It’s January 20, inauguration day. While markets will happily accept the excuse to sit back and do no more than absolutely necessary, the world hasn’t really stood still.
We’ve had some pretty hawkish comments from Madame Yellen in which she made it as clear as she could that the Fed had no intention whatsoever of hanging around behind the curve, which has the dollar higher again and bonds lower. But more to the point, we had a pretty fractious confirmation hearing that saw Steve Mnuchin, nominee for Treasury Secretary, being grilled by a panel of senators.
Partisanship aside, I was struck by the banality of some of the questioning. I would have thought that the purpose of the hearing is to establish whether Mnuchin is firstly a fit and proper person for the job and secondly whether he is technically up to it. Asking Mnuchin who is going to hire and fire the president’s ethics officer does not, to me at least, appear to be part of the job. I was impressed with his patience in the face of some very silly questioning and also with the way he dealt with some of the more pertinent interrogation. Stating, in a roundabout way, that he is still a private citizen and therefore not privy to much of the confidential information that would be necessary to give a proper answer was, to be honest, pretty cool.
He was very defensive on the subject of dollar strength but what became quite clear is that he is no more impressed with the way his new boss loves to shoot from the hip than is anybody else. Much has been written comparing Trump to Reagan with his kitchen cabinet. America has chosen a businessman and not a politician to lead it and, not entirely surprisingly, he is surrounding himself with business people. Mnuchin made a good fist of something he and his peers will surely have to do many more times, which is to contradict the boss while trying to behave as though the statement being contradicted had never actually been made and if so that it had only been in jest.
If the difference between business people and politicians had to be distilled into a single sentence, then it would most probably have to be that the former act first and talk after if they have to, whereas the latter talk first and act after, again only if they find they are faced with no alternative. Trump talks before, during and after by which time it becomes hard to remember whether he has actually done anything at all and if so what that was. As Treasury Secretary, Mnuchin will not have that luxury.
Forgetting for a moment that he is yet another Goldman alumnus and that he made more than a tidy fortune from buying a distressed lender from the FDIC when they were giving them away to anybody mad enough to want to take them one on, I thought he came over as a pretty pragmatic and level-headed guy; one, I think, who will stand his ground at the Treasury even when being shot at by the White House and/or Capitol Hill.
Old China
There were the inevitable questions about what to expect from the new administration’s stance on Russia but China, the much larger issue, was largely ignored. Overnight we were treated to the final reading for China’s 2016 GDP, which at 6.8% fell neatly into the government’s target range of 6.5%-7%. Whether this is fact or fiction is a moot point and for each of us to decide on for ourselves, but it does represent the lowest reported increase in GDP in over a quarter of a century. Though softer than in the past, the base upon which the percentage is being calculated is also growing from year to year and in absolute numbers rather than percentages, there is still a lot going on.
That said, overall economic growth continues to be fuelled by debt and loan growth is running at 15.4%. It is estimated that the total of outstanding debt in China is running at 264% of GDP. That makes for a pretty fragile system and one which is exposed to every minor external shock. Having a man in the White House who is clearly cognisant of this is very worrying to Beijing and President Xi Jinping’s appearance in Davos attests to this. He now needs all the friends he can get and must have been busy working the room in search of allies ready for when the first shots are fired from Washington. He will want to get over that if China sneezes, the rest of the world not only catches a cold but risks going down with double pneumonia.
China has evidently boxed itself in by pushing growth at all cost. Trump has identified the Achilles’ heel would appear to be fearing Beijing. When looked at that way, he is no doubt right that China needs America more than America needs China.
Promises
It is not particularly common for the inauguration – January 20 is a fixed date - to take place on a Friday; the last time was in 1989. We will have to wait to see how many of Trump’s first-day promises are announced over the weekend and how markets will react to them on Monday. There is much debate as to whether the incoming administration is up to speed, up to strength and ready to take over. Trump hates the press and the press hates Trump so there is little doubt that every little slip and slide will be reported as an impending crash.
We in the markets must be mindful not to let the hype by either side misguide us and we may need to find new ways of blanking out the white noise.
Meanwhile, we went through the regular ECB meeting yesterday with the concomitant press briefing by St Mario and, as expected, nothing came out of it. In fact, the ECB boss avoided all controversial subjects, from Brexit to the Italian banks, and he must be awarded an A* for blandness. Like all major economies, the lurking risk of a renewed slowdown, matched with rising inflation, is challenging the established policy playbook. On the basis that if I say nothing they think I’m dumb, if I open my mouth they know I am, Draghi played a blinder and so we’re left with “steady as she goes” while the ECB, along with the rest of us, tries to get a handle on what to expect from the new US administration.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. After the cancellation of last week’s Lauberhorn race due to too much snow, this weekend sees its opposite number, the Hahnenkamm, on the slate. What would possess any sane human being to launch themselves onto that slope and over the legendary Mausefalle defies me. Maybe the answer is in the question. Those downhillers might be as mad as March hares but how bland would life be without them. Please join me in wishing them all good luck in what I think is definitely one of the most demanding challenges in world sport.