The Trumpcare Vote: Previewing Thursday’s Big Event

By Heisenberg

Needless to say, the focus Thursday will be on the GOP proposal to repeal and replace the ACA.

Why do we care so much about this, you ask? Well, for one thing it represents a dubious attempt to replace one thing that isn’t working so well with something that won’t work at all. Which is funny – right up until you realize that it’s about healthcare. So you know, people’s lives are on the line.

But aside from that, the healthcare debate is seen as a kind of microcosm of the broader effort to implement Trump’s agenda. ACA repeal is generally seen as a prerequisite for moving forward with tax reform and other things that matter for the economy and, by extension, for markets.

Indeed, Tuesday’s selloff was at least partially attributable to jitters around the healthcare debate and if this thing stalls, well, let’s just say that doesn’t bode well for tax cuts and fiscal stimulus.

“House Republican’s ACA repeal/replacement failure doesn’t automatically equate to tax reform failure, though defeat would doubtless delay efforts and cut chances for comprehensive tax overhaul,” FBR’s Edward Mills wrote in note out Wednesday. He sees three possible outcomes:

  • Congress approves healthcare bill within weeks, increasing tax reform chances in the coming year
  • House passes bill but Senate doesn’t, or approves bill with changes that can’t get back through the House; tax reform would still be alive, but would be heavier lift
  • House fails to pass a healthcare bill, raising serious questions about Congressional Republicans’ ability to govern

So with all of this in mind, consider the following more comprehensive preview from Goldman, which should help to frame the issue that will be making headlines throughout the day.

Continue reading The Trumpcare Vote: Previewing Thursday’s Big Event

Trump to Fed: “Bow Down to Caesar” or Risk “Horrifying Misstep”

By Heisenberg

Ok, so we all know the Fed is more “S&P dependent” than they are “data dependent,” right? Don’t forget this from Wells Fargo:

The Fed rarely tightens unless the market is pricing at least a 60% of a rate hike one month before the FOMC meeting. Figure 7 underscores this point. The Fed has implemented 25 bps hikes on 27 occasions since 1991. Twenty days before the hike, the implied probability was below the key 60% level in only three of the 27 cases. The Fed tightening in December 2016 fit the historical pattern. The rate hike was very well advertised by the Fed, and the implied probability was about 80% a month before the FOMC meeting.


As I wrote last week, it’s not often that we get to say “wow, that Wells Fargo note is looking pretty prescient right about now,” but given that the excerpted passage and chart shown above came out in early February, this is one of those rare times.

But when it comes to the Fed anno 2017, one of the interesting dynamics to observe is the interplay between a committee that wants to normalize and a new administration that wants a weak dollar.

Obviously, a FF hike only serves to exacerbate the extent to which rate differentials are dollar supportive and so by definition, a hike is anathema to Trump and Navarro. Oh the f*cking irony, right? This would be the very same Donald Trump who just last year accused Yellen of keeping rates to low and doing “political things.”

Below, find the latest from former FX trader Richard Breslow who notes that the committee must now bow to “Caesar.”

Via Bloomberg’s Richard Breslow

Do you know why the Fed has decided to raise rates next week? It’s not because things have started to go well. It’s because nothing new has gone bad. What they fear like the dickens is to have to stand down, let alone backtrack. Better to leave it to the last moment and if the coast looks clear, make their move. Data dependence in an environment where the numbers have certainly been good enough has morphed into a vigil for when the next shoe will drop. This is the new form of optionality.

  • Talk is cheap. When they suggest three rate hikes or upgrade their dots, they are really promising little. They don’t know what the world will look like come June, let alone December. It will be one rate hike at a time, events permitting. Which also means data, while important, is a body of evidence whose meaning will only be revealed at the last moment
  • Don’t expect that we’re in a tightening cycle that will ever resemble those of yore. Global economic and geopolitical risks make that a simplicity of fond memory. The financial crisis-hangover means we are forced to take it the proverbial one day at a time


  • The institutional threats they face make the thought of any misstep horrifying. With all of the sniping from other parts of Washington and the looming new appointments, they understand the need to be the perfect Caesar’s wife. A lot to ask as they disengage the policy auto-pilot of the last eight years
  • By moving the rate hike forward, they did indeed increase the chances of more this year than previously priced. That’s true simply by definition. But their hawkish lurch changed pricing far less than anyone would have expected. Unless you were prescient enough to be playing the April futures contract
  • Friday’s post-Yellen price action was less buy the rumor, sell the fact, than a reevaluation of just how much things may not have changed to the as yet believable trajectory of things. Something to at least consider as you evaluate just where you think the dollar or 10-year might be going in the near future
  • Will Friday’s non-farm payrolls matter? Yes, only not for March. But how we begin talking about June. It won’t be an economic release potentially derailing the hike, just another of those infernal unknowns

What Trump Won’t Tell You About Illegal Immigrants and the Economy

By Heisenberg

One of the great things about having an intelligent, articulate, and cultured leader is that it reduces the need for the electorate to conduct their own due diligence on the issues that matter.

Illegal immigration is a great example. It’s a complex issue that has implications for the economy, demographics, and society in general. Fortunately, Donald Trump has come up with a handy Cliffs Notes guide as it relates to Mexican immigrants.

You can delve into the boring statistics if you like, but why waste your valuable time when there are only three things you really need to know? To wit, from the leader of the free world:

There you go. Everything you need to know about immigration in 9 seconds.

Now I don’t know why, but it turns out some folks are interested in finding out if there’s more to the story than that.

Folks like the economists at BofAML.

Continue reading What Trump Won’t Tell You About Illegal Immigrants and the Economy

9 Great Reasons to Doubt Trump’s “Phenomenal” Tax Reform Promise

By Heisenberg


Just one word.

That’s all Donald Trump thinks you need to know about his imaginary tax reform plan that’s supposedly being crafted by former Goldmanite – and man who got paid $285 million to quit – Gary Cohn.

You’ll recall that earlier this month, Trump proved he still doesn’t quite understand that when you’re President, you can’t just pull sh*t out of your ass because… well… because you’re the President and people take what you say seriously.

So when, in what I’m almost sure amounted to a throw away comment, Trump told a group of airline executives that “something phenomenal is coming on taxes,” the market took him at his word and promptly hit reverse on the reflation reversal (i.e. the reflation trade was back on).

Since then, the whole “phenomenal” thing has become nothing short of a standing joke. For example, if you click on the following tweet, you’ll note that Nordea’s Martin Enlund seemingly confirmed that the “phenomenal” annotation on the chart was indeed a bit tongue-in-cheek:


Still, the market has its “hope” and on Tuesday we’ll find out if Trump has come up with anything concrete on the tax reform front.

In the meantime, BofAML thinks that perhaps getting anything done on taxes is going to be a lot harder than the President thinks.

Continue reading 9 Great Reasons to Doubt Trump’s “Phenomenal” Tax Reform Promise

Trump Will Not Really Cut Taxes

By Steve Saville

As the financial world waits with bated breath for details of Donald Trump’s “phenomenal” tax plan, it’s important to understand that regardless of what Trump announces on the tax front there will be no genuine tax cut. The reason is that for a tax cut to be genuine it must be funded by reduced government spending.

Tax cuts are unequivocally beneficial to the economy if they are genuine, but if a tax cut isn’t funded by reduced government spending, that is, by the government consuming less resources, then one way or another it will have to be funded by the private sector. It will just be another Keynesian stimulus program, and like all Keynesian stimulus programs it will potentially boost economic activity in the short-term at the cost of slower long-term progress.

It should be obvious that the private sector cannot benefit from a tax cut that it will have to pay for, but apparently it isn’t obvious because most people seem to believe that the government can consume more resources and at the same time the private sector can end up with more resources. This is an example of believing the impossible. Unfortunately, it’s not the only such example in the world of economics, in that many aspects of Keynesian theory involve belief in the impossible.

The cost of government is determined by what the government spends, not how much it collects in taxes. And we can be sure that during the next four years there is going to be a large rise in the cost of the US federal government, meaning that with or without a so-called tax cut the private sector (as a whole) is destined to end up with reduced resources under the Trump regime. We can also be sure that it would have ended up with reduced resources under a Clinton regime.

The reason, as explained in the article posted at, is that spending increases in excess of revenue increases were ‘baked into the cake’ prior to the November-2016 Presidential election thanks to budgets dictated by previous presidents and Congresses. Getting a little more specific, the linked article points out that 150 percent of new revenue a decade from now is pre-committed to spending growth scheduled under laws that were in place prior to the 2016 election. Moreover, this should be viewed as an unrealistically-optimistic forecast because it assumes steady inflation-adjusted revenue growth. A more realistic forecast would account for the sizable decline in inflation-adjusted revenue that will be caused by a recession within the next few years.

The bottom line is that any cuts in the rates of US individual and corporate income taxes announced/implemented over the coming 12 months will be ‘smoke and mirrors’, because government spending is going to increase. It will essentially be a money-shuffling exercise to temporarily create the illusion that the burden of government is shrinking at the same time as it is growing.

The Song and Dance Man


I wasn’t really sure how well it came out, not my best rant at all, but when separate subscribers write in with feedback about the screed saying that it should make the open blog, I don’t see any reason to argue. Here’s one of the two opening pieces to IKN404, out last night:

The song and dance man

It’s oh so quiet, Shh shh
It’s oh so still, Shh shh
It’s Oh So Quiet, Betty Hutton, 1951*

Preamble: I’ve tried to tighten up this semi-disjointed rant up a bit, but part of its message seems to be its very disjointed nature so in the end I edited it down but kept its disparate nature. I’m not in the running for a Pulitzer anyway. The TL:DR is “Trump isn’t really much of a factor to our investments and the world isn’t about to end just because he’s in the Oval Office”.

We need to talk about President Donald Trump. Soon we’ll need not to talk about Trump, the subject will get too repeated and too boring and as already noted on the blog (1) I’m going to curtail references to The Donald over there as much as possible (my tiny contribution to online well-being), but as The US government and its declarations are in the centre of all things newsy at the moment, there’s no avoiding at least some comment.

And the main comment is that, so far at least, there’s very little that really matters to me about President Trump’s administration. For sure there has been constant noise, sometimes close to deafening, about the executive orders and decisions handed down, along with the pushback from politicians and legal beagles alike. For what it’s worth, my fave to date is his picking a fight with the US judiciary. Really not a very good idea, Donald, it’s your four/eight year tenancy vs jurisprudence of two plus centuries, you’re taking a knife to a gunfight.

But it’s all rather inconsequential so far because it’s nearly all domestic policy. For sure building a big beautiful wall, re-doing NAF(F)TA and not letting people in from dangerous countries will affect people from countries other than The USA, but all of those are domestic and not foreign policy decisions and if you piss off an Australian politico or two along the way, big deal. The only thing we mining investors should care about are either domestic fiscal policy decisions that have a knock-on effect through Wall St, or true foreign policy decisions by The Donald, so far at least we’ve had none. Yes, we’ve had mutterings about a “phenomenal” (bless him) tax plan (2) which people are guessing will be “stimulative” (translation: rich get richer) and just the rumour saw bank stocks pop higher last week. When that one gets rolled out we can see how much optimism is already baked in, but you don’t need to take my word for the lack of real fiscal or economic news out there as yet, take it from somebody much smarter than I am about the subject (3):

U.S. Federal Reserve Vice Chair Stanley Fischer said there was significant uncertainty about U.S. fiscal policy under the Trump administration, but the Fed would be strict in meeting targets of creating full employment and getting inflation to 2 percent.

Speaking at the Warwick Economics Summit on Saturday, Fischer also said he thought Dodd-Frank financial regulation would not be repealed as a whole, and he hoped capital requirements for banks would not be significantly reduced.

“There is quite significant uncertainty about what’s actually going to happen, I don’t think anyone quite knows. It’s a process which involves both the administration and the Congress in deciding fiscal policy,” Fischer said, in response to a question.

Translation: “We don’t know what he’s going to do to the US economy yet. And we’re the freakin’ Fed, we’ve got computers and stuff, you guys out there don’t have a chance!”

Meanwhile, when it comes to foreign policy and foreign relations The Donald has found out quickly that “The Art of the Diplomatic Deal” is a missing chapter from his best-seller, a good thing for all of us. Remember all that “recognizing Taiwan” thing? Remember the “China nasty people playing nasty currency games”? Remember the trade war Trump threatened if China didn’t start giving America a good/fair/better deal? I’m sure President Xi Jiping of China remembered all of them when he told The USA that he wouldn’t even pick up the phone if The Donald wasn’t ready to accept the One China policy. Trump agreed, he now recognizes China as a single entity offshore islands and all, the two had a long conversation (4) and once it was done, the two were telling us of their assurances to work together for the greater good of both countries. Donald, that’s what having your wings clipped feels like. So here’s my bet; domestically Trump will continue to make waves, cause controversy and shake up “the system” (or the bit of the system he has identified as the nasty bit), but when it comes to the fate of the world he’s not going to make much of a difference, the smarter world leaders (China, Russia, some parts of EU and that does not include the UK) have got his measure already. The most insightful thing I read about Trump this week came from an unusual source, but a whipsmart brain. Here’s Mel Brooks (5) on his new President and entourage (and before you send in any stuffy mails, “anti-Muslim travel ban” are the words of The Guardian, not Brooks’ or mine):

Brooks, who views Trump’s anti-Muslim travel ban as poorly planned and poorly executed – his parents came to the US as kids – does not revile the new president in the kneejerk way most movie people do. “Trump doesn’t scare me,” he says. “He’s a song-and-dance man. Pence [the vice-president] and Bannon [Trump’s scheming henchman, a kind of Dick Cheney without the radiant, cherubic charm], those guys make me nervous.” He adds: “We are not talking about Athenian democracy here.”

I agree. However much his style and persona might agree/disagree with you or I, this whole drain the swamp” and “break the rules” schtick is only going to travel so far. Will “The Resistance” in The USA change my life, or even my financial situation? About as much as the Tea Party did (i.e not at all). Will a Trump tax law that allows the rich to get richer have a knock-on effect on my portfolio? Maybe, but only in the same way the rich got richer through Reagan/Bush1/SlickWilly/Dubya/Barry did. As long as Trump defines himself as a financial force for change, be it ultimately positive or negative, I’ll be able to handle his character and mouthiness. The way he’s already being put in his place on the world stage augurs well, he’s turning into a net neutral for my life and that’s a welcome turn of events.

*Though you may remember the 1995 Björk cover version

Regime Uncertainty

By Steve Saville

Right now it looks like Donald Trump is going to make uncertainty great again

In a blog post last Friday I provided evidence that the extent to which a US president is “pro-business” has very little to do with the stock market’s performance during that president’s term in office. Regardless of whether the associated policies are good or bad for the economy, the key to the stock market’s performance over the course of a presidency is the market’s position in its long-term valuation cycle. On this basis there’s a high probability that the stock market’s return over the course of Trump’s first — and likely only — 4-year term will be dismal, no matter what Trump does. However, the policies of a president can have a big effect on the performance of the economy.

It’s obviously early days for the Trump Administration, but the initial signs are not positive. The main reason is that “regime uncertainty” is on the rise.

“Regime uncertainty” is the name given to the tendency of private investors to pull back from making long-term financial commitments due to uncertainty about what the government will do next. According to an essay by Robert Higgs, it was one of the factors that prolonged the Great Depression of the 1930s. Government intervention is generally bad for the economy, but it tends to be even worse when it happens in an ad hoc way.

As discussed in a Bloomberg article last month, the economically-depressing effect of government by ad-hoc command was also addressed by Friedrich Hayek in “The Road to Serfdom”. The problem, in a nutshell, is that if the government’s actions are predictable then people are able to plan, but if officials are regularly issuing commands it will become much harder for people to have the kind of security that is a precondition for economic development and growth.

The signs were not good when Trump started singling-out individual companies for special treatment even before he took the oath of office and got worse when Trump started talking about imposing a 20% tax on Mexican imports as a way of forcing Mexico to pay for a wall between the two countries. Does he really believe that forcing US consumers to pay 20% more for products made in Mexico amounts to making Mexico pay for the wall?

And the signs recently became more worrisome due to the sudden imposition of immigration and refugee bans. The effects of these bans on the US economy will not be significant, but the concern is what they imply about the decision-maker’s level of understanding and willingness to ‘shoot from the hip’.

The immigration ban imposed on seven Muslim-majority countries is a particular concern because of its blatant irrationality. Making America safe from terrorism is the official justification for the action, but over at least the past 40 years there has not been a single fatal terrorist attack perpetrated on US soil by anyone from any of the banned countries. On the other hand, Saudi Arabia is not covered by the ban despite having supplied 15 of the 19 terrorists directly involved in the 9/11 attacks and being well known as a state sponsor of terrorist organisations. I am not suggesting that the ban should be expanded to include other countries, I am questioning the knowledge and logicalness of a political leader who would decide to do what has just been done.

To top it all off, late last week Trump began threatening Iran for no good reason via his preferred medium for conducting international diplomacy: Twitter. What will he do next?

Taking a wider angle view, the protectionist agenda that the Trump Administration seems determined to implement will have numerous adverse consequences, most of which aren’t quantifiable at this time because it isn’t known exactly what measures will be taken and how other governments will react. All we know for sure is that Trump wrongly believes that international trade is a win-lose scenario and that trade deficits are problems for governments to actively reckon with.

Perhaps the initial warning signs are not indicative of what’s to come and Team Trump will settle into a more logical, impartial and cool-headed approach, but right now it looks like Donald Trump is going to make uncertainty great again. If so, private investment will decline.

Trump’s America & Abe’s Japan – Concrete Proposals

By Jesper Koll of Wisdom Tree

Abe is preparing to offer a comprehensive “Japan–U.S. economic cooperation plan”

Japanese prime minister Shinzo Abe is poised to be the first global leader to present President Trump with a concrete policy proposal designed to shape and promote Trump’s “America first” agenda and, at the same time, to advance the U.S.–Japan alliance. After meeting the then-president-elect for the first time on November 17 of last year, Abe will meet Trump for the second time on February 10–11; and the prime minister appears very determined to impress the president by offering a concrete “deal” so that both countries can move from talk to action. If, as we suspect, the meeting goes well, the implications are bound to be positive for U.S.–Japan economic and financial relations.

In our view, Trump’s America and Abe’s Japan are a match made in heaven, not just because both leaders share a basic strongman leadership and “my country first” philosophy but because their economic and financial agendas are very much aligned: Team Abe is determined to make Trump look good by offering “funded by Japan but built by America” infrastructure projects. At the same time, Abe is expected to propose that the U.S.–Japan bilateral trade and investment relationship become a blueprint for a new global trade and investment agenda. Make no mistake: this could be a bold and forward-looking agenda that should help markets understand how a Trump-led global economic and financial agenda will unfold.

Here Is the Deal 

Specifically, according to Japan’s largest-circulation newspaper, Yomiuri Shimbun February 2, Abe is preparing to offer a comprehensive “Japan–U.S. economic cooperation plan.” Bottom line: This deal is designed to create a US$450 billion market in the U.S. through railway and infrastructure investments and create up to 700,000 U.S. jobs over 10 years1. Japan would offer to seed-fund these projects with low-interest loans, mobilizing resources from Japan’s public pension fund and other public lenders. In addition, the plan proposes that the U.S. and Japan work together to create new cross-border trade rules covering all aspects from e-commerce, intellectual property, government procurement, labor and finance, etc. In other words, after President Trump killed the Trans-Pacific Partnership (TPP), Abe proposes that the bilateral U.S.–Japan framework assert itself as the new forward-looking model for President Trump to lead global economic developments.

Continue reading at TalkMarkets →

The Wrath

By Doug Noland

Credit Bubble Bulletin: The Wrath

It’s not the first time that a non-farm payrolls rally wiped away inklings of market anxiety. Coming early in the month – and on Fridays – the jobs report typically makes for interesting trading dynamics. By the end of another interesting week, the timely reemergence of “goldilocks” along with Trump The Deregulator were propelling stocks higher. Long forgotten were Monday’s “Stocks Fall Most in Month…” and “Trump Rally Hits Speed Bump on Immigration Concern.” Indeed, markets were grateful to let a number of developments slip from memory.

It’s still worth mentioning a few indicators that were beginning to lean away from “Risk On”. Prior to Friday’s jump, the powerful bank stock rally had stalled. The BKX was down almost 2% from Thursday to Thursday (Italian and Japanese banks down 3.4% and 2.9%). Small cap stocks have underperformed, with the Russell 2000 down slightly y-t-d as of Thursday’s close. Many “Trump Rally” stocks and trades have recently underperform. Equity fund flows were negative for three straight weeks. In high-yield debt, the rally had similarly lost momentum. Also noteworthy, Treasuries rallied only tepidly on Monday’s equity market selloff. European bonds continue to trade poorly (Greek yields up 33 bps; French spreads to bunds widened another 10bps). This week saw bullion jump $29. The dollar Index is now down 2.5% y-t-d.

The dollar/yen has for a while now been a key market indicator. After trading as low as 101.2 on election night market drama, Trump-induced king dollar euphoria had the dollar/yen surging to almost 119 by early January. The dollar/yen traded down to almost 112 on Thursday, to a two-month low. And similar to Treasuries, the dollar/yen these days struggles to participate during “Risk On” days. Trading slightly higher Friday, the yen jumped 2.2% against the dollar this week.

Continue reading The Wrath

He’ll bring them [inflation], and they will love him for it

By Notes From the Rabbit Hole

[biiwii comment: going back to posting select items of my own content here, because… why not?]

I used to make fun of the FOMC rate hike “decision” language in the mainstream media because under the Obama administration and its economic policies overseen by the Fed’s monetary policy, there really was no decision, was there? It was ZIRP-eternity, interrupted by a lone and token rate hike in December 2015 (the Dec. 2016 hike does not count because the transition to a new administration and policy regime was already known; in effect, the Fed has already made its first hike under Trump).

According to the traders who make up the Fed Funds futures, there is no decision tomorrow, either. From CME Group, we have virtually no one predicting two successive rate hikes.

cme fed funds futures

That may or may not be the case. I think everything changed with the election, and the Fed you had before is not the Fed you have today. That Fed was a promoter of inflation and a hands-on supporter of the economy and especially, asset markets. The Fed had kept its implied ‘inflate or die’ mantra and associated monetary policy in place for 8 long years. But now with the country flipped over like an egg onto its sunny side, a new administration has proven it means what it says (beginning with its blunt, heavy handed and in my opinion, misguided delineation of race and religion on immigration policy).


Focusing on the financial realm, what the Trump administration says is it is going to implement is fiscal (as opposed to monetary) policy in the form of tax breaks to corporations large and small, to tax payers, including and especially the wealthy, infrastructure building, including ‘the WALL’ (more symbolic than realistic in my opinion) and environmental and business deregulation far and wide. It is a much more business-friendly environment and keeping pure politics out of it, that is a good thing, economically.

In short, what is described above is a scenario where the administration has grabbed the policy burden from the Fed and thus, the Fed is free to do as it pleases now, no longer playing politics. The Fed knows, just as you and I know, that the indirect, and maybe even unintended aim of the Trump administration is to promote inflation. That is because they intend to promote economic growth through policy, just has the Fed has been trying to do for the last 8 years under Obama. By one method or the other, it is in the ‘promotion’ that inflation lives.

Continue reading He’ll bring them [inflation], and they will love him for it