(Part One of Three)
The world is witnessing the beginnings of a political confrontation with massive economic implications.
I’m not referring to the 24/7 cable news cycle forever discussing the litany of battles the Trump administration is currently engaging: Trump vs. the Democrats, Trump vs. China, Trump vs. CNN, or even Trump vs. the Justice Department.
No, while the White House is engaged in conflict on multiple fronts, these battles pale in comparison to the most important fight Trump must win for his economic agenda and thus his presidency to succeed.
President Donald Trump must defeat the Fed.
Among the main accomplishments that Trump has been able to point to is the dramatic economic recovery since he’s taken office. Business optimism is the highest it’s been in 10 years. His tax cut has allowed American corporations to be even more competitive and added to their bottom lines and their profits. The unemployment rate is at 50-year lows and Americans are more optimistic about their financial prospects at any time since the turn of the century.
These economic forces are represented by a stock market that has risen as much as 45% since his election. To make sure that no one has missed this dramatic rise, Trump has tweeted about the stock market more than 75 times since taking office. It’s the scoreboard he wants everyone to acknowledge and how he wants Americans to judge his success.
It was James Carville who coined the phrase “It’s the economy stupid” during the Clinton presidential campaign in 1992. Unfortunately for Trump, it’s not about the economy, which is actually showing signs of real growth at the moment.
Nope, for Trump it’s not about the economy but rather it all boils down to one thing, the stock market. He has lived by that sword for the first two years of his presidency. If he cannot find a way to counter balance the Federal Reserve, it’s the sword he may also die by.
The Fed’s actions are causing stocks to go down. Interest rates are rising and the U.S. dollar is strengthening. Neither is good for financial assets that have been inflated due to cheap money over the past decade. The result is that U.S. equity markets are rolling over, down roughly 10% from their recent highs. The number one and most visible measurement of success for Trump is now signaling failure.
Trump is in a direct face-off with chairman Jerome Powell and the Federal Reserve who are forecasting a continuation of rising rates and tightening monetary policy. The markets cannot handle higher interest rates. The bullish sentiment that has carried the day and fortified Trumps greatest support in his first two years in office is jeopardy of waning. Should bulls turn into bears there is little chance that Trump 2020 succeeds.
None of this is a secret to Trump, who has labeled the Fed “loco” and has identified Powell’s policies as his greatest threat.
The ultimate irony being that the more successful Trumps agenda and the more economic growth the United States procures, the more emboldened his primary opponent will be to stay the course and continue down the tightening path.
Don’t forget it was the Fed who kept rates at zero for nearly 8 years under President Barack Obama. Their reason then was that the economy didn’t exhibit any consistent signs of growth. The effect was interest rates that were left on the floor and were hugely supportive of financial asset prices.
Now that the policies of the Trump administration have caused real growth in the economy, the Fed is raising rates and engaging in quantitative tightening. The U.S. dollar has gotten stronger while other currencies have gotten weaker. King Dollar is now trumping Trump.
Trump’s has a deep grasp of his personal Catch -22. He has commented that he is “damned if he does and damned if he doesn’t.”
Very early after being elected he argued that a strong U.S. dollar is “not really a good thing.”
By creating growth Trump is in fact empowering his greatest adversary. It’s a negative feedback loop for Trump where the more growth he creates, the more the likelihood that the Fed keeps on tightening. In fact, the one scenario that most pundits agree would ultimately get the Fed to change course and stop tightening would be a serious decline in asset prices.
Only after a major collapse in asset prices would the Fed to act differently and stop or ease. Trump is damned if the economy grows and damned if the economy slows.
Now that it is showing up on the stock market scoreboard, Trump must find a way to cause the dollar to weaken. He must find a way to counter balance and undermine the independent Jerome Powell and the Federal Reserve. His presidency and re-election may hang in the balance. The big question is how?
Be sure to check back for Part 2 of this essay, where I will discuss how Trump can directly cause the U.S. dollar to weaken.
Adam Baratta is the author of the national best selling book "Gold Is A Better Way." He is one of the leading voices in the field of investments and precious metals today. Adam is the co-owner of Advantage Gold, the highest rated precious metal firms in the country, and the creator of the educational member site, www.goldisabetterway.com.
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