Daily Comment (August 21, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Eclipse Day!  Here are the news items we are following this morning:

Afghanistan policy: Tonight, President Trump will present his policy on Afghanistan.  Already we are seeing the impact of Chief of Staff (CoS) Kelly; so far, there have been no leaks of his plans.  We are expecting a modest increase in troop strength with a focus on planning.  There probably isn’t a workable solution to Afghanistan.  The NYT reported over the weekend that the country is again splitting up and being dominated by warlords.  There was never a unifying figure in Afghanistan and the naïve idea that merely holding elections will lead to democracy has been proven untrue.  American leadership is loath to walk away from a war and leave chaos but that is probably the more likely outcome here.  Still, we will watch tonight to see what the administration wants to do.

Post-Bannon: After rumors of his departure for the past month, Steve Bannon formally left the White House on Friday.  According to numerous reports, CoS Kelly told him he had to go shortly after Kelly took on his new role.  Bannon did accept and planned to leave in the middle of August; Kelly was prepared to grant him a graceful exit.  However, after his comments to the American Prospect last week, it appears he was pushed out.  There are several ramifications from his departure:

Bannon has the potential to be a major disruptive force to the president.  That isn’t his current plan but if the “globalists” in the White House control policy, we expect Bannon to become very critical of the administration.  Bannon has returned to Breitbart and there is talk of building a “right of Fox” media company complete with television, and there are rumors he may try to poach some of the more rightist personalities at Fox (FOX, 26.79) to build a new brand.  A famous line from The Godfather comes to mind here, “Keep your friends close but your enemies closer.”

The globalists dominate the White House now.  Bannon had a nationalist agenda, which included a travel ban for Muslims, trade impediments and infrastructure.  Nothing really got accomplished.  Some of this wasn’t necessarily his fault.  The nationalists’ agenda is a major shift in policy.  The lessons of history suggest that major shifts do occur but they need specific conditions in order to work.  First, you need conditions so bad that the majority of people are behind the new leadership that wants to make the change.  The last two major shifts, Franklin Roosevelt and Ronald Reagan, took office when the consensus was that the current path was unstainable.  Roosevelt’s Democrat Party held over 70% of the House and 60% of the Senate; by the next term, party control increased to nearly 80%.  Thus, he was able to make major shifts in policy.  Reagan’s party only controlled the Senate and by a narrow majority.  He was able to make policy work by building bipartisan coalitions.  Trump’s position is closer to Reagan’s but, so far, he has been unable to build a bridge with the Democrat Party.  Some of this is due to the current level of hyper-partisanship.  Second, major changes require organization and unity.  Bannon’s expertise appears to be disruption, not creation.  We do expect the nationalist agenda to eventually win out, it just may not be from this president.  For now, the globalists have won the battle but the war rages on.

Cohn is likely our next Federal Reserve Chair.  By all accounts, Cohn was quite angry with the Tuesday press conference during which the president assigned blame to both the right and left in Charlottesville.  There were rumors he was about to walk.  We suspect he is making a trade—he will stay if he gets the FOMC Chair job.

War may be more likely.  Although we don’t ascribe to the idea that military leaders pine for war, there is evidence to suggest that NSC Chief McMasters is leaning toward “preventative war” in North Korea.[1]  Bannon’s comments to the American Prospect last week suggested that there was no chance of war on the peninsula and that Kim had outplayed Trump.  According to the NYT article in the footnote below, McMaster has concluded that the usual deterrent policies that have prevented nuclear war in the past won’t work with North Korea.  We are not convinced that’s true, but McMaster’s position on this matter is far more important than ours.

The debt ceiling: Although the administration wants a clean raising of the debt ceiling, the Freedom Caucus continues to make noise about getting some adjustment.  If spending isn’t cut, then they want some sort of automatic measures to curb the growth of the deficit in future years, something that might require a sequester-type agreement.  Meanwhile, Bannon is already indicating that the president should veto any debt ceiling increase that doesn’t include money for the Mexican border wall.  This issue has been a sleeper but will become a greater focus for investors after Labor Day.

Jackson Hole: The KC FRB begins its annual gathering on Thursday.  The most closely watched figure will be ECB President Mario Draghi.  We doubt he will signal anything concrete about tapering but all eyes will be watching.

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[1] https://www.nytimes.com/2017/08/20/world/asia/north-korea-war-trump.html?_r=0