The Trump administration wants economic chaos to create a weaker dollar and lower Treasury yields to pay for U.S. tax cuts
Investors should be far more afraid than they are marketwatch.com
The dollar could fall 29% against the euro before getting to the point where typical consumer goods and services cost the same. It could fall another 18% against the Canadian dollar — before reaching the same parity. And it could fall a staggering 37% against the Japanese yen and an incredible 52% against the Mexican peso before prices levelled out.
So reports professor Werner Antweiler at the University of British Columbia’s Sauder School of Business, citing the authoritative data tracked by the Organization for Economic Co-Operation and Development, the international body for richer, more developed economies. “With the exception of the Swiss Franc and Icelandic Krona, the US dollar is unusually strong,” Antweiler tells me. “This means that US exports are relatively more expensive compared to goods produced elsewhere, and it also means that US imports are particularly cheap… The US dollar is currently going through a phase of broad over-valuation.”
This is the absolutely essential context for understanding the Trump administration’s economic, financial and trade policies, which economists and financial planners are increasingly describing as “the Mar-A-Lago Accord.” U.S. President Donald Trump wants to slash the value of the U.S. dollar against other international currencies, to make U.S.-manufactured products cheaper both at home and overseas while making other countries’ manufactured products more expensive.
Net result for Americans: Fewer imports, more exports, and more economic production. Supposedly, anyway.
The use of “accord” deliberately echoes the so-called Plaza Accord signed by the U.S. and other major world governments at New York’s Plaza Hotel in 1985 — two blocks from Trump Tower, as it happens — to end another period of U.S. dollar overvaluation. But there are a couple of major differences this time around. First, nobody so far has signed anything. There is yet no Mar-A-Lago Accord. Second, there may never be one.
With the Trump administration, unilateralism is a feature, not a bug. For better or worse Trump is trying to bring down the dollar through turmoil. If anything, we should talk about the “Mar-A-Lago Discord.”
Where will it lead? Place your bet. One of my go-to gurus this week, after begging me “find a way to quote me so that I won’t get murdered in the streets,” said Trump was successfully bringing on a U.S. economic recession both to plunge the dollar and to bring down long-term interest rates. This, he added, was critical to passing his big tax cut bill. The U.S. government cannot afford to finance its massive deficits and enormous national debt at current interest rates.
“Trump and the Treasury Secretary want yields down in a recessionary chaotic environment to justify passing their tax plan,” he says. “It does appear that he needs chaos to get his tax plan passed, just as with TARP in 2008.”
The Committee for a Responsible Federal Budget estimates that making the 2017 Trump tax cuts effectively permanent would add another $37 trillion to the national debt over the next 30 years.
But another source points out that even as the U.S. head towards “tariff day” on April 2, markets are recently moving in the opposite direction. U.S. Treasury yields, after tumbling for the first six weeks of the Trump administration, have stopped falling and started rising again. The interest rate on the benchmark 10-year Treasury has jumped to 4.35% from 4.15%.
And inflation expectations now are rising, not falling. The five-year so-called “breakeven” rate, which is the bond market’s forecast of average U.S. inflation over the next five years, has been edging higher for the past week. This, despite signs that the Mar-A-Lago Discord is having its predictable effect on the confidence of U.S. consumers, corporate CEOs and others.
Foreign currencies and international stocks would seem to be better placed to profit.
Trump needs a falling dollar, not rising inflation. In this context it’s worth adding that the Mexican peso is almost 20% lower against the dollar than it was a year ago. To the Mar-A-Lago Discord worldview, that helps Mexico and hurts the U.S.
I’m still surprised at how complacent U.S. stock investors are at this attempted revolution in America’s financial affairs. Where is the Mar-A-Lago Discord discount in U.S. equity valuations? Foreign currencies and international stocks would seem to be better placed to profit, but only time will tell. |
