The beginning of a Dollar recovery

Outlook:

We see the beginning of a dollar recovery forming. The euro may have topped out for the moment and in the absence of any juicy hard data, attention turns to Trump's tax initiatives. Everything so far is a negotiating stance and very far from anything resembling a genuine plan, but never mind. Markets have been hungering for the Trump tax reform, especially equities, which have the nice tailwind of decent earnings.

The central features of the Trump tax initiative are a cut in corporate taxes to 15% and a one-time repatriation tax on foreign earnings of 10%. Overseas holdings are estimated at $2-2.6 trillion.

The last time we had a one-time repatriation tax was the Bush Two version that was supposed to drive jobs. It did not. Companies brought back about $800 billion and spent nearly all of it on stock buybacks and executive compensation. Employment moved not at all. Needless to say, nobody is suggesting that this time companies be required to spend the money on anything specific.

Politics junkies are hoping for a showdown with Trump about how he personally benefits from a new tax regime. To do that, he would have to disclose his past tax returns. We say he is going to get away with withholding the returns again and with brushing off whatever benefits he gets as a drop in the bucket of the larger "public welfare." This is partly because business lobbyists are mightier than the selfrighteous indignant, and also because the Dems always get hosed by the Plubs on business matters. They don't want to be the ones that cause a government shut-down after being able to blame the Plubs for all the previous occasions. Technically, the tax talk is not tied to the continuing resolution due by Friday to keep the government open, but don't kid yourself—it's in the mix.

Another Trump policy issue is starting to appear. Commerce Sec Ross said he intends to re-write NAFTA by the end of this year. Sectors at issue include aluminum, semiconductors, and shipbuilding. Ross will also "ramp up" free-trade talks with EU, Japan, the UK, and S. Korea, according to the WSJ.

The tariff against Canadian lumber is not actually the first shot across the bow. That goes to an earlier Trump attack on Canadian dairy. Trump tweeted "Canada has made business for out dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!"

The FT displays the tweet today and reports that it reverberated around the world—to New Zealand. "New Zealand is the world's eighth-largest milk producer but its biggest milk exporter, so any threat to its core industry is cause for concern." Sure enough, the NZD slumped.

It may appear that resolve to get tax reform will overshadow everything else, but there are many cracks and faults. Budget director Mulvaney already lost the "repeal and replace" health care initiative and has low credibility and respect in Congress. Trump himself removed the Mexican wall from this round of talks but it's never going away—it's a campaign promise. Trump now decries the 100-day metric as foolish but the fact remains he has not delivered on a single promise he made specifically tied to the first 100 days. The latest setback is a judge ruling unlawful the Trump plan to withhold federal money from sanctuary cities.

It's interesting that the long list of badly thought out policy nuggets—you can't call anything a "plan"—is being brushed aside in favor of the Big Ideas—cut taxes to the bone and never mind neglecting the deficit/debt and disregarding side-effects. A narrow focus on one "good" thing over a plethora of bad ones is dangerous and can have unintended consequences. But for the moment, the US leadership looks dynamic—buy dollars.

Tidbit: Lurking just under the surface is a US housing problem. It was the housing finance market that triggered the last recession and while nobody expects a new recession, housing is becoming a problem sector. Yesterday Case Shiller reported Feb home prices rose 5.8% y/y or 40% above the bottom level of the crash in Feb 2012, according to the WSJ. "A dearth of new construction and strong demand from buyers are pushing up prices twice as fast as the rate of income growth, the latest data show, a level economists said is unsustainable."

Price moves are extreme in some places, like San Francisco—where home prices are up 98% off the low and 6% above their last high in 2006. Dallas is a similar story. Bidding wars are breaking out. A lack of supply—down 6.6% y/y in March--is due in part to an absence of new construction, at the lowest level since data tracking began in 1957. How does this end? With a whimper and not a bang, say economists.

Tidbit 2: Congressmen on the House Oversight Committee say former national security advisor Flynn almost certainly broke the law by not registering as an agent for a foreign government (Turkey) and by accepting money from Russia for a speaking engagement, which is always forbidden to ex-military officers. He could go to jail. Ironically, Flynn in the one who chanted "Lock her up" about Clinton during the RNC nomination shindig. The point is not that someone high-up committed a crime. The point is that the Trump gang didn't vet him properly and then waited nearly three weeks to fire him after the Justice Dept alerted them to the problem. And then fired the Justice Dept official (who will testify May 8). White House incompetence is never a good thing.