Grudge Match 2017: Trump vs. Yellen

Posted On Jan 5, 2017 By Dave Gonigam

  • Intelligence agencies issue not-so-veiled threat to Trump
  • Brace for a Trump-Yellen battle royale… with the economy the loser
  • Trump Trade begins to reverse: Stocks slump, gold rises, dollar slammed
  • All downhill from here: Auto sales squeak out a 2016 record
  • The inside track to a $9 billion-a-year business
  • Reader makes his own “case for gold”

Looks as if it’s game on — Trump versus the Deep State.

“Deep State” is a term that originated in Turkey to describe certain actors within the structure of government who were unseen but who wielded the real power irrespective of who won elections. A few years ago, a retired congressional aide named Mike Lofgren appropriated the term to describe a similar phenomenon here in the United States. Others, including Agora founder Bill Bonner, find it a useful prism through which to view the passing scene.

As you’re likely aware, President-elect Trump has expressed skepticism about the “Intelligence Community” and its claims that Russia “interfered” in the 2016 campaign for purposes of electing Trump.

On Monday night, the Deep State struck back — using Senate Minority Leader Chuck Schumer as its messenger. “Let me tell you, you take on the Intelligence Community, they have six ways from Sunday at getting back at you,” he said on MSNBC. “So even for a practical, supposedly hard-nosed businessman, he’s being really dumb to do this.”

This morning brings word Trump plans to reorganize both the Office of the Director of National Intelligence and the CIA. “The view from the Trump team is the intelligence world has become completely politicized,” said an anonymous person The Wall Street Journal describes as “close to the Trump transition.”

Grab the popcorn…

And then there’s Trump versus the Deep State’s most powerful economic cell — the Federal Reserve.

Yesterday afternoon, the Fed released the “minutes” from its meeting last month. While the name “Trump” appeared nowhere in the document, it nonetheless conveyed a veiled threat.

The key passage was this: “Many participants [in the meeting] commented that a more expansionary fiscal policy might raise aggregate demand above sustainable levels, potentially necessitating a somewhat tighter monetary policy than currently anticipated.”

Translation from Fed-speak: If Trump cuts taxes, we’re jacking interest rates even higher than we’ve already said we will.

“The new Trump administration will confront the Fed,” says Jim Rickards in his first big forecast of 2017, “and insist on accountability and rule-based decision making. The confrontation will present enormous risks and opportunities to investors.”

Recall that during the campaign, Trump declared he would fire Janet Yellen as Fed chair — although the president possesses no such power. “Trump also claimed that Yellen was keeping interest rates artificially low in order to pump up the stock market and help elect Hillary Clinton,” Jim reminds us.

Yellen began to strike back at her press conference right after the December Fed meeting. As Jim pointed out the day after, she said she might stick around on the Fed Board of Governors even after her term as chair is over in early 2018 — a lingering thorn in Trump’s side.

But she also hit out at Trump’s economic plan. When it comes to “stimulus,” Yellen is fond of tax credits for education, worker training and certain infrastructure. Across-the-board tax cuts that would most benefit the wealthy? Not so much.

Seen in this context, yesterday’s Fed minutes could be a way to turn up the heat on Trump: Yo, Mr. Big Talker, you wanna cut taxes for the rich? We’ll just ratchet up interest rates some more. We’ve been all about easy money these last eight years, but we’re gonna choke off “Trumpflation” at the first sign of it, bub. Remember who’s in charge here!

Or as Jim puts it, “The Fed expects to ‘lean in’ against the Trump stimulus and to avoid letting the economy run hot.”

But what if the economy doesn’t run hot, despite the Trump stimulus?

That’s a possibility Jim’s been entertaining for weeks now. “The problem with the Fed’s assessment,” he elaborates today, “is that the Trump policies may not be nearly as stimulative as the Fed expects.”

For one thing, the Republican leadership in Congress wants the tax cuts to be “revenue neutral.”

“This means,” Jim explains, “that for every cut in tax rates, there must be an offsetting revenue increase from some other source, such as the elimination of tax deductions and credits, conversion of capital gains into ordinary income, repeal of Obamacare or reductions in entitlements. Trump has already said entitlement cuts are off the table.”

In addition, Jim says, “It will be difficult for Republicans suddenly to become the party of big spending and higher debt ceilings without extensive criticism from the Democrats, the media and parts of the Republican base. Increased spending is in the cards, but it may be far smaller than both Trump and the markets expect.

“In short, the Trump ‘stimulus’ may turn out to be far smaller and far less stimulative than markets currently anticipate,” Jim concludes.

“The reflationary Trump Trade of higher stock prices, a stronger dollar, higher interest rates and a declining dollar price of gold may soon run into a brick wall of congressional opposition and budget realities. The rally in stocks and the dollar and the head winds for bonds and gold all seem overdone. The Trump Trade may continue for a few more months, but by the spring of 2017, reality will set in and a sharp reversal of market trends will be in the cards.”

And if the Fed keeps tightening policy at a time the Trump stimulus isn’t delivering the goods? “The Fed may cause the recession it has worked so hard to avoid.”

In the meantime, other elements of the Deep State will continue their own scheming. The International Monetary Fund convenes its next big meeting on April 21 — at the very time Trump’s first-hundred-days agenda would be hitting the wall. Then what?

Jim spins out the scenario in the rest of his 2017 forecast when you click here.

To the markets, where gold is the standout performer: It began climbing steadily in Asian trade overnight, and it continues to climb today. At last check, the bid was up to $1,183 — nearly $20 higher than at this time 24 hours ago.

“After briefly visiting 11-month lows, gold has started to quietly bottom out,” Greg Guenthner wrote his Rude Awakening readers yesterday. “Its spot price has risen five out of the last six trading sessions. Now we have a situation where gold is firming and the furious dollar rally is losing steam.”

Sure enough, the dollar index has backed off big-time this week — from a 14-year high of 103.8 Tuesday to 101.4 as we write.

Greg cautions gold’s final lows might not be in. “For now, we must think of precious metals as a quick trade. And nothing more.”

Even though he comes at the subject from a totally different perspective, Jim Rickards is inclined to agree: As long as the Fed keeps talking up the possibility of a rate increase in March, “this will be a head wind for gold.”

In the meantime, stocks are taking a breather: The Dow has shed 100 points, to 19,840.

CNBC is attributing the move to “uncertainty surrounding Trump policies” — which sounds to us like affirmation of Jim’s thesis that the Trump Trade has gotten ahead of itself.

Like gold, Treasuries are benefiting from an influx of hot money: Prices are rising and yields are falling. The yield on a 10-year note is down to 2.37%, a four-week low.

Crude’s been up, down and all around this week. Right now a barrel of West Texas Intermediate fetches $53.34.

Yes, we’ve reached “Peak Auto” for the post-Panic of 2008 era. No, this is not a repeat.

On Dec. 22, we took note that each of Detroit’s Big Three is idling some factories during January. Some of that is a function of overproducing sedans and minivans at a time when fuel prices are still relatively low and consumers would rather splurge on SUVs. But we also suggested nearly everyone who’s needed to buy a vehicle these last eight years has done so by now.

Yesterday, the automakers released final sales figures for 2016. It’s another record: All told, 17.55 million vehicles left the lot — up a skootch from the previous year’s 17.48 million.

Last month was one of the strongest Decembers on record… but that’s because of discounts amounting to an average $3,542 per vehicle, according to J.D. Power. That’s about 10% off the original asking price — something unseen since, well, the onset of the Panic of 2008.

But aside from peaking sales, another jolt is set to hit the auto industry this year. Play it right and it could be very profitable. More on that topic tomorrow…

“The blood thinner market is expected to grow into a $9 billion per year pharmaceutical business,” says Ray Blanco on the science-and-wealth beat.

Late last month, a company Ray’s been watching throughout 2016 submitted a New Drug Application for a blood thinner to the FDA.

The FDA was suitably impressed: Not only did it accept the application, it granted “Priority Review” status. That means “it will work speedily to decide whether or not it should be allowed to enter the health care market. Priority Review drugs are generally decided upon in a period no more than six months from the date of the FDA accepting the application.” Thus, Ray expects an FDA decision no later than June 24.

Nor is that the only “magic date” on Ray’s calendar. In fact, there’s one coming up at the end of the month — with the potential for a 50% gain in a matter of weeks. Follow this link to learn more.

“In response to the comments on the future of gold,” a reader writes, “one should use today’s prices as a buying opportunity, not a reason to sell.

“What we have today is a marketplace being heavily influenced by the actions of those in government and at the central bank. This has been apparent since 1987 and even more so in the last eight years. You don’t double-down on your debt without affecting most everything else.

“There are also two major events in the history of our country that show how government is heavily concerned about the price of gold. In 1933, FDR confiscated almost all the gold in the USA, leaving a few coins to be held by the citizens. Then in 1971, Nixon removed the option to convert dollars to gold, done by foreign central banks, to maintain what was left in the country’s national reserve.

“Here is why this should matter to those in the USA. During the reign of the U.S. dollar as the world reserve currency, anyone living in a country outside the USA would have done very well to preserve their wealth in gold, relative to their own currency. Now in 2017, we see the rest of the world slowly moving away from the U.S. dollar to conduct trade. There will be a tipping point one day, and it doesn’t look to be that far off, when the dollar’s use in world trade falls below 50%. Then the dollar will have a problem and gold will see big moves as priced in U.S. dollars.

“But people who live outside the USA have known the value of gold for a long time now. Just ask those in Argentina or Venezuela which form of money they wished they had saved over the years. The government of the USA has convinced the population that inflation is a good thing and it is doing what they can to achieve it. Inflation has always raised the price of gold and other commodities throughout history. It won’t be different this time.”

The 5: Well said…

Best regards,

Dave Gonigam
The 5 Min. Forecast

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