Firing Powell Won't Save the Market but These 2 Things Might
As the Trump administration criticizes the Federal Reserve, two other solutions can help the economy find stability.
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If you missed the podcast with Chris Versacce, I recommend viewing it.
There was a lot of chatter late last week and even over the weekend about the possibility of replacing Federal Reserve Chair Powell.
I don’t think that would be a good idea, because his position is defensible, so any change would be viewed as a direct intervention in monetary policy by the administration. That will likely send shockwaves throughout the financial system.
We can agree or disagree with current interest rate policies (I’d prefer to see a proper vote and the average or median being used to set policy), but at least we understand the framework. More importantly, I think we have an idea of when the Fed would use tools other than setting rates (QE, etc.). A change in leadership at this stage would make investors question that, particularly outside of the U.S., where the dollar relative to their currency is a primary concern. More noise on Powell this week will not help the dollar, the longer end of the yield curve, nor stocks (though stocks shouldn’t bear the brunt of the problem).
We need one of two things to happen, in short order, for markets to get back above where they reached after “pause” day (the day the administration not only paused the Liberation Day tariffs, but greatly reduced them once they go into effect):
- A pivot to domestic-focused growth: Need to deregulate, need to launch programs that can boost domestic growth and domestic jobs without playing a zero-sum game (or worse) with the rest of the world. That sort of pivot would be very positive and make me very bullish.
- Some trade deals:
-I don’t think we will get any “good” deals. They might get spun as being “good,” but are unlikely to be much better than what we could have achieved by negotiating in a less confrontational/aggressive manner.
-It might take time for the administration to realize they need to tone down demands (so far, there doesn’t seem to be a rush to ink deals as they’ve been presented).
-With some deals, even weak ones, markets should stabilize.
I could be surprised and see some strong deals, but I think the direction of surprise is more likely to be disappointing. Basically, I guess, what we really need is backing off of tariffs.
We need some sort of “re-think” from the top down. There did seem to be less “noise” over the weekend about tariffs, so maybe the administration is working to pivot there and back down. That would be best for markets.
Finally, the administration continues to discuss de-listing Chinese ADRs. I’m not sure that this would achieve much, but it seems to be resonating. So what I’m doing in my trading is:
When reducing exposure to China, my first step is to sell KWEB first (it holds ADRs).
I’m also periodically shrinking exposure to FXI (it holds Hong Kong listed shares). If the ADRs get de-listed, I’m concerned about what might happen to the HK shares, hence reducing some exposure.
When adding China exposure, I will be using ASHR (which holds Chinese listed shares).
I’m currently running about 50% of what was my max exposure on China and trading around here (buying some dips, in small size, and selling some bounces, in small size).
So, I remain cautious on stocks and bonds, until we see some shift in strategy out of the administration (away from tariffs and Powell, and more to domestic stimulus).
At the time of publication, Tchir was long KWEB, FXI and ASHR.
