Fed rate cut coming in September, but will there be more?

Outlook:

Payrolls looms. Today we get the ADP forecast of the private sector component, and that will set off the usual see-saw. We also get the service sector PMI, factory orders and the revision to July durables.

Yada, yada. What counts is the Fed's action on Sept 18 and the accompanying statement. The Beige Book was fairly useful this time, saying there is still a modest expansion and "Although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook." We are definitely getting a rate cut but we could also be getting a statement of intent that more cuts will not be needed. Normally the stock market would not be best pleased with such a statement bit this time it could be different—all financial types who look up from their own P&L should cheer a brake being applied to the Trump runaway train. The Fed can use the excuse that US-China talks are being resumed and Trump is a master deal-maker, right? So no worries. This is the very definition of the word "stymy."

As a side note, the FT has an interesting headline: "Pound climbs as Boris Johnson faces repeated blows over Brexit." This could be just the usual cute-seeking headline writer taking liberties with the reporters' story, but maybe it's accurate. Naming "Boris Johnson" and not "no-deal Brexit" as the cause of the sterling-favorable response, the implication is that political personalities can indeed move the FX market. In over 30 years of market observation, we have not seen much of that. Right after elections, yes—Thatcher and Reagan are especially notable. But it's rare. And since the China trade war is what has been driving uncertainty and risk aversion, "repeated blows" to Trump might have the same effect, although in reverse (dollar down). This is probably fanciful but heaven knows, the negativity toward Trump is seeping into every nook and cranny. Every once in a while, a WSJ editor tries to find a way to praise Trump. One recently said hey, we're not giving back the dues that NATO members are finally ponying up. But overall, it appears the bubble around Trump may be about to burst.

We need a little more evidence but on a preliminary basis, it looks like this correction could turn into a more lasting and far-reaching one, perhaps even a reversal. Stay tuned.

American Politics Tidbit: Trump has been even more erratic since G7. We speculated at the time that perhaps it was because he saw for the first time the extent to which the other leaders dislike and distrust him. Or maybe it's because just before the summit, the stock market had crashed and Trump had to lie about "China called" to restore his ratings. Here's the fun part: China has said it didn't call and the White House has admitted China didn't call that weekend--Trump was referring to some other call. That's manipulation of the market and it's a crime under the laws that govern the Securities and Exchange Commission.

Then Trump or a minion drew a line on a weather map with a Sharpie to pretend the National Weather Service really had included Alabama in its original hurricane forecast. It's a crime under a law pertaining to the weather service to mislead the public about the weather forecast. The White House is denying anyone added that line and the weather service staff is discreetly non-political, but every newscast yesterday contained the picture and commentators ridiculing Trump for not being able to admit a simple mistake.

In addition, the House committee is narrowing down its impeachment investigations and will now include the crime of law interfering with the 2016 election—using the porn star payoff. Trump's lawyer has already gone to jail on a charge of conspiring with others to violate campaign finance laws. Trump is the unindicted co-conspirator, exactly the same designation Nixon got in the Watergate affair. Nobody really wants to go back to this sleazy thing but because the events occurred before the election, Trump cannot use executive privilege to obstruct subpoenas seeking documents and testimony.

Finally, Trump's violation of the emoluments clause in the Constitution is becoming blatant. He sent VP Pence to Ireland to say at a Trump Hotel for no government purpose, but more importantly, the Trump Hotel in Washington DC has made some $81 million since opening just ahead of Trump taking office, to some extent on elected officials, lobbyists, and foreign governments using the hotel. The Attorney General is throwing his Christmas party there at a minimum cost of $30,000, when giving your boss a gift worth more than $10 is against US government rules—not a law, but still considered wildly unethical and a half inch from a bribe. We still think it could be emoluments that bring him down.

Four crimes right there, plus obstruction of justice in trying to fire Mueller and having staff lie about it, ordering federal employees to break the law with a promise to pardon them afterwards, and other things. Promising pardons to known law-breakers who are breaking the law on the president's order is another charge against Nixon.

These are the legal things. Then there is naming specific military projects from which over $3 billion will be diverted to build the Wall., including West Point. This is also a legal issue because Congress has the power of the purse and has already specifically prohibited any federal funding it has approved to be diverted to the Wall. But it will be treated as a political issue. It's hard to see how Congress can fail to prevail if it keeps its spine.

We all know Trump is a pathological liar—over 12,000 lies so far since taking office, more than the numbers of day in office—but it seems to be getting worse. Interesting side note: one 4-star general said on TV yesterday that the president is the commander-in-chief and every military officer must obey a "lawful" order. The implication is that the generals and admirals have discussed what orders they will not obey and on what grounds. Nobody does more planning than the military, so this is more than idle speculation.

The press is starting to make much of the Trump administration flooding the swamp rather than draining it. Conventional wisdom has it that voters chose Trump because of his disruptiveness and unconventional ways, including dissing Muslims, Mexicans and brown people generally. But they also voted for Trump because he promised to drain the swamp. Instead four cabinet members are former lobbyists and six departed cabinet members and staffers have moved over to lobbying firms. We doubt Trump will participate in a debate with whatever Dem is chosen to run, but whoever it is has some dandy ammunition.

We always joke that Britain leads the US, which has been true over half the time in various economic events like inflation and to some extent in politics (think Thatcher and Reagan). The UK parliamentary system is far twistier than the US system and lacks an actual constitution, but you do have to wonder if today's Parliament finding its spine is in any way a precursor to a major political shift in the US. British analysts worry that the Tory party is now irreparably shattered into bits and pieces. In the US, the Republican party is well on its way to the same fate. Remember, Republicans stand for free trade and fiscal responsibility while suppressing unions. Trump is doing the opposite. What policy ideas can any Republican run on these days? And plenty of them are already saying they will not run next time—five Republicans in the House alone so far and the election is over a year away. That makes one thing clear—the US needs an authentic dyed-in-the-wool conservative or we will be stuck with the messy Dems for another 8-year cycle.

Tidbit 2: For the Readers out there, a splendid new book by James Grant (the bond guy) on Bagehot, The Economist editor who defined the relationship of capitalism and the state during the Victorian era. It may sound a bit stodgy but it's sprightly and highly readable, and of course it's always fun and useful to be reminded that none of the crises we have been facing over the past thirty years are new. They all happened (and worse) in Bagehot's day. They had railroads, we have electronics. If you like economic history (and he who does not learn from history...), get this book. If you are a lady reader, you have to grit your teeth in some places. We know how to do that, right?

 

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