Blain’s Morning Porridge July 16th 2024: The Court of Trump – Players and Where Goes the Dollar?
“Yonder Cassius has a lean and hungry look, he thinks too much; such men are dangerous.”
Trump has chosen his VP – JD Vance is an interesting choice. What does it mean for markets? Will we see a return to a new political stability, or is it confirmation it’s time to think long and hard as the global economy de-dollarises?
You have to giggle..
Yesterday was St Swithin’s Day. Sometime in the 6th Century, the early English saint’s shrine was moved, causing it to rain for the next 40 days. It comes right at the start of the English summer school holidays and predicts the weather for the next 6 weeks: “St Swithin’s day if thou dost rain for forty days it will remain. St Swithin’s day if thou be fair for forty day ‘twill rain nae mair.”
Yesterday was torrential. Here in Blighty this is shaping up as the worst summer on record. Its wet, its cold and we have the jet-stream driving a series of leaden depressions, fuelled by warming oceans, over this green and dreich land with monotonous regularity. As I write this morning.. it is raining.. only 39 more days to go.. Meanwhile, Europe is baking in record early summer temperatures and global temperatures are set to record a record hot year!
I am very aware there is lots of stuff I should be writing about this morning that’s of immediate import to markets;
- how ESG/sustainability has tumbled down the priority list – yet remains a massive need,
- the AI myth vs reality game,
- the latest from Musk World,
- rising corporate default risk,
- what bond yields are not telling us,
- The European Sovereign Credit Market (yep, note I did not say European Sovereign Bond market – a subtle but critical difference), or
- China’s ailing economy, where I think something really significant may be underway…
These will be dealt with in due course..
As the UK prepares for summer floods and the inevitable food inflation that will follow later this year… there is no point worrying about America today… as it’s going to be something we have to worry about right through November and beyond, so why ruin a perfectly bad English Summer’s day?
At this point I would simply remind you of Blain’s Market Mantra No 2: “Things are never as bad as you fear, but seldom as good as you hope.”
Yesterday I wrote about how the attempted assassination of Trump has altered the US election calculus. American chums told me to forget the US election – it’s over. The ongoing attempts to unseat Biden will fizzle out because no serious Democrat candidate wants to end their political hopes and career losing to Trump in November.
Instead I am going to hope* Trump will surround himself with good, sensible, experienced people to whom he will listen to as they advise him on how to go down in history as a good president rather than lording it over America’s descent into the modern version of Caligula’s Rome, a divided, embittered nation sinking into dystopian ineffectualness – as portrayed in the film Civil War earlier this year. (Many of my Democrat-leaning American chums fear that is where they are headed – of course they do… to be frank, is Biden really any better?)
(* Hope is never a good strategy.)
My Republican chums are somewhat shocked at the strength of the Trump Mark 2’ comeback. They have had to stomach the unpalatable reality that a) Trump is their candidate, b) buckle up and swallow their pride, c) compete for the attention of the barbarian who has captured their party and swear fealty at his court. They will also be turning their thoughts to the post Trump era – the 2028 elections – what will Republican politics look like then?
We now need to focus entirely what the election means for markets, the dollar and Treasuries.
But first, understand the players: read any historical thriller and one of the major plot-lines is how the well-intentioned upstart king foolishly surrounds himself with bad people. I would suggest I Claudius and Claudius The God by Robert Graves as good primers in understanding the Court of Imperator Donald Trump. Watching the players today will reveal the likely players in 4 years time – on both sides of US politics.
Yesterday I could have picked a comment from any one of multiple Republicans vying for Trump’s preference by blaming Joe Biden for the assassination attempt. I chose Senator JD Vance of Ohio, who said: “The central premise of the Biden campaign is that President Donald Trump is an authoritarian fascist who must be stopped at all costs. That rhetoric led directly to President Trump’s attempted assassination.”
Not only will Vance be the likely next Vice-President of the USA, which a solid chance of promotion in the next 4 years, but he is the winner of Trump’s latest TV special: The Apprentice – Vice President.
This morning, I read an article JD Vance wrote in 2016 decrying Trump in the Atlantic. It’s a very well written piece and insightful as to the underlying disappointments of America’s neglected and hollowed out centre – the voters left behind that MAGA appeals to. He called Trump “cultural heroin: he cannot fix what ails them, and one day they’ll realize it…. Then perhaps the nation will trade the quick high of “Make America Great Again” for real medicine.
8 years later and he is Trump’s VP. Here in Europe we have to wake up to the likely consequences of the next Generation of Republican US politicians. Vance is not yet 40 and is not stupid – but he is an isolationist and sees no reason to be defending Europe or taking sides in our disputes. His background is service in the US Marines in Iraq, Yale Law School, Venture Capital in San Francisco and Peter Thiel of Palantir and Libertarian.
In the US money talks. Its particularly interesting that Trump has chosen a protégé of Thiel as his running mate after he and Thiel fell out spectacularly following the candidates Thiel funded in the mid-terms. My democrat friends suggest Vance’s appointment means Thiel may suddenly be back in Trump donation mode. Where Thiel donates, other tech-lords may follow.
Vance may be his own man. A senator for just 2 years he has shown his populist credentials but has demonstrated a willingness to get past the polarisation between the Two Parties to solve issues with the Democrats. He is not the Putin fanboy many articles have been portraying him as this morning. Yet, he has also demonstrated he’s willing to play the Trump game – saying whatever is required in support of his master. Such is The Game of Politics!
How will all this play out on markets?
Over the next 4 months we’ll all be watching US Treasury bond yields – what will they be telling us about the markets’ fears of a Trumpian “Lis Truss” event, and expectations of a rising US budget, new tax cuts, and unsustainable debt. If Treasury yields start to look sticky in the face of Trump calling for rate cuts… that’s a bad sign.
Even more interesting will be the dollar. Ever since the Global Financial Crisis began in 2008 pundits have been calling the end of the dollar age – but with the dollar riding high there are few apparent signs it is happening. But it might already be underway beneath the floorboards of the global economy.
It’s difficult to argue you can hedge political instabilities around the world by holding the currency and bonds of another politically uncertain nation – the US. That will be magnified if, under Trump/Vance, the US becomes more isolationist. Any smart investor might decide the ongoing risks of US political polarisation make the apparent political stability of the UK and other nations look more attractive on a diversified economic basis.
At present the dollar is strong because of high US rates, and the fact the US trade deficit is financed in dollars which are ubiquitous around the global economy in the dollar-price of all major goods, services and commodities. Effectively the global economy relies on the relative stability and exchangeability of the dollar for all its transactions.
What if that starts to incrementally change?
It is beginning to happen. Saudi will now sell oil in whatever currency suits the buyer. Russia, China, and India are increasingly a non-dollar zone. Although global central banks are largely dollar hoarders, increasingly they are not investing in Treasuries to park liquidity. Sovereign wealth (ie, not reserves) funds are invested in markets to generate returns – for instance Saudi’s PIF doesn’t buy US bonds, but Global sports and real assets.
The distinction is subtle. Smart nations might ask why they are funding Uncle Sam, when they could be buying equity and owning America instead? (A problem the UK is waking up to – that foreign direct investment means the UK no longer owns itself!)
The Chinese renminbi is only 2% of global reserves compared to around 60% for the dollar (a number that has fallen 11% since 2010)… but that can change swifty as the nexus of global trade shifts if/when America turns isolationist. If may be triggered by a comparatively small move in Treasury buying patterns pushing up yields a tad before setting a new equilibrium funding rate… which keeps climbing as more and more global trades settle away from dollars. Eventually it becomes a dollar cascade event – even though there is no obvious dollar successor. (Hence my position in Gold is not going to reduce.)
The key point is… if the dollar was not the global currency de jour, the Treasury market would be unfinanceable! The US would have no choice but to turn on the printing presses to issue new money to repay old debt – which is ultimately unsustainable!
Watch the Dollar and Treasuries…
Out of time and back to the Day Job…
Bill Blain
CEO and Founder,
Wind Shift Capital
