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Eric Coffin: President Trump and the Banana Peel

Posted by Eric Coffin

on Thursday, 18 May 2017 14:54

As this is being written, New York markets are having their worst day in almost a year, with the Dow, S&P and NASDAQ all off over 1.5%.  If you think a 1.5% drop isn’t that impressive I’d have to agree.  Today’s action comes after one of the most boring stretches of trading in history, notwithstanding the fact that NY markets managed to hit new highs in the process.  The most surprising thing about recent market activity, indeed, is that lack of excitement.  Volatility was at all time lows before today. Even equity bulls have found it hard to square complacency and all time highs that were coming simultaneously.   It’s been a very strange market since the start of 2017, with markets trading against each other in ways you rarely see.

Has all that changed now?  It’s too early to tell.  What has suddenly happened is that Wall St has started paying attention to the gong show in the White House.  Donald Trump has been stepping in it, daily.  Even a host of aides running around passing out panicked “corrections” to the Tweeter in Chief’s latest gaffes can’t keep up with it.  Trump slips on the banana peels he dropped and ends up with one or both feet in his mouth several times a day.  I sympathize with the West Wing staff.  It must be making them nuts.

The current drop comes from disclosures that Trump did a couple of things that are dangerously close to being “High Crimes” that could, potentially, have Congress talking about impeachment hearings.  Do I think that will happen?  Not a chance.  The GOP is not going to impeach a president who is part of their own party unless he’s taped killing someone with his bare hands in the Rose Garden.  Ain’t gonna happen.

So why is Wall St suddenly concerned?  The truth is, Wall St doesn’t care about Trump.  They care about tax cuts, less regulation on the banking sector and infrastructure spending.  They really don’t care who gets the bills passed supporting those things if they happen.  The problem is that Wall St is now worried that Washington is becoming such a clown show that there will be a legislative bottleneck and their favorite cause (themselves) won’t get the attention from the politicians they think it deserves. 

It’s still too early to tell if this will impact things like the Federal Reserve’s rate hike schedule.  Most FOMC members are still telegraphing a rate hike next month but the recent market action has turned bond traders into skeptics again.  A week ago, the bond market was pricing in 100% odds of a rate hike next month.  Now the odds have dropped back below 50%.  The Fed isn’t supposed to care about politics but if they see consumer sentiment weakening they might decide to back off.

One side effect of lower US yields and political concerns is a weaker US Dollar.   The USD has dropped sharply in the past week as the political mess expanded.  You can see from the chart below that the move it had from the “Trump reflation trade” has now fully unwound.

ecmay-1

Can it go lower?  It’s certainly possible if the White House doesn’t contain things and there are any weaker economic readings from the US.  There should some support here but it’s an ugly chart. I certainly wouldn’t bet against the USD going lower until I saw a good bounce put in.

On the other side of the trade, gold put in its strongest one day performance since Trump was elected.  It bottomed a week ago and a big part of this move can be traced to the fall in bond yields.  The real (inflation adjusted) rate turned positive last month as inflation fell and bond yields held up. Oil, arguably the biggest determinant of inflation expectations, seems to have bottomed and yields are falling again.  That helped push gold up $40 in the past few sessions.

ecmay-2

It would be normal to see some consolidation after a move like that.  Most chart analysts are still calling for a lower low in gold prices, somewhere in the high 1100’s.  They might be right but I’m skeptical about that unless US leadership suddenly gets more rational.  The sheer unpredictability of the political landscape should put a bid under the gold price.  I don’t see the Trump administration suddenly getting professional overnight.   I don’t expect a big run higher.  Frankly, I’ll  just be happy with some stability.   HRA remains focused on high risk/high reward exploration plays that don’t depend on the day to day movements of the metals they explore for.  Rising metal prices would be nice, don’t get me wrong, but if one of those companies makes a discovery I’m confident the market will reward it.  My other focus developers of high quality metals resources that I think can become take over targets in the near to medium term.   The majors will always need high quality, lowest quartile cost deposits and are willing to pay up for them.    US politics is entertaining to watch and should support the resource sector but I’m not depending on it to either help or hurt much in the longer run.

Good luck and good trading. 

Eric


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