Friday, 12th of July 2019
“Could you imagine having Sleepy Joe Biden…as your President, rather than what you have now, so great looking and smart, a true Stable Genius!!”
– Donald Trump
Equities continued to climb this week as central bank dovishness reassured investors that the longest bull run in history may still have legs. On Friday morning, the DJIA opened above 27k for the first time ever while the S&P 500 Index was nudging 3000 in turn, despite there being few, if any, noteworthy developments in the real economy. After a decade of easy money and beta-driven returns, investors have become hypersensitive to monetary policy, interpreting data and events through this one single lens to the exclusion of all others. Fundamentals, which made a brief comeback in the wake of Trump’s election (an optimistic era when rates were rising, earnings were beating, and central bank guidance was credible) are once again in retreat. And as we descend once more into the topsy-turvy world of negative interest rates and QE-infinity – where Greek sovereign debt offers you <2% yield, emerging economies like Poland and Hungary can borrow money for free and central banks reign supreme – we expect much ‘good news’ to be bad news for the market. For example, the strong US jobs data released last Friday was great for the US economy and the American worker. However, it nonetheless drove a repricing on Monday this week as market expectations for US interest rates recovered some hitherto absent realism, and the probability of an imminent 50bps cut was heavily discounted. The simple notion that more jobs signal a healthy economy that is likely to spur better equity returns seems almost quaint.
As you might expect, therefore, Fed Chair Jerome Powell’s testimony on Capitol Hill this week was closely followed by market participants for any whiff of what to expect at the FOMC meeting at the end of the month. As it turned out, Powell stuck to a fairly bland script and failed to upset the applecart, something he has inadvertently managed to do several times in the last year as his every word, motion and sideways glance are analysed and overanalysed by investors. But the central bank chief did confirm in the minds of most that the Fed would indeed cut rates in two weeks’ time. Powell highlighted the weakness of growth outside the US and the looming danger of a further escalation of trade tensions as the principal threats to the US economy. We agree (and have spoken at length about both in previous newsletters). Moreover, with the US election season now in full swing, we expect President Trump to adopt his tried and tested scorched earth approach to policy and personnel as he bids for support from the blue-collar Midwestern voters who backed him in 2016. His base is rather partial to an international scrap, so long as China / EU / Mexico / Canada / Japan / North Korea / Iran etc. does not hit back too hard. Now the Fed is being more accommodative, Trump has the policy space to get on an election footing and audition to be the tough businessman dealmaker (and “Stable Genius”) he played on the Apprentice for a second term as President.
One casualty of Trump’s wrath this past week was the UK Ambassador to Washington, Sir Kim Darroch, who in 2017 described the new Administration as ‘inept’, ‘incoherent’, ‘chaotic’ and ‘divided’ in cables that were leaked to a UK newspaper. He has since been forced to resign after the US President called him a ‘very stupid guy’ and refused to work with him in response – an unprecedented move for a head of state equivalent to expelling the chief diplomat of a close ally for reporting their personal view in private or, in other words, for doing their job. Moreover, given the state of the White House at that time, we would be more shocked if he had not described it as chaotic and divided! Trump then went on to lambast outgoing PM Theresa May and her Brexit strategy as a failure, which is also arguably true. However, it in no way helps America’s national interest or the Trump Administration’s allies in Britain for the US President to say, ‘I told you so’. (Dare we suggest it seems rather inept.) This whole episode is yet another reminder that the US President’s scattergun diplomacy and remarkably thin skin could, at any moment, obstruct crucial international agreements and damage relationship that are currently in flux, from the US-China trade and technology agreement to a potential UK-US trade deal post-Brexit. Do not count your chickens before they hatch.