Tip-toeing into September

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source: http://rall.com/comic/trump-controversy

Summer has officially drawn to a close putting a lid on one of the most bizarre three months in U.S. history. With so much activity in D.C., I am highlighting the key events though I am sure to have excluded others just as bizarre or galling.

Domestically, Congress has failed to pass any major legislation despite Republican control of both chambers and the White House. Republicans did pull together to present several bills to replace Obamacare but none provided a feasible solution, just options that, if passed, would strip healthcare coverage from tens of millions of Americans. The final round played out with John McCain, after undergoing blood clot surgery (the clot being discovered during routine care covered by his health insurance), flying back to Washington to vote in favor of moving a Senate bill forward and then, just a day later, casting the decisive vote to kill that same legislation. Trump’s response has been to strip out the insurance payments under Obamacare, threatening the viability of the exchanges while presumably hoping that the public blames someone else for the carnage.

Internationally, the White House has accelerated ten years of global decline into a single season. Key trade agreements are being dismantled, stripped or threatened in every economic zone creating uncertainty amongst our key trade partners who have responded by aggressively forming alternative trade arrangements with China and others. Trump’s conduct during his European tour continues to make the United States government look incompetent, exemplified by Trump’s holding private one-on-one meetings with Putin without, at minimum, a U.S. translator present.

If trade loss was not enough, we have somehow entered nuclear brinksmanship with one of the world’s poorest nations and no viable way to counter their aggression without the massive loss of life. From a broader perspective, China has 90% of North Korea’s trade and full ability to put a stop to the Hermit Kingdom’s aggression. While I am not a policy expert in the region, it appears that China might be using North Korea to test how far one can push the Trump administration in anticipation of the trade war that he threatened to start with China.

Inside Washington, the White House staff are ineffective and struggling from eight months of disarray. Firings have been aplenty and the the few adults left in charge are ready to walk away. With such turnover in the executive branch, Trump’s varied responses to the incident in Charlottesville highlight the biggest risk to the markets. His Economic Advisor Gary Cohn, a Jew and strong supporter of Jewish causes, was deeply offended by Trump’s comments and nearly resigned. If Mr. Cohn does resign, the markets will view it as the loss of the last bit of hope for market friendly and timely policies. In short, the loss of Mr. Cohn would be the final straw for stocks.

Finally, lest we forgot, the Meuller investigation went into full swing this summer. The home of Trump’s former campaign manager, Paul Manafort, was raided in July and Meuller has now teamed up with the New York Attorney General to pursue allegations of money laundering against Manafort. Keep in mind that Presidential pardons only work at the federal level, opening the possibility that Manafort might testify against the Trump campaign in a plea deal. The phrase that best sums up the White House’s preparations against Meuller’s all-star team of prosecutors came from Nicholas Allard, Dean of the Brooklyn Law School, “is like going to a knife fight with a stick of butter in your hand.” [Bloomberg, August 10, 2017]

In stark contrast to what is happening at the seat of our government, the market’s response to this summer was almost blissful: a small rise of 2.6% in U.S. equities with continued low volatility. We had a couple of spikes in the volatility coupled with market dips, but nothing materialized to keep the markets down. One theory to explain the market’s stability is that as long as there is substantial quantitative easing somewhere in the globe stocks will go up (European Central Bank is the current source of money printing). But with September being a historically volatile month and the potential for surprise events from all corners of the White House and the world, that theory will be strongly tested in the coming weeks.

A Wall of Water

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As a former student of meteorology, I look at the satellite images and data from Hurricane Harvey with fascination. From miles above, it is a stunning cyclonic structure – a perfect funnel formed from massive pressure walls driven by atmospheric warming. The location only enhances the completeness of this event – bridging the intersection of warm, consistent Caribbean waters with the varied and dry lands ready to receive the moisture transfer.

Of course, what I am describing is also the worst-case scenario of global warming. As the oceans warm, that meteorological engine of atmospheric disturbance also increases in potency. Up to fifty inches of rainfall — a statistic with no real meaning to us until one experiences it — is a devastating statistic. The human suffering will be immense and last for years as the region rebuilds. Yet this event will not the be last catastrophic weather disaster we will endure in the near future.

The irony of Harvey’s timing is the rhetoric from the Republicans and our withdrawal from the Paris Climate Accords. Whether it be Hurricane Harvey, the regular flooding of Miami Beach or the scorching heat records in the south, most of the damage from global warming is now concentrated in states that voted for Trump and continue to support him.

At some point, however, when people’s lives are at risk, economic livelihoods are threatened, and quality of living is further eroded, people will start to pay attention to fact and dismiss fiction. At least that is the hope.

For me, the most meaningful aspect of this weather event is yet to come: how will people respond, who starts to recognize the connection with global warming, where will they assign blame? I hope, perhaps naïvely, that some will start to worry less about a wall of concrete along the Mexican border and will focus more the wall of water just dropped on their state.

Market Complacency amid Political Disarray

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The previous two weeks have been dizzying in Washington, but, yet again, the markets barely responded.  If you recall, in mid-July the White House was exploring pardons for Trump’s family and Bloomberg reported that the Mueller investigation is examining the Trump organization.  Events then moved to various forms of the Republicans’ failure to pass an even nastier version of Obamacare repeal.  Last week, we saw the White House staff firings and a retired general taking control of the mayhem.  Keep in mind that the last time we had a general as chief of staff was in the waning days of the Nixon administration.

The surprising part is that the markets don’t reflect the risks.  U.S. stocks continue to hover near all-time highs while the VIX – the volatility indicator – is at historic lows.  Even futures on the VIX – indications of where volatility expectations will trade several months out – are trading at levels typical of very low risk periods.

The market’s complacency is in stark contrast to what is happening with the dollar.  The U.S. Dollar Index (DXY) is down even further this week, at lows not seen in 30 months.  The euro and the pound sterling are getting back to strengths last seen before Brexit and European nationalist concerns.  With such extreme indicators something has to give but how or when is unclear.

On the brighter side, Apple continues to push ahead with stellar earnings.  Those gains, however, are not driven by the U.S. consumer: over 60% of the revenue comes from foreign consumers who continue to thrive.  Because of tax inefficiencies here, much of those profits sits overseas.

Which leads us back to where we started — if Congress can get something done on tax reform, gains such as the ones achieved by Apple might actually make it to the U.S.  Combined with other companies in the same situation, tax reform addressing offshore profits would be a welcome boon to investors.  Such an event however requires the White House and Congress to write and pass major legislation which has yet to happen in this new administration.