Rockefeller Treasury Services, Inc. Analytics | 14 of April

Posted 14 April, 2017

We get important data today, CPI and retail sales, but markets are closed. Banks are open, which is why the spot FX market is open, but with Europe closed, we can’t expect much action. London is closed Monday, too, making FX even thinner. The CME holiday schedule shows Globex FX futures are closed and will reopen at 4 pm Sunday (3 pm ET).


Nobody in his right mind would put in orders today for Monday when there is some possibility of a showdown with N. Korea this weekend. Whether we get an Incident or outright war depends entirely on Trump. Having just discovered he really is commander in chief, Trump is intrigued by military power. Not only did he chose to send Tomahawk missiles onto a Syrian airfield, he also said “yes” to the bombing of a terrorist region in Afghanistan with the largest non-nuclear bomb in the world, named MOAB (mother of all bombs). The military gave us the excellent word SNAFU so we can forgive them this name.


Trump wants to show machismo but he must also be aware that starting a new world war in his first 100 days is not going to favor him in the history books. But the official stance right now seems to be that if N. Korea is perceived to be about to go ahead with its latest nuclear test, the US will launch a preemptive strike using conventional weapons to prevent it. Yikes! Talk about needing to trust your intelligence. Many a Hollywood movie has been based on exactly this kind of thing.


If N. Korea backs down and does not conduct the test, it’s a win for the US that Trump will shamelessly boast about—making matters worse. They don’t show that in the movies. Yet.


Bottom line—the Trump brand is disruption and what he sees as unconventional stances, even if anyone with a smidgeon of knowledge about history knows that Trump-like figures abound and there is nothing that hasn’t been done before in war situations. Surely there was some Roman general who botched things for the same reasons. Crassus? Tiberius? Caligula? Nero? Anyway, it’s far from a foregone conclusion that war will be avoided. We put the probability higher than at any time since the Cuban missile crisis.


Here’s the question—does war favor the dollar as the ultimate safe haven? How can you square that view with the warring country being the issuer of the currency? History favors a “yes” answer but common sense favors the “no” answer. Alas, we may find out. One thing we can predict—the dollar should fall some more against the yen. See the chart. The dollar/yen is almost at the green 200-day moving average. It can continue as far as 100, seen last October. Safe-haven buying of the yen may fall off temporarily if a showdown is postponed, but that’s the critical word—delay, not a final solution.


The holiday weekend gives us time to mull over the phenomenon of politics impinging on market behaviors more often and more deeply than anyone can remember. Risk aversion has risen—although not as much as we think would be warranted—on Brexit, on the US having elected a loutish jackass, and on the French possibly going down the same rabbit-hole.


One thing to celebrate and fear simultaneously is that Trump can be taught. His reversal on NATO, the EX-IM Bank, Chinese currency manipulation, and even Yellen are due to influence by better-educated and better-informed advisors, including economics advisor Cohen and TreasSec Mnuchin. It was Chinese president Xi himself who taught Trump about N. Korea. The WSJ writes that Trump is swayed by business interests, implying he is now in the thrall of Wall Street (which bodes ill for the blue collar underdogs who elected him), but we should focus on the happy thought that the unprincipled Trump can be taught and is willing to learn. An open mind, however rusty and ill-prepared, is better than one paralyzed by preconceived ideas and ideology. Nobody has ever said Trump is stupid—just ignorant.


Here’s the problem—he is most influenced by the last guy he talked to. The sharp reversals in policy stance arise from meetings with experts, such as China screwing the US and the health care debacle. During the campaign, Trump said he knows the health care system “better than anybody and only he can fix it.” After speaking with experts from the health insurance industry, though, Trump said “nobody knew health care was so complicated.”


On-the-job education is not ideal but it’s better than not being open to education at all. Trump listened to Xi explain the Chinese economy and millennia-old Chinese-Korea relations, and voila! no more currency manipulator. Trump told the WSJ he learned a lot from Xi. As Quartz.com puts it, “It’s far from clear how long any of these ideas will remain fixed in the president’s mind. But for a sneak peek into the president’s thoughts, just take a look at who he spoke with most recently.”


That brings us around to N. Korea again. Trump is besotted with “his” generals (the ones he called a sorry bunch of losers during the campaign) and impressed by “his” military. We should not assume the military establishment is egging him on to take big risks. But the military does more planning and has more alternative scenarios than anyone on the planet, ever. They will always have a giant plate of options to show Trump in any situation. In other words, they are unlikely to offer “do nothing” as the single best option. Those who remember the bad behavior during the VietNam war—from lying about body counts to one strategic error after another (it killed LBJ)—can’t help but worry about these guys.


Something else: Notice that Trump has stopped insulting people. During the campaign, we kept waiting for someone to notice that when he insults someone with a belittling nickname, like “Crooked Hillary” or “Lying’ Ted,” he is projecting his own faults on others. This is not to say Trump is becoming selfaware, something narcissists do not do, but it is to say “flexibility” is more than an excuse for having no principles or moral compass.


Across the sea, LePen could win in France. The election first round is a week from Sunday (April 23). She is likely to get enough votes to qualify for the second round, probably around 24%. Macron gets the same number. Now it’s up to supporters of the other candidates to pick the lesser of the two evils. Fillon fans move to LePen and so do Melanchon voters, not because they like LePen but because they dislike Macron more as the Establishment guy. A lot of voters will simply abstain.


This is the scenario of Roger Cohen in the NYT. He writes “It could happen. Only a fool, after Brexit and Trump, would suggest otherwise. Le Pen’s line of attack on Macron is clear: he is the perpetuation of Hollande, the representative of ‘the system’ and a product of ‘international finance,’ with all the attendant innuendo. This attack is pretty disgusting, which is not to say it won’t work. Russia is helping.”


The French are ripe for disruption. Cohen writes discontent is pervasive. “For some time France has been a country that does not like itself. Somewhere on the road from its humiliation in World War II to its disappointment with European integration to its discomfort with globalization, France slid into moroseness. High-speed trains purred; France pouted. Grumbling became a way of life, the response to lost grandeur. Now France seems ready to vent this slow-ripening anger in an election that could see the extreme right return to power for the first time since the 1940s and Europe revert to a turbulence not seen since that epoch.


“If Marine Le Pen of the National Front wins, she says she will take France out of the euro, the shared European currency, and restore the franc. Exit from the European Union could follow. This would constitute an economic and political rupture so violent that even Donald Trump’s victory and Britain’s vote to leave the union would pale beside it. Europe, and not just its markets, would be upended. President Vladimir V. Putin of Russia, who has been meddling, would be happy.”


No wonder the euro is floppy. Happy holiday. May we get gamboling lambs and not a mushroom cloud.

 

                                                                                              By Barbara Rockefeller

 

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18 April, 2017 15:00

← Rockefeller Treasury Services, Inc. Analytics | 18 of April

Markets are not very good at pricing geopolitical risk. On Friday it seemed as though the yen should keep rising on the conflict between the US and North Korea (and never mind that Japan itself is involved), but otherwise, the dollar should be strong on the hawkish Fed.

Rockefeller Treasury Services, Inc. Analytics | 18 of April

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12 April, 2017 15:30

Rockefeller Treasury Services, Inc. Analytics | 12 of April →

The world is worried about Trump’s ability to rise to the geopolitical challenges thrown at him in the first 100 days. Every president gets provocation from some hostile party at the start of his administration. After the travel ban and health care bill debacles, not to mention the FBI investigation into Trump campaign connections to Russia, Trump has a tough row to hoe.

Rockefeller Treasury Services, Inc. Analytics | 12 of April
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