Trump Will Make Volatility and Uncertainty Great Again, Pt. 3
"Although uncertainty has been ignored by most market participants, the Trump ascendancy comes with a lot of unknowns. A nationalistic and protectionism-based pro-business policy aimed at accelerating the rate of domestic economic growth through less regulation, cash repatriation of overseas profits and lower statutory corporate tax rates also is associated with the likelihood of higher interest rates in a debt-heavy world and the rising possibility of trade and foreign policy wars.
Uncertainty's brother is volatility, who is likely to appear more often in 2017. Risk is a close cousin to uncertainty and volatility, and he also appears to be gaining a larger role this year.
From my perch, the gap between economic reality and expectations rarely has been wider. Above all, the markets are now inattentive to the ideological, logistical and fiscal constraints that represent practical headwinds to the implementation of the administration's proposed initiatives."
--Kass Diary, "The Return of the Orange Swan"
This morning's opening missive is not about politics -- it is about the intersection of politics and our markets.
It is also about the growing probability and my strengthening view that President Trump will make market volatility and uncertainty great again.
If you take the position that our new administration's policy and conduct are not essential ingredients for the health of our capital markets, then you are simply not a student of market history.
Since The Great Recession in 2007-2009, our Federal Reserve took interest rates to zero and eased quantitatively in order to resuscitate domestic economic growth. In time, its zero interest rate policy (ZIRP) has lost its effectiveness and now, in order to avoid economic stagnation, it generally is understood that a cohesive and thoughtful fiscal policy program is needed to accelerate growth and corporate profits.
The new administration has promised repatriation of overseas corporate cash, reduced corporate tax rates and regulatory relief. The markets have taken a leap of faith that the baton hand-off and implementation of those policy actions will be smooth.
From my perch, the assumption that these promises will be delivered in the magnitude and in the timing expected should be reassessed by the markets.
I remain bearish.
The recent problems for President Trump all started with an executive order written by a young and relatively unknown Stephen Miller with an assist from Trump adviser Steve Bannon (and not shared with such confidants as CIA Director Mike Pompeo, Secretary of State Rex Tillerson, Homeland Security's John Kelly and Defense Secretary General James Mattis, among others) that importantly impacts U.S. immigration policy through a travel ban. U.S. Rep. Bob Corker and House Speaker Paul Ryan, two key Republican leaders, also were not informed; they specifically said they learned of the ban from the media.
The press has reported that the aforementioned Cabinet members and Republican leaders could not be trusted to be told of the immigration ban in advance.
It has been documented that middle- and lower-level staff members had to sign nondisclosure agreements so members of the administration would not be informed of the new immigration policy and travel ban.
Last night the president went one step further by firing acting Attorney General Sally Yates and acting Director of Immigration and Customs Enforcement Daniel Ragsdale. It is a move some people are calling the Monday Night Massacre. (Remember the Saturday Night Massacre, where President Nixon's dismissal of special independent prosecutor Archibald Cox resulted in the resignations of Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus in 1973 during the Watergate scandal?)
Many will say President Trump's first week of decisions were part and parcel of what was promised in his campaign. Fair enough.
But that is not my point. It is in the logistics and lack of communication and cooperation with the most senior and respected members of his team that raises serious questions regarding the effectiveness and ability of the Trump administration to deliver future policy and legislative initiations.
President Trump embraced the populist zeitgeist that led to his November election victory. However, there is a fundamental difference in managing a real estate empire and the U.S. government. The president's roll-out of policy must be a coordinated and thoughtful process. It is fine to be strong-willed, but the stage is now far different for our president.
President Trump's decision not to fill in his Cabinet secretaries and Republican leaders about a major change of immigration policy implicitly says to some that Mattis, Kelly, Tillerson, Corker, Ryan and others couldn't be trusted by the administration to be told of the ban in advance.
The risk to the capital markets is quite simple to me. If this sort of logistics and lack of communication continue, the probability of implementing tax, repatriation and regulatory changes -- Jim "El Capitan" Cramer's three stools to Trump's pro-business agenda -- materially will diminish. Likewise, the consensus expectation of accelerating domestic economic growth and the projected "hockey stick" increase in U.S. corporate profits also will be eliminated.
Moreover, if the chain of command breaks down further in the months ahead and rifts widen within the administration, one of my Surprises likely will occur even sooner than I thought:
Surprise #4: "The Unartful Deal" -- President Trump's Popularity Quickly Fades as "The Dude" (Doesn't ) Abide. Trump's cabinet of independent billionaires and generals begins to behave increasingly impatient with policy and their roles and become less cohesive and supportive participants of the administration. The first official departure is Secretary of Commerce Wilbur Ross, who resigns near year-end (citing "health problems"). Several others follow and return to the private sector in early 2018.
--Kass Diary, 15 Surprises for 2017
And what happens if a real crisis occurs?
The trajectory of domestic economic growth remains substandard and the U.S. economy remains reliant upon effective fiscal policy going forward.
Events that already have occurred in the first two weeks of the Trump administration raise substantive questions on the effective delivery both in magnitude and timing of repatriation of overseas profits, lower corporate tax rates and an easing of regulatory burdens.
President Trump will make the market volatility and uncertainty great again.