Trump’s Reckless Trade Gamble; Congress Leaves Town; The Democrats’ Disastrous Debates
Author: Greg Valliere
August 2, 2019
THE TIMING WASN’T EXACTLY SUBTLE: After getting only a measly 25 basis point rate cut from the Fed, President Trump decided to ratchet up the trade war with China. His message to the Fed was clear — I’ll make sure that trade will be a major economic headwind for months to come, so you’d better cut rates further.
THIS STRIKES US AS A RECKLESS GAMBLE by Trump, for three reasons: 1. There’s no reason to believe rate cuts can compensate for the uncertainty over tariffs; 2. There’s no guarantee that Trump can pivot and cut a deal with China this winter, which we believe is his pre-election scenario; 3. The Fed goal of higher inflation may be just around the corner, eliminating the need for more rate cuts.
ONE THING APPEARS CLEAR IN THE TRADE WAR: Both sides are dug in, determined not to lose face. Talks won’t even resume until early September, and hopes for a deal by December may be too optimistic.
THE NEW TARIFFS ANNOUNCED YESTERDAY account for a fraction of U.S. GDP, but they send two important signals — Trump, the self-described “tariff man,” may use this tactic again against China and possibly Europe; and the new tariffs, hitting Chinese toys, consumer goods, cell phones, etc. are bound to ratchet up inflationary pressure. Everyone seemingly has proclaimed the death of inflation — but that kind of unanimity makes us nervous.
THE GREAT UNKNOWN is whether Presidents Xi and Trump have an end game. It’s looking like they may not, with the prospect that an escalating trade war may create more problems than the Federal Reserve can solve.
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BUDGET DEAL DONE, CONGRESS LEAVES TOWN: Republicans didn’t vote overwhelmingly for the spending/debt ceiling bill yesterday, but Democrats did — because it raises spending by $320 billion and effectively abolishes strict budget caps.
IN PRIVATE, Democrats were so satisfied with the deal that they looked
the other way as two provisions passed: one would would allow Trump to spend money on a wall with Mexico, the other retained the Hyde Amendment’s curbs against federal funding for abortion.
FISCAL POLICY IS TOTALLY OUT OF CONTROL, monetary policy is super-accommodative, the labor market is red hot, and tariffs will bring higher prices. We’re astonished that virtually no analysts are adding up these factors and predicting the inevitable return of inflation.
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THE UNMITIGATED DISASTER, SELF-INFLICTED, for the Democrats in their first two rounds of debates has rocked party insiders. Wednesday’s pile-on against Joe Biden wasn’t the big surprise; the real shocker was criticism of Barack Obama by virtually all of the candidates — which simply provided talking points for Trump and the Republicans.
THE PARTY IS REELING, with only one candidate — Biden — who has a realistic chance of beating Trump. Their most forceful candidate, Elizabeth Warren, has dominated the first two rounds but we would make her a serious underdog in the general election.
BIDEN SIMPLY NEEDS TO WRAP HIMSELF AROUND OBAMA and avoid gaffes; he stumbled verbally several times on Wednesday night, raising some eyebrows. He’ll maintain a low profile for the rest of the summer, but he can’t run out the clock as more debates loom in September. Biden is the front-runner for the nomination, but if he stumbles, the party’s pro-Warren progressives may get what they want — and so would Trump, who is eager to run against a far-left Democrat.
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EDITOR’S NOTE: Now that Congress has left town, the Fed has acted, and the debates are over for a while, we’ll scale back our schedule. We won’t publish every day in August, probably only two or three times a week.
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