Trump’s Hole.

Trump is certainly trying to build a hole, a hole in the budget that is. And in a fit of petulance that would do Erdogan proud, Trump complained bitterly about the Fed, Powell and why there is no reason to hike rates at a function for high end donors.

Powell is currently up at the Central Bankers Conference or rather retreat in Jackson Hole where all things central bank are discussed and is expected to provide further guidance for markets on how the Fed is seeing the economy and the rate outlook. For Powell, it must be rather confusing. He is somewhat hawkish in view and that’s good because he believes the economy is growing and can easily withstand any hike in rates. Trump, however, must be nervous and perhaps believes that his rhetoric is really nonsense and that the economy is not the most buoyant ever!

So how did markets react? Well, the equity market rallied up until the news about Trump and interest rates and sold, but still was higher on the day. The bond market took all the news in its stride and rallied. Bonds are playing a different game, it appears. Bonds are more concerned about growth and the deficit, something Trump does not wish investors to know.

However for bonds, the big news is the scepticism they are treating the news of the Sino U.S. trade talks. In the same meeting Trump called the Europeans and Chinese currency manipulators. Hence, the comments probably suggest the Chinese talks won’t be fruitful.

The dollar weakened and bonds rallied on the day. Gundlach suggested there was short squeeze in play and that’s why bonds rallied. The curve flip flopped, with the short end flattening and the longer part of the curve steepened. Gundlach may be talking his book a little because it appears a major part of what is driving the record short positions may in fact be bank treasuries hedging their long duration bonds.

Bank treasuries have been active buyers in the long end and have offset those risks by selling futures. A duration offset basis trade is in play. Also, the pension funds have been playing the stripping game as a result of tax reform and the dealers end up with excess coupons and the insurance companies keep the principle strips.

And if anyone wants to understand why Trump is so agitated about Germany, one only has to look at its surplus. Germany is expected to round the year out with the largest surplus of any country at $299 bio and the U.S. with the largest current account deficit! Japan is next with an expected surplus of $200 bio. The U.S. current account deficit is expected to be about $420 bio.

I guess it’s a case of the Germans make things that people want and make those products well. Maybe there is a lesson there for everyone, use the best technology, have a highly educated productive work force and pay them well. Germany can compete with China because they make stuff and it’s well-made and often stylish and innovative. Let’s not forget too that wages are considerably higher in Germany and so too productivity. There is a lesson there for many western countries including the U.S.

Meanwhile, a delegation of consumer product companies are actively lobbying the Trump Administration to ease tariffs on China. One such group is the bridal association. They are complaining about no one in the U.S. is prepared to do the hand beading for wedding or prom dresses. Others are saying the consumer won’t pay 25% more for a ball cap. There are a range of businesses that will really struggle if Trump introduces tariffs.

The dollar eased on the day and some of that movement could be related to Trump’s attack on Powell and how when he made Powell the Fed Chairman he thought that Powell liked cheap money. Meaning low interest rates. If you don’t think Trump has an effect on the dollar look again.

And in a regressive step, Trump has just announced the complete unwind of the environmental protections put in place during the Obama administration regarding power plant emissions. The coal industry is the chief beneficiary. This clawback is largely for political purposes as many large plants have transferred across to gas and only a few coal power plants remain. Its saying I have done something without actually doing anything. Hopefully, those poor coal miners in Pennsylvania will understand this. It won’t change their industry or the malaise all that much.