If there’s one thing I’ve learned in my twenty plus years of market-watching it is that markets hate uncertainty. Uncertainty breeds volatility and volatility usually prefaces a panic.
Donald Trump learned an important lesson this month when the equity markets slapped him silly for attacking FOMC Chairman Jerome Powell for raising interest rates. Trump came across in his tweets as a paranoid teenager, all but accusing Powell of trying to ruin his presidency by undercutting his brilliant economic recovery.
There were even rumors of Trump wanting to fire Powell, even though he doesn’t have the power to do that.
Trump really does think a rising market is a thumbs up on his policies while a falling market is a raspberry.
And even though the Fed is anything but independent, the perception that it is free from the meddling of politicians is one of the bedrock assumptions of global markets.
So, with Trump hemmed in on all sides politically post-midterms, he lashed out at Powell as equity markets around the world crumbled under the weight of a growing perception of a global economic slowdown for next year.
Combine that with normal end of the year selling pressure due to tax-code manipulations and we had a recipe for a good ol’ fashioned market meltdown heading into Christmas. And that meltdown spooked Trump because he finally saw the fruits of his sanction first, ask questions later approach to foreign trade.
This crisis of confidence finally led him to order the withdrawal from Syria and Afghanistan while stock markets continued to fall on fears of trade wars, compromised monetary policy, fiscal insanity and a showdown in the US over border security.
No matter how powerful you are, you can’t dictate to markets for very long without there being a comeuppance. Even the Fed understands this. That’s why for the past ten years central banks have embarked on a communications policy to massage markets first, to prep them for any changes in monetary policy.
Because shock policy moves cause shocking amounts of money to move, creating panics both up and down. Trump thinks he can conduct foreign trade like he conducts a real estate deal – shock and awe up front to create chaos during negotiations and then settle. But you can’t negotiate with investors and fund managers.
They simply react to chaos with pulling their money off the table and looking for safe places to hide it. And that’s the lesson from this period of volatility in the global markets.
Trump looks willing to gut global trade, if not start an outright trade war, to get what he wants from China. His advisors and foreign policy wonks in D.C. want war with Iran and Russia to make the world safe for Israel.
And he wants everyone else to pay for it because he sees our allies as a bunch of losers freeloading off American largesse.
Is it any wonder the markets slapped Trump around a little these past two weeks?
They let him know that kidnapping Chinese CFO’s, endless wars for no form of peace and chaos in the White House is not a recipe for a bull market in stocks.
This is why Trump and his Treasury Secretary Steve Mnuchin were out there doing damage control on Christmas eve, reassuring the markets that institutions were there to prevent further panic.
It seemed to have worked as the US equity markets put in a monster three-day rally to finish the week after taking a breather over Christmas.
But the proof will come in 2019 and we find out whether Trump learned his lesson or not. Because his only hope of getting re-elected in 2020 or even surviving that long is to invite capital back to the US and tone down the war of all against all he’s been waging.
Because if he doesn’t do that, he will invite even further chaos than what we’ve seen so far while letting the feckless and virulent leaders of the European Union off the hook for their stupidity.
Europe is a basket case economically and its leadership is so desperate all they can do is deny the changes occurring all around them in Italy, the U.K., France and Spain. Trump’s continued chaotic approach to global problems keeps the focus off of Europe’s problems while over-emphasizing the US’s
As I’ve been saying all winter, Trump is boxed in on all sides both economically and geopolitically. Syria is a mess of the US’s devising and up until last week was nothing but a drain on global resources and a continued source of uncertainty.
He was right to end that and start drawing down in Afghanistan.
His tariff and sanctions policy combined with his outdated views on trade have been a disaster waiting to happen. It finally did. He’s going to have to ratchet down the trade war talk with China, ditch the extradition order on Huawei CFO Meng Wanzhou, stop sanctioning everyone who looks at him sideways and begin a real dialogue with Russian President Vladimir Putin.
He cannot listen to John Bolton who will argue that he use the Syria pull out as a pretext to shift those resources to some other geopolitical hotspot. The troops truly have to come home and the military presence in central Asia lessened.
At that point he’ll get his rising stock market as investors will feel secure that the US is coming to its senses again.