Dollar getting asymmetric treatment: bad news exaggerated while good news are downplayed

Outlook:

Really good news on US inflation and other matters, including the Philadelphia manufacturing index jumping to a 33-year high, is being more than offset by political matters. Reuters notes the dollar index is down 6 of the last 8 weeks and "concerns about policy under president Donald Trump [are] quelling hopes of a new rally in the currency."

To be fair, the dollar always gets this asymmetric treatment. Bad news is exaggerated and good news is downplayed. The Teflon euro can hold up under bad data releases that would fell a lesser currency. Yesterday the news included a candidate for the National Security Advisor job declining the post because he would not be allowed to name his own deputy and team. And Trump held a frighteningly off-the-cuff press conference and disgraced himself for a full 77 minutes, saying the intelligence leaks are fake news. This raises the credibility question—who do you trust, the habitual liar or the spooks? He also denied that he (and nobody he knows) has ever spoken to Russian government officials, when the intelligence group has definitive proof that staffers did.

Richard Wolffe in the Guardian has a summary: "Watching Donald Trump's freak show of a press conference, it's painfully clear that we have all made a terrible mistake.

"For the last several months we all thought we were watching the presidential version of Celebrity Apprentice. Trump was going to walk into our living rooms, fire somebody at random, and then happily walk out. In fact, we have our shows all mixed up. This is actually a very long season of The Office, with our new president playing the role of a self-obsessed buffoon who clearly thinks he's smart, funny, kind and successful.

"Trump is the boss we all know so well, and never want to see again. The one winging it at every turn, in every sentence. The one who just read something, or talked to somebody, and is now an Olympicsized expert." He thought the disgraced Flynn was doing a good job. There's nothing really wrong with lying to the VP, the press, Congress or the FBI. Actually, lying to the FBI is a crime in its own right. As Wolffe says, it would be funny if it were not so scary.

An article published two days ago in MarketWatch is making the email rounds and getting ink at some newspapers (The Guardian). It says UK bookie Ladbrokes sees the probability of Trump leaving office via an impeachment or resignation before he finishes his first term has doubled over the past three months. "Immediately after his election win in November, the odds of Trump staying in the Oval Office for four years were 3/1, indicating a 25% chance he'd leave early. Now a little more than three weeks into his tenure, the odds have been slashed to 11/10, putting a 47% chance that he'll resign or be impeached."

The New York Times is almost hysterical. Krugman makes the point that Congressional Republicans have a duty to provide a counter-weight to the executive and are shirking it—a bipartisan independent commission is needed to look into this Trump-Russia issue. To be fair, the WSJ reports the new trade talks are not going so well because Republicans are trying to protect their home state industries.

Brussels is starting to sound a little hysterical, too. The Eurogroup will meet on Monday without a deal that includes the IMF, unless something wild happens over the weekend. Greece doesn't' actually need the next tranche of €7 billion until July, when it owes the ECB, among others, an interest payment. But while Greece doesn't need a deal right now, other EMU members do, lest the bailout become an election issue. Tsipras must be smiling. The Dutch are electing a new parliament in March and France has the first round of voting for president in April.

To compare the US' political problem—an erratic, impulsive, unqualified President—with the prospect of political turmoil in Europe is no contest. One is actual and in place and the other is just a worry about the future. In other words, Trump is worse than another debate about who pays for Greece's bailout, although we admit LePen is positively Trumpian in scope.

But wait—it's worse. The WSJ reports "What's striking about the French presidential election is the extent to which the two front-runners share a basic analysis of the choice facing the country. Marine Le Pen, the leader of the right-wing National Front, and Emmanuel Macron, the 39-year-old former economy minister who quit François Hollande's government to stand as an independent, are poles apart politically. But both agree that the defining issue is France's membership of the eurozone.

"Both point to the widening divergence between Germany and France's economic performance during the past decade as evidence that the status quo isn't sustainable. The National Front points to a recent International Monetary Fund study that suggested the euro is up to 15% undervalued in Germany and 6% overvalued in France as proof that France is at a competitive disadvantage. It argues that the only way France can remain a member of what one party official calls the ‘fixed eurozone exchange-rate regime' is to pursue an internal devaluation by cutting back on social protections and driving down wages. The alternative is to quit the eurozone.

"Mr. Macron implicitly agrees. He wants France to stay in the euro and is campaigning for changes to the country's public sector, welfare system and labor rules, which he says are needed to restore the country's competitiveness. He advocates a more flexible welfare system and labor market that protects individuals rather than jobs and allows employers to strike deals with workers at a company level rather than across sectors.

"Ms. Le Pen, on the other hand, believes there is no appetite for cuts to welfare, which the National Front says provides an important economic as well as social safety net, helping to maintain household consumption. It argues that the only way to preserve the welfare system is to quit the Eurozone and devalue the currency."

The WSJ makes the interesting point that what makes Frexit different from Brexit is the essential pinko French nature: "whether Ms. Le Pen's policies would inspire the necessary confidence in the success of post-Frexit France. One reason why Brexit hasn't yet had the impact that many economists predicted is that mainstream Conservatives quickly took control of the Brexit process, dumping populist Leave campaign proposals such as an extra £350 million ($436 million) a week of health spending and has instead reaffirmed the U.K.'s intention to remain an open, liberal, free-trading economy. In contrast, France's rigid labor laws and high levels of taxation are likely to be a drag on its competitiveness regardless of what currency arrangements it might choose."

This implies Britain has a chance of getting somewhere good with Brexit, but France doesn't have a prayer. That rings the intuition bell, doesn't it? The French are pragmatic but they are also fully committed to the welfare-state. They know which side of the bread their butter is on.

In the end, Trump has the potential to damage US credibility and the dollar, while Frexit has the potential to damage the euro, perhaps fatally. The US economy is bigger than Trump. The bond market and equity markets are bigger than Trump. We can hunker down and wait him out. But while the Eurozone can exist if France were to exit, it lacks the infrastructure to make it work well in the face of capital controls and other bad things that would ensue. It would be like New York or California seceding from the union. Remember, if California were a country, it would be the 4th largest country in the world (France is 5th).

Stay tuned.

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