Markets are undervaluing the dangers of more tension

Outlook:

Today we get the National Association of Home Builders housing index for Feb, forecast a little better at 59 from 58. We say this may be more important than usual, reflecting the fresh activity now that the Fed's halt in raising rates has had time to be digested. We also get a speech from Cleveland Fed Mester. Tomorrow it's Dallas Fed Kaplan and the Fed minutes from the Jan FOMC.

As noted above, the next week or two are going to deliver a new picture of the trade talk environment. The markets seems to believe all will go swimmingly—a US-China deal, a UK-Japan deal, no US tariff on European cars, and Japan escaping the need for any deal (see the Tidbit below). Ask yourself when was the last time Trump allowed a normal course of events to develop in the expected, standard, normal way. We think markets are undervaluing the dangers of more tension and turmoil. Turmoil is what Trump craves because it gives him the limelight and distracts attention from his cronies getting jail sentences, among other woes.

Here's the problem, and it's the same as before—turmoil on trade favors the dollar as the safe haven. It's also especially hard on the commodity currencies. China can't buy milk from New Zealand and iron ore from Australia if its economic slowdown is worsening. While we wait for trade outcomes, we will be judging how deep is the German hole and whether anyone will stop digging.

Tidbit: All decent Americans are hanging their heads in shame over Trump's latest embarrassment—he claims to have received a 5-page letter from Japanese PM Abe thanking him for halting the barrage of missiles from N. Korea flying into the Sea of Japan and even over some Japanese islands. The letter supposedly says Abe forwarded the letter with a nomination for the Nobel Peace Prize to the Nobel committee. Abe declined to deny, which means either he really did send and forward the letter, or that he is too polite to call Trump a liar. If Trump lied about the letter, you'd think Abe now has a trump card, but Trump is shameless when his lies are disclosed, which occurs daily.

Yesterday it emerged that the House Finance Committee will issue subpoenas to Deutsche Bank to obtain information on Trump's business dealings. Back in December 2017, the special counsel was reported to have issued those subpoenas but the story fizzled and if there were subpoenas, they were withdrawn (presumably to prevent the special prosecutor from being fired). Remember that Deutsche Bank was fined over $600 million by the German government for Russian money laundering.

On another front, longtime pal and sometime campaign advisor Stone posted a photo of his federal judge with target crosshairs superimposed on her head. Later he sent a formal apology to the judge. These people are too stupid to have been recruited by the Russians.

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