Post-Market Commentary: Tillerson, Tariffs and Trouble

The big news today is Donald Trump’s sacking of his Secretary of State Rex Tillerson. For months, Trump and Tillerson seemed to be at cross-purposes on foreign policy. They denied it. Now we know the rumors were true as Tillerson is out.

The Tillerson sacking

The interesting bit is that the news comes after Tillerson made comments critical of Russia. According to the timeline that seems most credible, Tillerson first learned of his sacking on Twitter. Apparently Trump had decided to replace Tillerson with CIA Director Mike Pompeo, even informing Speaker of the House Paul Ryan. He then announced the decision on Twitter, where Tillerson first learned he was being replaced.

Since that time, Tillerson has said that he received a phone call from Air Force One around noon. And he discussed with Trump how to make a smooth transition.

The troubling aspect of Tillerson’s dismissal is how it was handled. But after the departure of Gary Cohn, just last week, it shows Trump cleaning house. Clearly he has decided that he needs people who are 100% on the same page with him. Cohn and Tillerson were not. Now they are gone. Speaking to the decision from the White House, Trump confirmed he is indeed trying to get ideological alignment. And he said he is almost there, suggesting there are one or two more shoes to drop.

My view here is that the Trump agenda in 2017 was marked by ideological splits within his administration. Now that Trump is re-casting personnel, we are going to see a (marked) shift in policy. And I believe that means more aggressive and bold decision-making.

The implications of Tillerson for tariffs and the EU

For the economy, the implication of Tillerson’s departure is that Trump is looking to consolidate power. He wants to be surrounded by ideological and loyal brethren on all fronts. And given Gary Cohn’s departure due to his opposition to tariffs, that is significant.

For instance, Bloomberg had a story today about Germany.

Angela Merkel’s most immediate challenge when she resumes office no longer looks to be refugees, Russia nor even rising populism: It’s President Donald Trump’s relentless focus on Germany.

Like an itch he’s unable to stop scratching, Trump just can’t seem to leave Germany alone. Whether tariffs on steel, a proposed “tax” on imported cars or threats to penalize countries that fail to meet NATO defense-spending targets, Germany is the European country with most to lose.

In the context of Cohn and Tillerson, it seems likely that protectionists will have a freer hand. And being an ally of the United States won’t matter. An escalation of animosity with the EU and Germany on trade is already brewing. Now, the Trump Administration is aligned along ‘America First’ lines. And that increases the possibility of a trade war between the EU and the US.

From a national defense perspective, this should also be a warning. Regimes in Iran and North Korea will face a more hawkish Mike Pompeo as Secretary of State. And Trump will be surrounded by like-minded people more prone to seek confrontation. That could mean a military engagement or a real war.

So confrontation on the economic front and the military front is more likely. The risk of a policy error thus increases.

Trouble on the economic front

Meanwhile, there are some indications that the synchronized global recovery is flagging in strength. Bianco Research was out last Thursday with a note saying:

Less than 50% of the world’s economies are now producing positive economic data surprises. Realized economic data following suit in the months to come would remove the tailwind of ‘concerted economic growth’ for risk assets and central banks. Emerging markets may be first on the list to experience higher volatility.

The accompanying chart from HSBC’s Stephen King is also informative.

Synchronized growth

Source: FT

King is saying that the growth we are experiencing now will ‘mean revert’. The language he uses is ‘economic shock’, which is a more alarming prospect. King’s thesis:

history shows that periods when many countries are simultaneously growing above their long-run trends are associated with financial and economic upheavals. The only exception to this rule is the aftermath of recessions


Is the confrontational path that Donald Trump is choosing a precursor to an economic shock? If we have a trade war, the answer is yes. Or perhaps the Fed’s regime shift is the catalyst. On that front, the comments by Boston Fed President Rosengren that I found most significant concerned volatility. Rosengren said that the Fed believed market volatility

likely reflects, in part, the realization that financial markets need to factor in the risk that wages and prices could grow too quickly in the event of too much fiscal and monetary stimulus, “particularly with the economy currently at or beyond full employment, and inflation approaching the Fed’s goal.”

And this comes under a subheading entitled “Avoiding a “boom and bust” economy”. The implication is that raising rates will help stop a boom-bust outcome. Moreover, volatility is actually good to the degree it shows a recognition that markets are overvalued. That’s how I read it.

In any event, the equity markets in the US were down again today. The Trump rally seems over for now. Volatility has indeed returned — just as the Fed wants. Meanwhile, the 10-year is stuck at 2.84% as we await the next wave of macro data.

For now we are in a bit of a holding pattern. But I expect elevated volatility to remain a feature of markets for the rest of 2018.

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