SECOND WORST DOVE

2017-04-13 2pm EDT  |  #Trump #Yellen #FOMC #Fed #bonds

The market was sent for a spin yesterday afternoon after President Trump told the Wall Street Journal the U.S. dollar “is getting too strong” and he would prefer the Federal Reserve keep interest rates low. From the WSJ:

Mr. Trump also said his administration won’t label China a currency manipulator in a report due this week.

He left open the possibility of renominating Federal Reserve Chairwoman Janet Yellen once her tenure is up next year, a shift from his position during the campaign that he would “most likely” not appoint her to another term.

“I do like a low-interest rate policy, I must be honest with you,” Mr. Trump said at the White House, when asked about Ms. Yellen.

“I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurtingthat will hurt ultimately,” he added. “Look, there’s some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good.”

He continued, “It’s very, very hard to compete when you have a strong dollar and other countries are devaluing their currency.”

Mr. Trump said the reason he has changed his mind on one of his signature campaign promises is that China hasn’t been manipulating its currency for months and because taking the step now could jeopardize his talks with Beijing on confronting the threat of North Korea.

“They’re not currency manipulators,” Mr. Trump said.

Ms. Yellen was a frequent target of Mr. Trump’s during the campaign, when he criticized her for keeping interest rates low.

Asked if Ms. Yellen was “toast” when her term ends in 2018, Mr. Trump said, “No, not toast.”

The most amusing part of yesterday’s market move is that anyone was surprised by Trump’s comments. The United States has a President that made his fortune on the back of debt, yet somehow the market thinks Trump will govern in a tea-party-hard-money fashion. Nothing could be further from the truth.

He says Yellen is “not toast.” Well, I disagree.

The chances of Yellen being reappointed are slim, but not for the reasons many are forecasting. During the election campaign Trump made some comments about low interest rates hurting the American economy. Since then, market participants have mistakenly being fooled into believing Trump is some sort of hard-money advocate. Cough, cough… Bullshit.

And in case you believe Trump should be taken at his word, look at all the election promises he has already gone back on. In fact, look at what he said about China just a week ago:

And then compare it to what he said yesteday:

Patrick Watson summed up the situation perfection with this tweet:

We would all be wise to forget anything (and everything) Trump has said, and instead just ask ourselves what his most likely course of action will be once he gets to that fork in the road.

And there is little doubt in my mind that given the choice between cutting spending, raising taxes, instituting tighter monetary policy, and the alternative of just inflating away, he will choose the easy money option.

I don’t think Yellen stands a chance of being reappointed, not because Trump wants to put Jim Grant in charge of the Federal Reserve, but because he will be looking for a modern day Rudolf Havenstein. The truth of the matter is that Yellen has done nothing but tighten during her whole tenure as Fed Chairperson.

Yellen is the second worst dove in history.

She has presided over a collapsing yield curve and soaring US dollar. How does that jive with Trump’s recent comments?

Yesterday the market was hit over the head with the idea of “easy money” Trump. Yet here is the twist they haven’t figured out. Not only will Trump replace Yellen next year (she will be blamed for the coming slow down/recession), but the FOMC board has an unusual amount of upcoming reappointments.

7 out of 11 of the 2018 FOMC voting board members will be potentially appointed by Trump!

Meanwhile speculators are massively betting on higher short term US dollar rates.

The market has badly misinterpreted Trump’s monetary leanings, but so far not panicked because they believe Janet & Co. have their back. Well, next year’s FOMC board will look dramatically different. Betting on their continued hawkish tendency is crazy. One of these days the market will panic, and the rip roaring short cover at the front end of the yield curve will be vicious.

Thanks for reading and have a Happy Easter weekend,
Kevin Muir
the MacroTourist