Daily Comment (March 26, 2018)
by Bill O’Grady and Thomas Wash
[Posted: 9:30 AM EDT] Risk assets are rising this morning after the weekend media suggests the rhetoric on trade is much more potent than the reality. Here is what we are watching this morning:
BREAKING: President Trump to expel 60 Russian diplomats, joining 14 other EU nations taking similar actions in response to Russia’s attack on a former double agent in the U.K.
The trade walk back: In a series of Sunday interviews, Treasury Secretary Mnuchin intimated that the administration is in trade talks with Chinese officials.[1] We suspect China is working from the position that giving President Trump some high-profile “wins” will likely placate him and persuade him to back away from blanket trade impediments. We agree with this assessment. As we have said repeatedly, if the president had really wanted to implement anti-import legislation, he could have simply accepted the border adjustment tax. President Trump appreciates the power of image. Passing a complicated tax that reduces imports won’t fire up anyone (expect a few policy wonks), whereas high-profile actions, such as promises from China to purchase more U.S. goods, have much more impact on voters but matter little to the overall flows in the end.[2] Our position is that trade action will end up being rather modest; significant trade restrictions are more likely to come from a left-wing populist.
John Williams to the NY FRB: Reports indicate that San Francisco FRB President John Williams is the leading candidate for the NY FRB position. Williams is a respected economist, considered strong on policy. We rate Williams a “2” on our 1-5 “hawk-dove” ranking system, meaning he is a moderate hawk. What makes this job important is the unique voting power of the NY FRB president. The other 11 regional FRB presidents rotate on the voting roster; only four of the 11 regional bank presidents actually vote on policy in a given year. However, the NY FRB is a permanent voting member due to that district’s power as the center of American finance. Like all FRB presidents, the local FRB bank board approves its president with the approval of the Federal Reserve in Washington. The governors of the FOMC are approved by Congress. Thus, the NY FRB president is a rather powerful position. If he is appointed, he will make the FOMC’s permanent voters a bit more hawkish than the current composition.
Radicals in Italy? In a rather unexpected development, the Five-Star Movement and the Northern League are making progress toward forming a government. If that were to occur, it would be a “Nader alignment.” Ralph Nader[3] proposed that right- and left-wing populists should make common cause based on their economic interests and build coalitions to remove the establishment from power. Although the economic attractiveness of such a coalition makes sense, in reality, the social differences are really difficult to overcome. However, if this government does develop, it would offer a roadmap of sorts for other populists in the West. Thus far, financial markets are not expecting these parties to actually form a government as the German/Italian bond spreads have not widened significantly.
Puigdemont arrested: The former leader of Catalonia was detained[4] as he crossed the border from Denmark into Germany. Germany intends to extradite Puigdemont to Spain where he is subject to arrest for separatist activities.[5] News of the arrest sparked protests in Barcelona.
[1] https://www.wsj.com/articles/u-s-china-quietly-seek-trade-solutions-after-days-of-loud-threats-1522018524
[2] https://www.ft.com/content/1d56221c-30bb-11e8-b5bf-23cb17fd1498
[3] See Nadar, R. (2014). Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State. New York, NY: Nation Books.
[4] https://www.nytimes.com/2018/03/25/world/europe/germany-carles-puigdemont.html?emc=edit_mbe_20180326&nl=morning-briefing-europe&nlid=5677267&te=1
[5] For background on Catalan separatism, see WGRs, The Situation in Catalonia: Part 1 (11/6/17) and Part II (11/13/17).