The considerable uncertainty of Trump

8 min read

Risk asset markets might have been on fire for the past eight weeks but yesterday’s release of the FOMC’s December minutes certainly put a damper on things.

Whether this is a temporary check offering a chance for gains to be consolidated or whether it spells an end to what appears to be unbridled bullishness is yet to be seen.

The minutes stated that members “emphasised their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives as well as about how those polices might affect aggregate demand and supply”. In other words, the consensus seemed to be that FOMC members don’t trust Trump. Well now, there’s a surprise! I shouldn’t really need to remind anybody that the Fed and its officials are about as staunchly Democrat as can be and one would have had to assume that the biscuits served with the coffee would have had to have been laced with marijuana for anything else to have been concluded.

Please don’t get me wrong; I’m as sceptical as the next man given the burden of debt that the US economy is already bearing at all levels, from central government via state, municipality down to household and I can’t see where the economy - already growing at 3.5% (in Q3, chained 2009 dollars, quarter-on-quarter and seasonally adjusted) - can go from here. The horizon is blurred with a basket full of Rumsfeldian known unknowns and unknown unknowns, the largest of which has to be the revision of the corporate tax code. A significant element of Trump’s promised investment in America’s creaking infrastructure, the principal driver of the stock market rally, is supposed to be financed through repatriated retained earnings, which are currently still sheltered in all manner of off-shore tax havens.

The grand scheme is supposed to begin with a slash and burn in the corporate tax space. That might well be the case but even if the process begins on January 20, a root-and-branch revision of the corporate tax structure will not be completed overnight and with all the amnesties in the world, money will not of a sudden come flooding home. Thus, the White House will be looking for the appropriation of funding for its pet projects from a congress that can only guess what the tax amnesty will bring back. I have been watching the gap between what politicians think tax code revisions will yield and what they really do bring in for far too long to be blinded by the rhetoric. French and British governments both have particularly poor track records when it comes to forecasting the benefits of changes to the tax system and I have no reason to believe that the US will be any different.

There is a lot at stake in countries such as Ireland, Luxembourg or, for example, the Netherlands Antilles, where being a parking place for American corporate profits has become a major industry. I can’t imagine that the national assemblies of those countries will simply sit back and watch their financial districts being drained and left to the tumbleweed. Yes, the Trump White House will strike the first blow but it will not be the last one and it surely won’t be a one-punch knockout either.

The FOMC is right to express a level of scepticism but, on the other hand, the US economy looks as though it may have developed enough momentum to sustain the current level of growth for most of the rest of the year. With the Markit US service and composite PMIs along with the ISM non-manufacturing index slated for today and December payrolls tomorrow, markets would do well to take just a few chips off the table. Any weakness in markets today should be seen as a technical event rather than a change in the underlying trend.

Europe had fun yesterday with its own PMI releases which, other than in Italy, more or less uniformly beat the already bullish forecasts. In summary, the eurozone composite was predicted to read 53.9 while it actually reported at 54.4. And yet the ECB’s key refinancing rate remains stubbornly at 0.00% and the QE programme is still running full speed ahead. Are we about to begin playing the same “will they- won’t they?” game with the ECB that we played with the Fed last year? A significant part of the global financial crisis – think of Ireland and its ridiculous real estate bubble – was driven by the ECB’s obsession with tailoring monetary policy to the needs of one region – in that case Germany – and not to treat the eurozone as one whole. As a collective, the eurozone now needs tighter and not looser monetary policy. That some regions will get whipped about is the price to be paid for currency union and one-size-fits-all central banking.

It did not go unnoticed earlier this week that Germany’s 1.7% CPI figure was largely driven by the oil price collapse this time last year and that core inflation is only 0.8%. That might be true but that still leaves the entire German government bond curve well entrenched in negative real interest rate space and even the French 10-year bond only just scrapes home with a yield of 0.8%, flat to core CPI. At some point the monetary authorities are going have to let go of the lead-reign and permit the establishment of a more realistic relationship between economic reality and the interest rate structure. The old adage that power corrupts and absolute power corrupts absolutely applies to central bankers just as much as it does to everybody else.

Ever since 1997, when Alan Greenspan was runner up for the title of Time magazine’s Man of the Year – he lost out to the Intel chairman and chief executive Andrew Grove as driver of the digital revolution – central bankers have become little rock stars. William McChesney Martin would be spinning in his grave at the thought. This fame has not liberated but limited them as they no longer occupy the engine room and have been promoted to the bridge. Their actions are over-interpreted (by us) and thus they have become fearful that if they act one way and the economy goes the other, that they will be blamed for it all. They have become deer in the headlights; that’s not a good way to be managing monetary policy.

Trump or no Trump, Dutch, French and German elections or no Dutch, French and German elections, Brexit or no Brexit, monetary authorities need to be bold and set policies that make sense for the next five years, not just for the next five minutes. The damage that can be done by excessive timidity was seen by the near collapse of capitalism and of the global banking system in 2007/2008. Will they really make the same mistake twice? At the moment I struggle to see any clearly defined signals that they won’t. That said, 2017 doesn’t look too bad and I’d be tempted to suggest that indications of tighter monetary policy make markets a buy and postponement and prevarication should be taken as signals to sell.