The biggest dollar-negative factor: the expected Fed rate cut on Oct 30

Outlook:

We shouldn't forget that IMF forecast of global trade sliding down to a growth rate of only 1.1% this year from 3.6% in 2018. Because of trade, the Philly Fed survey yesterdays showed nearly 20% of regional companies intend to reduce capital spending next year. The overall survey index fell to 5.6 from 12.0.

Yesterday brought a drop in industrial production and weirdly, also housing starts. We had imagined starts would be a reflection of resilient domestic demand, but instead total starts fell 9.4% after rising 15.1% in August. What happened? Well, single-family homebuilding was tepid but positive, up 0.3%. It was multi-family housing that dropped 28.2%. Granted, this segment is volatile, but we'd put the drop in the same basket as the one-fifth in the Philadelphia Fed survey saying they will cut capital investment.

The Atlanta Fed left the Q3 GDP forecast the same as before at 1.8%, but points out that its "nowcast" has real business fixed investment contracting even further from -0.9% to -1.2%.

And that brings us back around to the biggest dollar-negative factor—the expected Fed rate cut on Oct 30. We have zero evidence that investors will respond to cheaper money by building new factories or apartment buildings or any other initiative. Cheap money in the face of a slowing economy may keep activity treading water, but doesn't shove it forward. In other words, it ain't gonna work as "stimulus." It will be applauded by equity traders working on margin, but speculation is not production.

Now that we have the euro upside breakout, we have to follow the technicals and buy euros, but at some point the Fed rate cut is going to get fully priced in, and at some point the drop in global trade is going to hit the Germany economy even harder. We will be getting a correction/retracement in the euro, to be sure, but we doubt it will go all the way to a full recovery, or the last intermediate high on the monthly chart (1.1556, Feb 2018).

Politics: Stunning news yesterday included Trump capitulating to Turkey in every sense. Turkey gains territory and status as a tough guy; the US gained nothing (and lost its military bases, which it bombed to prevent them falling into other hands). One analyst said Trump's claim of having "made peace" (for a few days, anyway) is like the arsonist claiming credit for helping put out a fire.

Meanwhile, the ambassador to the EU testified he had been hoodwinked. He told Congress Trump ordered Giuliani to get information from Ukraine about the Bidens and ordered him to help Giuliani.

The bombshell was a press conference at which the Trump chief of staff (and budget manager) admitted Trump held up the money requisitioned by Congress for Ukraine defense against Russia in order to get information on Ukrainian involvement in hacking the Democratic Party's server in the 2016 election. He specifically said it was a quid-pro-quo and "we do it all the time," apparently believing that because it was asking for information about a past event, it was not of political value and therefore not a bad thing, and the president has total control of foreign affairs, anyway—"get over it." Besides, it was about the server, not Biden. It was a full-throated confession of the impeachable offense, so a few hours later he issued a statement saying he didn't say what he said. But it's on tape. The lawyers are appalled.

The pundits are in overdrive and we sometimes forget how sad it is that the worst of America is on display. Right now it looks like Trump will throw Rudy under the bus, just as he did Cohen, and maybe the chief of staff, too.

On the tax story, a small amount of information is now out. Former lawyer Cohen was vindicated in his charge in court that Trump cooks the books. Tax documents that are likely fairly accurate show one set of occupancy and revenue numbers but the same data for a bond issuance on a Walls Street building show different numbers. Two sets of books, aka fraud. The bond data starts out lower than the tax data, presumably to show vast improvement in trends in occupancy and cash flow. That bond is now on the watch list.

Gaining traction is the idea that Trump has bought into a conspiracy theory, likely promoted by Russia, and it colors everything he does. This theory has it that the Deep State is conspiring against him and invented the Russian interference in the 2016 election, Ukraine tried to help Hillary, and the Bidens are corrupt. But what about rejecting the legality and constitutionality of the impeachment process? That could be pure ego ("not Me!") but maybe there is something else at work. Trump can pretend he is cozying up to Putin because together they can bring peace to the world. This is why he attacks NATO, for example, and what he must have told the Japanese PM to induce him to write to the Nobel committee recommending Trump for the peace prize. Three guesses who gave Trump that idea. Again, the easiest victim for a con man is someone who fancies himself the con man.

 

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