Certain things are taboo in politics, like members of the same Party criticizing one another; unless, of course, they are engaged in an electoral primary. Other actions are not only forbidden but also never seen, like a sitting president criticizing a cabinet member or senior administration official.
And then came Trump.
Trump is no politician indeed and that’s exactly why he was elected. Millions of Americans feel disenfranchised by, and disenchanted with, both political parties. Trump is the antithesis of them, and completely different from anything ever seen before in Washington DC. And knowing Trump as we all do, it’s really no surprise to see him chastise Federal Reserve policy and his chosen leader for it, Jerome Powell, as he did the week of July 15, 2018.
Good for him. Every tentacle of the establishment government bureaucracy is working against him and the success of his agenda. There is no time for him to be timid. Besides, it was a brilliant political move.
Look at it this way…
Trump is in a trade war and both China and the European Union are devaluing their currencies, which make their products cheaper and ours more expensive. At the same time the U.S. Federal Reserve is raising interest rates and unwinding QE (quantitative easing) – which is now being referred to as Quantitative Tightening, or QT. All of those efforts make American products more expensive, and thus counteract Trump’s foreign policy initiatives and tariff plan. And he’s pissed-off about it.
But Trump’s ire doesn’t end there. After all, the entire establishment (and especially the Federal Reserve) did everything and anything possible to support the Obama agenda – economically sound or not, constitutional or not, sane or not. Of course, Obama was one-of-their-own, an establishment guy to the nth degree. Trump is not. And so there was no reason for the establishment to rush to protect and support him as with Obama.
There can be little doubt that before going public Trump asked Powell for a more accommodative monetary policy to support his foreign policy agenda. Obama surely did the same during his years. The only difference was that Obama got a yes and Trump got a no. So he called Powell out for not getting the same grace. Fair enough.
But the strategic importance of the move goes far beyond simply highlighting the hypocrisy of the Fed’s actions under Obama (a Democrat) versus Trump (a Republican), to something directly connected to the next major crisis and the thereafter. Fact: there is always a cause to crisis, and therefore, always someone responsible, and always someone to blame. Make no mistake; Trump is in the game. He knows he’s the target.
Consider that the economy is in the late stages of expansion, taxes have just been cut and interest rates are finally on the rise. The initial estimate for 2nd quarter Gross Domestic Product (GDP) was recently released and no one is talking about the big news in that report – which was not the 4% Real rate of growth (more on growth in a bit.) Instead the big news was inflation has finally returned to the U.S. market; it reached 3.2% in Q2, above the Fed’s 2% target. (Side notes: The last time U.S. inflation was greater than three-percent was 3rd quarter 2008…Inflation drives interest rates higher.)
Trump is opportunistic and so he is using strong economic growth as leverage in his foreign trade negotiations. He is certainly making more of it than it is. That’s how he is, and what he does. Investors need to see through his gamesmanship. Q2 is only one quarter.
To take an economic bearing recall that 1st quarter 2018 growth was just 2.2%, so the average rate for the year is only 3.1%. Also consider that former CNBS anchor Larry Kudlow, who now works in the Trump administration is already talking the pace of growth down, forecasting Q3 gains to be in the 3% range.
It’s a three-percent economy, not four.
In addition, quarterly GDP has been at this level before only to fall flat for the year. For instance, the middle two quarters of 2014 averaged 4.9% growth. But the first quarter shrank by -1% and the last quarter posted a paltry 1.9% gain. The year ended with an uneven 2.7% advance.
In 2015 the economy started the year with two solid quarters of 3.3% growth but fell flat in the final six months, posting gains in those quarters of just 1% and .4%. It was a weak and uneven 2% for the year.
Be careful not to read too much into this initial estimate of 2nd quarter GDP. Growth is stronger but still uneven.
The reason for the uneven growth pattern since the Great Recession is because government spending, not consumer demand, was the main driver of growth during the time. Growth dependent on government spending is economically unreliable and fiscally unsustainable, and therefore carries little political weight in the global arena. A robust economy driven by a free people produces more wealth, prosperity, and ingenuity than any other economic model, which produces more vibrant and longer-lasting economic expansions.—And Trump knows it.
That’s the reason for his multi-pronged tax cut plan. Personal tax rates were reduced to increase the individuals’ share of market spending, something that always boosts growth and places the economic trend on a much more reliable and sustainable footing. Corporate income taxes were reduced to make it easier for businesses to profit and re-invest, incentivize employees and expand. Both tax category reductions help ease the transition to a higher tariff environment.
The Trump agenda is measured and well planned.
His position to impose higher tariffs on foreign nation states is so that U.S. taxpayers and enterprise can choose whether or not to pay higher taxes or tariff. In other words, buy American or pay a tax (tariff). The choice is for Americans to make.
Trump places America and Americans first, damn the consequences.
Another great piece of the Trump tax law was the provision for U.S. multinationals to repatriate foreign profits back to American shores at a much-reduced tax rate. This brought hundreds of billions of dollars back to America making U.S. banks stronger and more capable of withstanding the high pressure certain to arrive during the next crisis.
Trump policies place America on stronger footing.
This is purposeful, as he is preparing the country for a full-blown economic war – a trade war, currency war, and political war – that is brewing now and sure to arrive at the most inopportune time. Trump sees it coming and he is leading the charge. Those not with him are against him, calling Powell out just another example of him willing to fight on any front, whomever they are, foreign or domestic.
Good for us.
Those criticizing Trump for his public exchange with Powell do so not just because it has never been done before, but because any sane person knows that the Fed should have moved rates higher and tightened money six or seven years ago. Tightening is way overdue. If not now, when?—During the next crisis?
Powell knows he can’t do that. It would be cataclysmic to inject trillions of new QE dollars on top of what is already there during the next crisis (and clearly he is planning to use the technique again, otherwise he would acquiesce to Trump’s request for continued lower rates). So he must get as much of the old QE money out of the system as fast as he can and before the next crisis hits – without causing world panic in “the market” – and that’s the real trick. Again, the economy is in the late stages of expansion and rates have only begun to move higher.
In a nutshell, Powell has a job to do and is going to do it his way. Trump can go it alone, his own anti-establishment way.
And Trump has little concern with that. He will continue doing what he plans because he believes it is right. There is no quit in him. No let up. No fear.
Good for him.
Think of how fast the Trump policies have changed the global dynamic. The Trade War just got started and many countries and emerging markets are already feeling the pinch – China, Turkey, much of Europe, not to mention countries like Venezuela, Iran, Syria, and North Korea, are all experiencing some pain. And not only is Trump not letting up but he continues to add more foreign trade pressure. America is finally flexing her muscles!
It’s about time.
And while American economics and money are doing fine, foreign currencies are devaluing everywhere and interest rates are spiking. The recent drop in the Turkish lira, for example, sent their interest rates to 22% from 12% in a blink of an eye. Venezuela is experiencing 1,000% inflation and capital is dry. Those few conditions will only spread and get worse as American policy moves forward with higher tariffs, higher inflation, and much higher yields (the 10-year yield is still below 3%; there is long way for the U.S. to move higher).
Investors must take note: We have entered the next cycle of correction. (See: SURVINING THE NEXT CRASH for more information.)
During the heat of the next crisis, like the rest of the world, Trump will blame the U.S. establishment, namely the Federal Reserve, for lighting the fuse of global disaster with higher interest rates. Democrats and foreign governors will also blame Trump’s trade and tariff policies, and perhaps his tax cuts, for the economic explosion. But the street fighter will counter.
Trump will attack the corrupt Federal Reserve, pinpointing the unconstitutionality of the QE Hedge Fund they created during the Obama years, and then highlighting how the Fed, like the FBI and IRS, have turned themselves into a political arm of the Democrat Party. It is Us versus them, and high-time to reel in a runaway Federal Reserve and every other rogue big-government agency.
That’s where the true wisdom of the President's exchange with Powell resides. Trump will have been on record against the rate hikes for more than a year before disaster. They will have no doubt made matters worse. And so Powell will be considered wrong at every corner and an inferior replacement for Janet Yellen. He will become a logo for the new crisis.
And why not?
What the Federal Reserve has done over the last two decades is nothing short of criminal. The next crisis will be the right time to fight that fight -- and it will be ugly.
That said, perhaps the best way to close this blog is with a few excerpts from my whitepaper, SURVIVING THE NEXT CRASH posted in January 2015, which are still relevant today.
“And while another act of war on the homeland can obviously begin the next major corrective cycle, I still believe the impetus will be money related: inflation, spiking yields, widespread currency and debt devaluations, the collapse of the Euro, or something along those lines.”
“ Inflation all by itself can cause world havoc…Inflation is the cost of money. When the cost of money increases so does the cost of debt, because debt is simply borrowed money. When interest rates rise in America they rise everywhere else. Greece, for example, will see their interest rates rise from 7% to 12%, 15%, or even 20%, depending on the level of inflation. Heck, Greece can’t afford itself at these historically low rates; higher rates will only push them further down the hill faster. And it’s not just Greece…”
“The QE-boom has injected too much money and a lot of risk, manipulation, and corruption into this stock market. And like all booms, it too will undue itself.
“When the QE-boom goes bust currencies and debt will experience widespread devaluation and default; yields will spike and countries will go broke; inflation will be a cancer, and banks will be in trouble again – especially foreign banks. The specter of an expanding world war will loom, DC will look lost, and Wall Street will again be surprised.
“And stocks will dramatically sell-off.”
I still see it that way.
Prepare your portfolios now.
The road to financial independence.™