Trump Says the Fed is Loco … Here's Why He May be Right

Trump Says the Fed is Loco … Here’s Why He May be Right

Over the last 2 weeks the stock market has been on a wild ride, and for the most part a downward slope.  Last week the Dow dropped for 6 straight days, including an 831-point drop which was the 3rd largest of the year, and the biggest since February.

Long ago we reported to you that the stock market had decoupled from the main economy.  This occurred during the previous Administration in the wake of the 2008 financial crisis.  Banks did not lend into businesses for the purpose of business expansion, but used government bailouts to trade bank stock and financial paper.  This was great for the stock market – which continued to rise and allowed your 401K to rebound from the collapse.

But it was lousy for the economy – GDP grew at less than 2% for that 8 year period … wages remained stagnant … job growth was non-existent.  The unemployment rate came down, but because more people went on government assistance in all forms, including disability, and stopped looking for work.  Bottom line – instead of stock market gains from a new invention, a new drug, or increased demand, we instead had artificial inflation due to money printing and quantitative easing.   The market had decoupled from main street.

Fast forward to the Trump Administration – tax reform and massive deregulation allowed the stock market to not just go up, but explode skyward!  This was on the back of real GDP acceleration – main street was creating jobs again … wages expanded 2.8% – first time in a decade … businesses were expanding … this is real economic growth, the vibrancy of capitalism unleashed from government intervention.

All of those upward trend-lines are at risk, however, if non-market factors return as the dominant player, and that is happening as the Federal Reserve continues to raise interest rates, and hint there are more to come.  It was that decision that prompted the most recent sell-off, and remains the primary concern of traders on Wall Street.

Our readers know the Fed raises rates when the economy appears to be overheating, or if the value of the dollar begins to significantly decline.  Since we remained at zero interest rates for virtually the entire post-financial collapse period of 2009-2017, it was natural to begin to see the Fed move off their accommodating policy and begin to tighten the money supply.  This began in the final year of the previous Administration.

This was a sign of a healthy and strengthening economy, and a normal process to undertake.  Federal Reserve rate policy helped price the dollar at a stronger position, and despite raising the cost of borrowing, the economy continued to expand.  This was the Trump-Bump effect!

But taking long-overdue steps to normalize rate policy does not mean the Federal reserve is making the right decision to continually raise rates in such short time span.  It could derail the expanding economy as jittery business owners spooked by rising borrowing costs slow their hiring decisions and potential investment back into the business.  Trump says the Fed is “loco” … here is why he may be right!

 WHY TRUMP MAY BE RIGHT – LONG-SUPPORTED FED RATE HIKES MAY BE COMING IN TOO FAST FOR NOW:

 1. “Fed’s dual mandate could cause both to get worse”: The Federal Reserve has a dual mandate – keep inflation in check and keep unemployment low.  So monetary policy – and what the Fed does with interest rates – is to serve these two policy objectives.  The problem is both are impacted and driven by a myriad of factors beyond just what the Fed does, and often times they are their own driver of particular outcomes in the economy.  Raising rates to stem the tide of inflation can result in higher costs for government debt service … which in turns drives the government to borrow more money to service that debt …  which in turn leads to a larger money supply… which in turn – you guessed it – drives up inflation.  Inflationary pressure squeezes profits – and that squeezes wages and hiring.  That also leads to greater unemployment.

2. “Fed rate increases have not hurt the economy – yet”: Markets remain elevated at record-setting levels and the US economy has been on over-drive during the last 2 years.  The Fed has increased rates 8 times since December 2015 – taking us off zero and bringing the fed funds rate to 2.25% as of September of this year.  This remains historically low – the federal reserve has typically maintained rates between 4 and 6% when experiencing expanding GDP.  We have been in a government created expansion between 2009-17, and market driven expansion the last two years, but the rates have remained historically low.  So increasing rates is bring them within the normal historical range.

However…..

Raising rates too quickly in such a volatile environment runs the risk of off-setting the gains of the last two years.  25 basis point is not a huge number, but the market is pricing in more rate hikes and higher rate increases thanks to commentary coming from the Fed.  That lays the groundwork for a correction.

3. “The evidence confirms fed rate hikes are slowing housing and auto sales”: Despite an on-fire economy, sales in housing and autos were down year-over-year in the last quarter.  These two data points are the “canaries in the coal mine” for potential negative downturns in the economy.  The Fed right now has a direct hand in the potential negative shift in the market, and in the GDP numbers.

Despite some correction numbers occurring in the stock market over the last two weeks, the economy has been humming along.  Decoupled from Wall Street, businesses no longer prioritize their stock broker when looking for funding.  The market dip does affect balance sheets, portfolios and retirement accounts, and the raising of interest rates right now is beginning to take its toll.

Want protection from market downsides such as in the recent negative dip?  Call now for protected principal alternatives. (877) 912-1919

Nikki Haley: A Job Well Done

Nikki Haley: A Job Well Done

Nikki Haley’s service to our country has been an exemplary record of accomplishment and success.  Best known for her commanding performances as United States Ambassador to the UN, she is also the proud representative of immigrant and minority success.  She is the proverbial “… only in America” story.

Nikki Haley: A Job Well Done

Ambassador Haley was born, “Nimrata Randhawa” in Bamberg, South Carolina, to an Indian-American Sikh mother and father.  Her parents emigrated from Punjab, India to Canada, where her father had received a scholarship offer from the University of British Columbia. When her father received his Ph.D. degree in 1969, the family moved to South Carolina, where he became a professor at the historically black Voorhees College. Her mother, Raj Randhawa, earned a master’s degree in education and taught for seven years in the Bamberg public schools before starting a clothing company, Exotica International, in 1976.

Haley, a Clemson graduate and a Republican, ran her first race for the South Carolina State House in 2004, winning a run-off 55-45 over Larry Koons.  She was the first Indian-American to ever serve in a legislative seat in South Carolina.  She won the Governorship in 2010, and re-election in 2014 by a 55-41 margin.  Her voting record was that of a moderate conservative, and she remained popular throughout her tenure as the Governor of South Carolina.

The Presidential campaign of Mitt Romney in 2012 considered her on the short list of Vice-Presidential candidates, but Haley asked for her name to be removed so that she could finish her first term as governor.  When Trump came calling in 2016, UN Ambassador was a prestigious and important role that kept her far away from domestic politics.  Haley accepted, and was a stellar representative of US interests for the last two years.

Lots of speculation has swirled in DC as to the timing and meaning of her departure…. the Trump team is rightfully concerned about Haley as a political rival in 2020, and that she would consider challenging Trump for the Republican nomination.  Putting aside the DC gossip, there is no question that our nation was served very well at the UN by the leadership and moral persuasion of Ambassador Nikki Haley.

Here are Nikki Haley’s Top 3 Moments at the UN:

3. “The American Response to the Syrian Chemical weapons attack”: When dealing with the Syrian dictator Assad’s use of chemical weapons, Haley outlined the horrific attacks on their own people by the Syrian regime, and the Russian’s complicit support in the attacks. Haley did what her Obama administration predecessor did not:  she showed the world the immorality of what Putin and Assad are doing in Syria. This effort has prevented Russia from setting the narrative on the Syrian civil war, and it served as one of many actions taken by the administration to combat Russian adventurism.

2. “The US-North Korean Nuclear Standoff”: At the height of Trump’s taunting of North Korean Kim Jong Un, referring to him as “Rocket Man”, and threatening North Korea with “fire and fury” for failing to accede to American demands to dismantle their nuclear program, Ambassador Haley was the calm during the storm. Evidencing a steely resolve while enunciating US demands and expectations, it was clear that the US was standing strong on our de-nuclearization expectations.  Haley was quoted as saying at the Security Council:  “If we act together, we can still prevent a catastrophe and we can rid the world of a grave threat. If we fail to act in a serious way, there will be a different response.”  That different response, as we know, would be a US military strike.  Seldom have we seen such clarity from US Ambassadors under such tension-filled circumstances.

1. “From Russia with Love”:  Perhaps the greatest standoff and quote in history of global diplomacy occurred during the Cuban Missile Crisis, when US Adlai Stevenson confronted Soviet Ambassador Valerian Zorin at the UN with this famous line:

 “…Do you, Ambassador Zorin, deny that the U.S.S.R. has placed and is placing medium- and intermediate-range missiles and sites in Cuba? Yes or no — don’t wait for the translation — yes or no?”

 The great Russian-American standoffs at the UN has a new favorite line, however, and it comes from Russia’s boss – Nikki Haley:

“…. I’m in awe, Vasily, of how you say what you say with a straight face.”

 Any proud patriotic American would laugh from joy and beam with pride at such strong moral leadership from our UN Ambassador.  The occasion was the on-going debates regarding the Syrian Civil War.  The Russian Ambassador Vasily Nebenzya blamed the United States for the current situation and the plight of the Syrian people.  Ambassador Haley put him in his place.

From the moments listed above, to the movement of our embassy to the Israeli capital of Jerusalem, to the elimination of US funding for the Palestinians (UNRWA) – and much more … Nikki Haley has been at the forefront of some of the more pivotal moments in UN history for the 21st century.  She has represented herself, and her country, in spectacular fashion.

From a grateful nation, thank you Nikki Haley – for a job well done.

NAFTA Out … USMCA In

NAFTA Out … USMCA In

It was argued during the last 8-10 years that it would be impossible to re-negotiate NAFTA (North American Free Trade Agreement), and even if we did, we could not get the changes we wanted for the betterment of the American labor force.  NAFTA, ratified in 1994, helped open markets between Canada, Mexico, and the US.

Most analysts have argued over the years it has been a mixed bag, with the United States usually on the losing end regarding market share and exports.  Before President Trump, many politicians ran against the benefits of NAFTA, and labor groups regularly have denounced it.

BOOM!  My how things have changed!  Out with NAFTA, and IN with the United States, Mexico, Canada Agreement (USMCA).

While the media refers to “cosmetic” changes, or that the President did not get the Canadians to concede on the main sticking points of dispute resolution, any fair-minded review of the terms and conditions leaves no doubt that this was a categorical victory for the country.  And the market response reflected that, with another record stock market high this week after the news was released.

Politically, the deal still must be ratified by each country’s legislature – the US, Canada and Mexico.  One would think that US Democrats would join Republicans in ratifying this new treaty, since they support so many of the new changes.  But in this polarized atmosphere, who knows?

What are the changes the USMCA will bring to North American trading rules?  Here are the Top Five:

Top-Five Changes coming out of the USMCA Trade Agreement

 5.“Lowered tariffs across the board among member states”:  The average tariff under NAFTA among the US, Canada and Mexico, when goods are sold across the border, is approximately 9.3% under.  The agreement would drive the average percentage tariff down to roughly 7% – this 2% decrease totals nearly $20 billion in savings for the consumer.   WINNER?  AMERICA! 

 4.”Higher Pay for Auto Workers”:  Starting in 2020, 30% of all automotive production must be completed by workers earning more than $16 an hour…in 2023, that number rises to 40% of all production completed by workers making over $20 an hour.  This will drive wages up for US producers and increase jobs as supply line savings will not off-set the increased pay for foreign labor.  This requirement did not exist under NAFTA.  WINNER? AMERICA!

3.“Auto parts must come from North American manufacturing”:  Under NAFTA, you could qualify for zero tariffs if only 62% of the automobile was made of North American parts.  now, the requirement has been upped to 75% must come from North America.  WINNER?  AMERICA!

 2.“Greater and more stringent protections for Intellectual property”:  While also needed with China, these new laws allow for law enforcement to stop and raid potential pirating by counterfeiters in intellectual property and increases the sentencing guidelines for such theft.  The easier approval for warrants will help prevent the IP from getting shipped to Chinese or other state-sponsored crime organizations in the first place.  WINNER? AMERICA!

1.“And Trump for the win, Canada caves in on US access to their dairy market”:  A long-time complaint of US farming was the near total banning of US dairy products.  That has been revoked under the USMCA.  As the USA Today put it:  “….Canada will ease restrictions on its dairy market and allow American farmers to export about $560 million worth of dairy products. That’s about 3.5 percent of Canada’s total $16 billion dairy industry.”  Canada, former President Obama, and scores of US officials said this was a red-line for Canada, they would never do it…BOOM!   WINNER? AMERICA!

It was not all a victory.  Any fair negotiations will have some compromises, or moments where we “agree to disagree.”  Another Canadian red-line was the Dispute Resolution process under NAFTA.  It has been grandfathered in to the USMCA despite American resistance.  The Canadians were unable to remove the current 25% steel tariffs Trump has imposed on all steel entering the country.  So not everyone got what they wanted.

But the American worker clearly got what they needed.