EXPOSED: Trump’s Brilliant Strategy

Today we bow our head, tug our forelocks… and stagger in awe of a superior strategist.

The president leans upon a rising stock market for reelection. And so he leans upon Jerome Powell.

That is why Mr. Trump sobs and moans for aggressive rate cuts. And why he razzes poor Jerome Powell for failing him.

Then came Wednesday…

Mr. Powell insisted the rate cut was a mere “midcycle adjustment of policy” — not the beginning of another rate cut cycle.

Mr. Trump did not mask his disappointment:

“As usual, Powell let us down.”

Following Mr. Powell’s comments, market odds of a September rate cut took a swan’s dive down — to perhaps 60%.

But the 4D chess player would not be so easily put off…

Clever as a fox, cunning as a serpent, the object of our unalloyed veneration — Mr. Trump — set to work.

He hatched a plot, executed a flawless gambit… and placed Jerome Powell immediately in checkmate.

Early yesterday afternoon Mr. Trump announced tariffs on all remaining $300 billion of Chinese wares. These tariffs would enter effect Sept. 1.

What brio! What gusto! What dash!

Surely Machiavelli glanced upward in admiration from his infernal perch.

Bravissimo!” cried Cesare Borgia. “Bon travail!” tooted Cardinal Richelieu.

The stock market — solidly in green at the time — went careening as planned.

Green jumped instantly to red.

The Dow Jones shed 281 crimson points on the day. Gold went rampaging, gaining over $18. And the 10-year Treasury yield plunged.

The president timed his trap for maximum leverage.

The exuberance that seized Wall Street in recent weeks, argues financial analyst Mark Hulbert, “in turn made the stock market vulnerable to a big drop.” More:

To appreciate just how exuberant that mood has become, consider the average recommended equity exposure among several dozen short-term stock market timers I monitor. (This average is what’s reported in the Hulbert Stock Newsletter Sentiment Index, or HSNSI.) In early July, this average reached its highest level since I began compiling the index two decades ago — 84.2%. And though the HSNSI has pulled back somewhat from that record-high level, it currently is still higher than 87% of daily readings since 2000.

Mr. Trump’s plot paid him additional dividends today…

The Dow Jones sank another 98 points. Only a late day rally spared it heavier losses.

The S&P lost 21 points on the day. The trade-sensitive Nasdaq was battered most — down 107 points today

Meantime, gold gained $22.40.

So ends the week in markets.

Jerome Powell cited trade concerns to justify Wednesday’s rate cut.

Now they have doubled…

China’s foreign ministry has pledged to take “countermeasures” if the tariffs go through.

If they do and China retaliates… how can Mr. Powell fail to act?

Again… the brilliance.

Meantime, the July unemployment report came issuing today.

It did not necessarily favor Mr. Trump. Nor did it disfavor him.

The United States economy took on 164,000 jobs last month.

Economists as a group expected 165,000.

The varied details counted plus and minus.

But in all, analyst Joseph Brusuelas awarded the report a “gentlemen’s C.” The fellow cites downward revisions from May and June… and a decline in total hours worked:

If I were to give a grade to the July employment report, it would be a gentlemen’s C: Three-month average has declined to 140,000, the downward revisions to May and June, and that decline in hours worked, which impacts your median household, is not encouraging.

In all, we see little reason why today’s report would undo the president’s battle plan.

Yes, the president outfoxed his hapless opponent… and boxed him in a corner.

Sixty percent after Powell’s babblings Wednesday, today’s market odds of a September rate cut rise to 98.1% — in favor.

Those same market odds indicate a 99% chance of at least one additional rate cut by year’s end.

Two rates cuts are most likely — say federal funds futures.

We must conclude the president will have his rate cuts. And so we admire his virtuosity, his craftsmanship… and his execution.

But we are far from certain artificially low rates provide economic benefit.

Both Japan and Europe creep along under infinitely low interest rates. And these have worked very little benefit.

We fear lower interest in these United States will only pump helium into existing asset bubbles.

It is a plan fraught with risk… and peril.

The economy shows cracks beneath the solid surface. Why risk expanding them by expanding trade war?

Notes Gregory Daco, chief economist of Oxford Economics USA:

“It’s like shooting yourself in the foot just to get another dose of morphine.”

The president has his pistol out.

We only hope he does not shoot himself in the foot — or the economy in the head.


Brian Maher
Manager editor, The Daily Reckoning

The Daily Reckoning