2017/02/02 Quick Take: Fed and Flynn
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Quick Take: Thursday, February 2, 2017
Fed and Flynn
The Federal Open Market Committee statement (our mildly marked-up version) was as close to a ‘carbon copy’ statement as possible while still offering some indication they are aware of the key psychological changes under Trump administration policy shifts. Yet the changes are more than just a few subtle adjustments, and that includes the composition of the voting members beginning with this first meeting of 2017 for the balance of the year. While they shifted some of the inflation anticipation language across the first couple of paragraphs, that remained remarkably the same. The single more aggressive stance there was taking the previous statements’ assessment that inflation ‘is expected’ to rise to 2 percent with the assertion that it ‘will’ rise to 2 percent. While that might have given some of the govvies bulls pause, they were comforted by the surprise for the public interest rate hawks that…
“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction…”
This was one area where the ‘bond vigilantes’ feel it is appropriate for the Fed to allow just a little bit of tightening through modest reduction of its Brobdingnagian balance sheet in the face of almost assured fiscal stimulus to come. Yet maybe even that was more than should have been anticipated at the first meeting of the more dovish 2017 roster of FOMC voting members. As we have noted since mid-October, even some previous doves among the 2016 voting members had become more hawkish by late 2016. They have been replaced by folks who are, on balance, quite a bit more dovish. (See the bottom of page 2 of our marked-up version for the details.)
Yet even in the ‘steady as she goes’ statement citing that “…business fixed investment has remained soft…” (predictably as companies wait to see what really transpires on taxation and regulation), it notes, “Measures of consumer and business sentiment have improved of late.” Maybe that explains why a still accommodative statement from the Fed left equities sagging on concerns over things remaining kind of soft for now. Maybe.
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NOTE: Given the likelihood the US economy will now get the structural reform that we (along with Mario Draghi and others) have been loudly complaining was not forthcoming since our dual It’s Lack of Reform, Stupid posts in January 2015, we need to adjust our view that a potential economic and equity market failure is coming. We previously referred you back to our December 8, 2015 post for our major Extended Perspective Commentary. That reviewed a broad array of factors to consider Will 2016 be 2007 Redux? While a continued regime of higher taxes and more regulation (i.e. under Clinton) might have fomented a continued weak or even weaker US economy, the tax and regulation changes proposed by a Trump administration that will likely be approved by the heavily Republican Congress now diminish the similar fears we had to what transpired in 2007-2008.
▪ Like quite a bit else in the various asset classes’ psychology these days, much of the Evolutionary Trend View is indeed wrapped up in anticipation rather than the reality of the promised structural reforms actually being in place as yet. With quite a bit of concern remaining over when they will be in place, the exact form they will take and especially (as noted previous) whether they will be made retroactive to apply to fiscal (i.e. also taxation) aspects of 2017 operations, the markets are very prone to reactions based on any potential delays. That was the theme we explored in Wednesday morning’s Commentary: Kool-Aid Derails ‘Trump Bump’? post, and refer you back to that for more details.
Within the pressure on the equities and US dollar along with the modest bid in the govvies since Monday there is at least some influence coming from the Democrats’ attempts to delay (as they cannot derail) confirmation of President Trump’s cabinet appointments. However, as noted Wednesday morning, the Republicans have now developed the means to get around the Democrats obstructions, and various important agency and department heads are either already approved or are anticipated to be confirmed very soon.
Possibly most important among those for now are Rex Tillerson as Secretary of State and, of course, Steven Mnuchin as Treasury Secretary. While the international situation is already heating up with various actors predictably testing the new US administration, the ability of Mr. Trump and also House Speaker Ryan (THE Congressional fiscal policy wonk) to act on tax reform required that a Treasury Secretary be confirmed.
With all of that now moving forward, at least the policy implementation delay headwind for the US equities and related markets should be substantially mitigated. And the somewhat soft economic view on the current level of business fixed investment from the FOMC statement notwithstanding, if the stalled cabinet nominee approval dilemma was a contributing factor in the early week equities selloff, it should be clear by late week in the form of the equities ability to rally once again.
To a lesser degree that applies to the US dollar as well, and would be consistent with the govvies coming back under pressure. And that makes it a fairly clear cut test of just how much the seeming return to more gridlock in Washington DC and it abating once again has been an issue for the equities since the beginning of the week. Of Course, that is also barring any major exogenous event coming along to negatively impact the equities. In light of the latest actions by Russian proxies in eastern Ukraine and especially the Iranian ballistic missile test, those cannot be fully discounted. However, what we have now seen is a willingness of the Trump administration to challenge hostility instead of acquiesce.
The Flynn Force
As opposed to ex-President Obama’s florid expressions of lofty ideals (from his Secretaries of State Clinton and Kerry as well) yet near paralysis on any action against actual offences by pernicious operators, the Trump administration waited only the most limited time before tackling the most obvious of those.
New National Security Advisor (retired lieutenant general) Michael Flynn wasted no time and spared no rhetorical inflection in his brief forceful first public pronouncement during a regular White House press conference. To wit (after being introduced by new White House Press Secretary Sean Spicer)…
Well, if part of what folks voted for with Mr. Trump was change on the previously wimpy Obama administration international style, it’s certainly reversed now. And after Ex-President Obama’s implicit criticism of the Trump administration’s snap implementation of its immigration restrictions, Flynn’s criticism of the lassitude that pervaded Obama foreign policy seems the sort of turnabout that is fair play.
Just what Trump, Flynn and the rest of the new administration’s defense and foreign policy team decide to actually do about Iran’s now very overt flaunting of its newfound regional presence is going to be interesting. Hopefully they work behind the scenes initially to leave the Iranians some room to ease off of the bellicose behavior they found so easy to get away with during the Obama regime.
Yet, we have a sense that only works if there is a credible threat laid out to dissuade the Iranians (and Russians, and whoever else might get into the act) from pursuing more of their offensive behavior. It’s like when Ronald Reagan (also considered a ‘loose cannon’) first entered the White House, and the Iranians immediately released the American hostages. There was some daft suspicion the Iranians had held the hostages to help get him elected. That’s as stupid as the Russians wanting to help Trump defeat Clinton.
The fact was that most denizens of the Middle East respect strength, and even fear ‘crazy’ leaders elsewhere. The Iranians rightfully feared what Ronald Regan was capable of doing if they failed to release the hostages. The current vague threat from a new administration where the President and the top security advisors are viewed as capable of almost anything is a good move.
And the vagueness is just what Trump promised as counterpoint to the long-winded bloviating on what the US might do that was so prevalent in the Obama administration. The key is that ‘behind the scenes’ activity that needs to be spelled out in detail to the other party, and acted upon if they continue in the offensive behavior… as distinctly opposed to the Obama administration that laid out a series of challenges (‘red lines’) then failed to act on any of them. We shall see.
There is no Extended Trend Assessment in this post due to all of the Evolutionary Trend View Market Observations being the same as in previous posts.
Thanks for your interest.
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