The dollar 'should' fall, despite countervailing winds from a decent economy

Outlook:

For many months the dollar remained firm on risk aversion due to the US-China trade war and despite the clear intent of the Fed to cut rates. Now we have de-escalation in the trade war and the rate cuts are behind us, all three of them, and with nice US economic data to boot—but the dollar is hanging on to gains.

The dollar benefits from risk-off but fails to suffer when risk-on comes back. Needless to say, this casts doubt on the risk model, or maybe it’s just taking its time to manifest itself. Or we need to place more weight on the remaining risks, including Brexit, and the ever-growing evidence that “it’s too late”—the US may not be getting a recession, but the rest of the world is getting it, or close to it.

If you are confused, you are not alone. If the risk model is valid, getting Phase One and settling the auto tariff question this month will put a lot of risk to bed. The next Event is the UK vote. So, by Dec 15, and especially if Trump removes the postponed tariffs due then, we could have a world with substantially less uncertainty and risk. The dollar “should” fall, despite countervailing winds from a decent economy.

Today we get durables and factory orders, and tomorrow, the service sector PMIs from Markit and ISM.  Now that we have excellent payrolls and decent Markit manufacturing, these factors are minor in comparison unless any of them contain an unpleasant Surprise.

Off on the side, the FT has a screaming front-page headline “Nearly two-thirds of US voters say Trump has not made them better off.” This poll result, from the FT-Peterson Institute, is supposed to show that Trump’s campaign promises were not kept. The problem is the headline is false. The actual data shows 31% say they are worse off, but 33% report no change and 35% say they are better off. 

This is slanted reporting or at least slanted headline-writing. In practice, the 35% or so who are always-Trumpers can be sleeping on the street and they would still vote for Trump, because they buy the story that Trump is on their side in the need to disrupt the status quo and the norms of the elite. Trump is not the elite (which rejected him) and while he is not the average Joe, either, his pretence of leading the average Joes is his brand. Followers are brand-loyal.

Tidbit: About that shortage of liquidity in the repo market: a Reader reached out to a fund manager who supplies securities to the repo market. This manager says he doesn’t really understand the problem, either, but one cause of the shortage could be that there are too few primary dealers and at least some of them might be hoarding their own securities, loathe to lend them out for repo purposes. You can see vast amounts of information on primary dealers at the NY Fed website (there are 24 today by our count of the list). Nearly all of the information is incomprehensible to us mere mortals, like which quintile bought 3-years. You can’t line up Bank A with how many securities of which tenor were lent out or taken in for overnight repo purposes.

The other cause of a shortage has to be plain, old-fashioned uncertainty. This is not a full-bore crisis of confidence, but it might be the beginnings of one. Confidence in whom? Not the Fed, which will always step in to Roto-rooter the pipes, but rather one or more of the overnight borrowers. Again, a solvency and/or credit issue—providers of securities worry they won’t get them back on time. Legally, the lenders must get them back because that’s what the contract calls for, but a week’s delay in a court proceeding would have the lenders bleeding cash.

Finally, extreme caution leading to hoarding may be due in part to fear of bank failure and getting held up in court. There were zero bank failures in 2018 but four so far this year, including one on Friday and two on Oct 25.

Politics: One of the curious factors in the mysterious case of Rudy Giuliani and his pro bono representation of Trump is why Trump would trust the clownish, big-mouth Rudy. Now we know. Rudy made his bones with Trump by getting Ukrainian Pres Poroshenko to shift the “black ledger” case implicating Trump campaign chief Manafort from the Anti-Corruption prosecutor to his own office, effectively ending cooperation by Ukraine with Special Counsel Mueller.

The black ledger disappeared as a factor for Mueller, but enough of it was already known to proceed with Manafort’s prosecution in the US, mainly on tax charges otherwise demonstrable. In return for halting cooperation with the US on Manafort, Poroshenko got—within days—his coveted White House meeting that an expensive Washington lobbying firm had failed to secure for many months beforehand.

In other words, this was the second time Trump, using Rudy, extorted something of value to him, not the country, from a Ukrainian president.

Reporting is by the Washington Post, reprised by Maddow on cable TV. Maddow notes that Kiev newspapers at the time knew exactly what was happening with the black ledger—it was being buried and some $2 billion in money stolen by the pro-Russian president before Poroshenko was getting away with it. That’s the guy who had a private zoo at his house (Yanukovych) and was ousted by revolution in 2014. 

Another new development is the release by the Justice Dept of summaries of testimony by the office of special counsel Mueller, seemingly willy-nilly and even out of order, in response to Freedom of Information lawsuits brought by BuzzFeed, CNN and others. The court order covers subpoenas and search warrants, too, but so far, just the summaries have been released. Another installment will be released every month for at least the next eight years. Evidently the Justice Dept thinks such a long delay will have folks lose interest.

The chief take-away so far is that even before the election, Manafort was pushing the debunked idea that it was Ukraine that had hacked the Dems. And never mind that the intelligence community collectively determined it was Russia. Evidently these conspiracy theorists believe there is a physical box named the DNC server and that box got pirated to Kiev.

Diehard Republicans continue to defend Trump. He didn’t do it, and if he did it, it’s not a crime that rises to impeachment. Unhappily, Trump is serving as his own defense “war room,” at which he is no more capable than he is at governing. We cannot expect a coherent, credible defense.

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This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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