Daily Comment (November 21, 2016)

by Bill O’Grady, Kaisa Stucke, and Thomas Wash

[Posted: 9:30 AM EST] The weekend’s news flow seemed to be all about the president-elect.  Perhaps the most interesting was an interview in the Hollywood Reporter[1] with Steve Bannon, the incoming president’s chief strategist.  Bannon outlined his policies and it dovetails with our read on him and the incoming administration.  Bannon describes himself as an “economic nationalist.”  He views himself and the incoming administration as similar to Andrew Jackson, a position with which we would agree.  His goal is to support the working class who have mostly been on the negative side of globalization and deregulation.  In particular, he appears to want to create a coalition similar to Roosevelt’s.  This coalition was a combination of center-left establishment and right-wing populists.  Bannon’s appears to be comprised of center-right establishment and right-wing populists.  However, we have serious doubts that the center-right can accept the goals of the right-wing populists.  We have noted Ralph Nader’s book, Unstoppable, which called for a political coalition of populists on the left and right.  Although still a long shot, the likelihood of such an outcome is probably higher than it’s been for a while.  We continue to closely monitor comments from Sen. Sanders with regard to the president-elect’s policies.

A WSJ article[2] today highlights the uneasy relationship between the center-right and the right-wing populists.  Here is a good quote:

One group, which appeared ascendant in the closing weeks of the campaign, largely rejects mainstream economic thinking on trade and believes eliminating trade deficits should be an overarching goal of U.S. policy.  That camp views sticks—tariffs on U.S. trading partners and taxes on companies that move jobs abroad—as critical tools to reverse a 15-year slide in incomes for middle-class Americans.

The opposing camp is closer to the traditional GOP center of gravity on taxes and regulation and includes many policy veterans staffing the transition team and advising Vice President-elect Mike Pence.

Those advisers have long championed supply-side economics and reject the hard-line position on trade that one side’s gain must come at the other’s expense.  By offering more carrots—slashing red tape and taxes to make the U.S. the top destination for businesses—they say stronger growth would obviate any need for trade protectionism.

If the latter group wins, we will probably get a fairly standard issue plan of deregulation, tax cuts and pressure on the FOMC to raise rates.  Trade protectionism will be token, if at all.  If this side wins, we would expect Trump to be popular on Wall Street but probably a one-term president.  If the first group wins out, the economy will be much different; trade barriers will rise, reregulation will occur and tax cuts will be modest at best.  This outcome would be unpopular for Wall Street but wildly popular in the “flyover zone.”  At this point, it’s unclear who will win.  But, for the most part, this is one of the key issues.

In foreign news, Chancellor Merkel has made it official.  She will run for another term.  At this juncture, she will likely win in next autumn’s elections.  On the other hand, if there has been any trend it’s that betting on the establishment has been a poor wager.  It also appears that the Italian referendum is in trouble.  The FT notes that Chairman Xi was actively wooing Pacific nations in light of the Trump win, the end of the “pivot” to Asia and the end of TPP.

Finally, oil prices are higher again this morning in anticipation of an OPEC deal.  This lift is flying in the face of a stronger dollar and the massive inventory overhang.  We expect a deal of sorts to be made.  We also suspect it will be far short of what is necessary to boost prices and will disappoint the markets.  If we are right, prices will trend toward $50 per barrel into Nov. 30th and pull back in the wake of the meeting.  Overall, however, oil prices are mostly in a $40 to $50 trading range; we expect that to hold.

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[1] http://www.hollywoodreporter.com/news/steve-bannon-trump-tower-interview-trumps-strategist-plots-new-political-movement-948747

[2] http://www.wsj.com/articles/inside-donald-trumps-economic-team-two-very-different-views-1479643204