It's Trump Vs. the Economy
No matter what the president tells Congress on Tuesday, one thing is clear: The economy doesn't like uncertainty. So, here's how I'm positioning.
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Pres. Donald Trump is going to address Congress on Tuesday night. What message does he want to deliver? Will he present himself as a deal maker? Will he say he pushed our trading partners, who gave us so much in return, that we have already won the trade wars? If so, we could see some very positive headlines in the next 36 hours or so.
Or will he say something else? Will he want to pound the table and declare that the U.S. is done being “taken advantage of” by nations across the globe? Will he repeat that tariffs will not only invigorate the U.S. economy, but will quickly reduce the deficit -- and to expect implementation against Canada and Mexico, and great tariffs on China?
What happens, then?
I’m not sure how the “crypto tweets” of the weekend play into this. Did he want some “wins” for a big part of his donor base, so he can play hardball elsewhere? (Like with Ukraine). Or is this just the first round of a series of “accomplishments” ahead of the speech? (I put accomplishments in quotations, as I’m not sure anything really new was said, which may be why the Ripple Labs crypto currency XRP in particular has given back some gains and Bitcoin is still off the highs from earlier this year).
Game of Economic Risk
The economy, meanwhile, faces many risks.
The Citi economic surprise index continues to decline. This means that data is missing expectations. That tends to force economists to lower their expectations, which puts pressure on markets.
The Atlanta GDPNow forecast dropped from 2.3% to -1.5%. That looks worse than it really is. The most recent data, trade data, had an outsized impact on the forecast. Much of that trade data was a function of front running tariffs. That should dissipate over time or could go away altogether. But, it does show how quickly the economy can shift in response to even proposed legislation. Uncertainty is not the economy’s friend.
Auto and credit card delinquencies are rising, too. Not to problematic levels, but certainly to levels worth paying attention to.
Housing is showing some cracks as well. Homebuilder optimism is declining and homes available for sale are increasing back to “normal” levels. Neither of those bothers me too much, but we are seeing very high number of homes available in Florida for one example.
I fear this has less to do with rates, and more to do with people overpaying for homes. Particularly for those who were looking to buy to generate income. Implementing strategies during Covid and the aftermath may have led to some bad decisions as things normalize.
We will get jobs data this week. While important, I think strong data will be downplayed, as many seem to be in my camp, doubting the validity of the numbers.
So, if the jobs data is weak, expect recession chatter to build, but strong data won’t signal an all-clear for the economy. Too many people, rightfully, are concerned the jobs data is being overstated and will be revised down in the coming months.
I am not sure what policies will or will not be implemented by this administration.
I am not sure when they will be implemented, or how long they will remain talking points even if they don’t get implemented.
I am not sure how the global economy will respond to them all (I fully understand the intentions of the policies, but what policies are intended to do and what they do, don’t always mesh – just look at what happened to 10 year yields after the Fed started cutting rates).
Game Plan Amid Uncertainty
If we get some resolutions in the coming days, I can be all in. Uncertainty, in the meantime, however, remains a concern.
For equities I continue to like Chinese stocks and anything that can be linked to national security and to national production. this includes commodities and domestic chips. I’m overweight things that the market is underweight and vice-versa, as I expect a “normalization.” Both the equal-weighted Nasdaq and S&P are beating the market-cap weighted version. I’m about to start adding small caps to bring them to overweight (though not sure if that is a today thing or I wait until after Tuesday night).
On rates, I’m more or less neutral here. You could say I have slightly bearish bias. But I think the Fed is going to be forced to cut three or more times this year, because my economic outlook is so bearish, which is why I’m still underweight equities as a whole. Rate cuts -- because the economy is struggling -- won’t help equities that much, at least not initially.
Good luck, and hopefully March comes in like a lion and goes out like a lamb, but I’m dubious on that.
At the time of publication, Tchir had no position in any security mentioned.
