of inflation adjusted return, given the running averages displayed below; and notwithstanding all the hedonics (car prices haven’t increased a dime for 20 years), geometric means, imputations and other adjustments the BLS has embedded in its patented short-ruler for inflation measurements.
Fortunately, our friend Jim Grant appeared on the same bubblevision gumming session, with a reminder about Walter Bagehot’s famous aphorism: “John Bull can stand many things but he cannot stand 2%”
Needless to say, the bubblevision hosts responded with a blankish stare. They obviously had never heard of either John Bull or Walter Bagehot.
But no matter. Back in Bagehot’s heyday (the 1860s and 1870s) England was booming and under the gold standard of the age there was no inflation. So what Bagehot meant was that you needed more than a 2% real return to bother with the risks associated with taking your savings out of gold sovereigns and investing them in securities.
So Powell and his posse mean, apparently, to be the anti-Bagehots of the present: If need be they now stand ready to print whatever it takes to keep the real yield on money at a mere sliver of what not only was required by John Bull, but modern day investors, too.
During the eight-year span over 1994-2001, when the US economy averaged 3.5% real GDP growth—it did not happen because John Bull’s latter day descendants were denied their due. In fact, the Fed funds rate averaged 4.78% during the period compared to a 2.53% average for the smoothed CPI (less food and energy).
That is to say, savers got 225 basis points of real return back then, not the niggardly 25 bps decreed by the Eccles Building today.
For 30 minutes or so the robo-machines ripped higher on the news, but apparently some saner angels showed up in the casino before Powell even left the podium. They may not have read their 19th century Bagehot, but they did recall the 21st century facts of the matter: That is, the Fed did not actually hit the permanent pause button until the funds rate was at 6.5% in June 2000 and 5.25% in July 2006.
So freezing it at just 2.4% caused an altogether different meme to seize the algos. To wit, maybe it’s not MAGA that the Fed heads see looming around the corner; and maybe they had the right headline in late morning when the Donald poked the Red Emperor right in the eye.
As to the latter, the day traders and robo-machines have priced in a China Trade Deal virtually every third days since last fall. Mostly that smacks of after-the-fact rationalization for what the chart-monkeys were doing anyway, but after today’s contretemps in the casino, this Trade Deal pump-and-dump cycling may actually begin to implicate a famous warning: Be careful of what you wish for!
A deal of some sort is surely coming–whether it be in April, May or June. But it most definitely will be the very opposite of the “all-clear” signal that the casino has been pricing in week after week.
That’s because the Donald and his chief trade advisors are in totally different worlds. And while Team Trump might collectively stumble into some initial “shape of the table” type framework that the two leaders can sign to well-choreographed fanfare, its staying power will lie somewhere between slim and none.
By now it should be evident that the Donald is a primitive paint-by-the-numbers mercantilist/narcissist hybrid. Trump thinks the nation gets MAGA and he wins (most importantly) when the bilateral trade score moves sharply in America’s direction, and that as the world’s most accomplished deal-maker he knows how to prevail in the game of zero sum economics.
By contrast, the rest of Team Trump doesn’t give a whit about the bilateral trade balance with China, albeit for wholly different reasons.
The Mnuchin/Kudlow free trade faction thinks it doesn’t matter—especially after some rules-of-the-game tinkering that will purportedly make it shrink; and, on the other end of the spectrum, if the jingoistic China hater, Peter Navarro, got his way, we’d be counting war casualties, not soybean shipments.
But what really matters is the other 70% of Team Trump represented by beltway lifer and chief trade negotiator, Bob Lighthizer. He’s a K-Street racketeer of the first order and has spent his entire career in the service of expanding the reach, power and pelf of the Leviathan domiciled on the Potomac.
As we will lay out in Part 2, his entire focus is on “opening China” to American corporate investment without the inconvenience of playing by the rules of the Red Ponzi. The C-suites wish to come on CNBC to brag about the gangbusters growth they expect from their growing presence in China, but don’t wish to share technology with Chinese partners, have communist party members on their JV boards, get lower than standard royalty payments for their patents or even have Chinese partners at all.
But here’s the thing. The Red Ponzi is the most opaque, authoritarian freak of economic nature in world history. There ain’t no way that Yankee corporate law and practice can be transpotted and enforced in the Red Ponzi—–even though Lighthizer and his K-Street accomplices are attempting to confect their best imitation of a Rube Goldberg contraption to enforce the deal.
As per today’s WSJ:
Negotiators for China and the U.S. are still working to resolve one of the most stubborn sticking points: how to ensure China makes good on its promises to ease burdens on U.S. companies operating in China……Mr. Lighthizer has sketched out key provisions in Congressional testimony, describing a protocol in which the two sides would hold consultations on disputes, starting with lower-level officials. If those officials didn’t resolve the problem, Messrs. Lighthizer and Liu would get involved. If no agreement is reached, the U.S. could impose tariffs, Mr. Lighthizer has said.
Needless to say, none of this will move the bilateral trade balance by a whit because Team Lighthizer is not about bringing the jobs and production back to America.
They are in the swampish business of erecting a bureaucracy of Trade Nannies in Washington who can function as taxpayer funded concierges for American companies doing business in the Red Ponzi; and of establishing a more robust US “industrial policy”, which inherently means more supplicants at the Federal teat and more customers for the K-Street racketeers.
Meanwhile, the Donald thinks he is playing out the Art of the Deal with his beloved tariffs, and that the $30 billion of levies now being imposed on $250 billion of Chinese imports are a potent bargaining chip to drastically shrink the bilateral trade deficit with the Red Ponzi.
Yet the tariffs are making the numbers dramatically worse, already, after less than six months in effect.
The trade numbers are now in for 2018, and the merchandize deficit with China surged to $443 billion or by nearly 12% from $396 billion in 2017 and $366 billion in 2016. That is, after two years on his watch, the US/China trade deficit is $77 billion bigger than the one he ran against, and accounts for 51% of the total $151 billion rise in the US merchandise trade deficit with the entire world since 2016.
So the Donald isn’t going to let go of his tariffs, and his team is serving up nothing that will make this “losers” number of $443 billion go away—including the phony step-up in purchases being promised by Beijing.
As we will elaborate in Part 2, that’s not going to happen either because the US economy doesn’t make much stuff that a faltering Red Ponzi will be needing in the years ahead.
And on top of that, there is the whole anti-China militarist wing represented by the madman Peter Navarro, and the Deep State operatives who have had the daughter of China’s Bill Gates arrested in Canada for not observing Washington idiotic hex on Iran.
You can’t make this stuff up. And you can’t get an All-Clear Trade Deal out of it, either.
Yet after today’s moment of reckoning with the Fed, that’s about the only hope the Wall Street gamblers have left.
The biggest irony: while the US accuses China of back door spying, the world already knows that the US is guilty of just that, thanks to Edward Snowden’s revelation. As a result, European lawmakers have been wary of Cisco, Huawei’s American rival, ever since it was revealed that the National Security Agency’s used U.S.-made telecom equipment for spying on, well, everyone. This is one of the reasons why between 2013 and 2018, Huawei increased its telecom market share by 8 percentage points: