What to Worry About Today: Russia

Outlook:

Fed chief Powell offers testimony to the Senate today starting at 10 am. We will all be watching. The prepared remarks were already released but the key moments will come in the Q&A session. First on the list is whether to expect a fourth hike after the third hike in August. The CME FedWatch tool gives it a 62% probability. Powell will likely stick to the four hikes scenario and downplay the inverting yield curve and its implication of recession.

It would be fun if Powell were to bring up Greenspan’s conundrum and note that with other major countries still in the grip of QE, the US is the only game in town.  Where Powell is going to have to tap-dance especially skillfully is in response to the economic effects of the trade war. Various press outlets are enumerating exact effects on specific sectors and companies around the country, but soybeans always high on the list. (In the 1960’s, school children were taught that by 2000, just about everything would be made from soybeans. It didn’t happen, but it could.)

The problem is that not even the best economist can know the end-effect of the trade war on various types of sentiment, and especially capital spending plans by leaders in core industrial sectors. What, exactly, does the head of strategic planning at (say) Caterpillar believe about sales of farm equipment five years out? Those guys must be tearing their hair out. Forty years ago Jack Walsh, then head of strategic planning at GE, revolutionized corporate strategic planning. What is its state today?

At a guess, strategic planners are beavering away at plans that might have to be dropped like a hot potato at any moment. Plan A gives way to Plan B and so on. Here’s the issue—Plan C is smaller than Plan B and Plan D is smaller than Plan C by a vast amount. It’s hard to imagine any plan in this environment that results in a significant rise in capital spending, and without the productivity gains that come from capital spending, we can’t foresee wage growth.

Powell must know this. He can put on a good show about the trade war not being a knowable factor yet, but in the regional Fed reports and other reliable sources, the sad truth is that the trade war is a terrible, heavy drag on the economy. Momentum matters. The loss of momentum that is all too likely from the trade war is a serious risk to the Fed’s normalization scenario. We don’t expect Powell to admit it, but you never know.

Politics: Going little noticed is Putin’s admission that he did, indeed, seek to support Trump during the campaign and “ordered officers” to help. Right after Putin made this admission in response to a reporter’s question, Trump denied again that Russia helped him.

Trump persists in denying that Russia helped him win the election because he is obsessed with having won on his own, as many observers have noted.  He continues to talk about his inauguration crowd and demand investigation of Clinton’s various deeds, despite the Justice Dept having closed, once and for all, the Clinton investigations.

Trump says he can’t understand why Russia would have sought to help him, anyway. Well, it’s not hard to grasp: Russia wanted an incompetent and inexperienced narcissist that it could manipulate. Trump got played. By now everyone in every capital city knows and is holding his breath to see the American response. Because when backed into a corner, Trump attacks, his next response might be more trade war, including Nafta. Trade unfairness is something that works for Trump, or so he thinks.

This is a Very Big Deal. Nixon was forced to resign because he was caught hiring and paying burglars who broke into the Dems’ offices. Trump is caught having accepted the help of burglars who broke into the Dems’ computers. What we lack is the US citizens associated with helping the burglars and their connection to Trump, whether he was informed or not. Do we really need those citizens? Not really. Ex-Watergate prosecutors say denying there was a burglary is tantamount to colluding with the burglary. It’s an interesting idea. 

To the extent that the trade war is a dollar negative by holding back the Fed, we may finally get the dollar-negativity that Trump ‘s very existence in office has long presaged.

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