Back on May 17, at what could very fairly be described as a kind of psychological low point for a market that has otherwise managed to power inexorably higher on the back of central bank promises, mindless ETF flows, and good old fashioned greed, this very site published what, to my mind, was its best post of 2017. Here was the punchline:
[Trump’s] election gave us the “Trump Bump” which was bizarre, entertaining and wildly profitable for many, but then it seems like we forgot to correct for the data point that Donald Trump is the fucking President of the United States.
That dose of reality accompanied a truly awful day for U.S. stocks which were in an uncontrolled dive as the James Comey fiasco spiraled rapidly out of control.
Exactly a week earlier, Donald Trump hosted the two Sergeys (Lavrov and Kislyak) in the Oval Office just hours after firing Comey. That move all at once reinforced the Russia connection and provided the most compelling evidence yet that the President is either completely dense when it comes to bad optics or else just doesn’t care. Either way, the stage was set for sentiment to deteriorate, which is exactly what happened, culminating a week later in the selloff which provoked the article from which the excerpt above is taken.
Since then, there’s been no shortage of evidence to support the contention that Donald Trump is hell-bent on doing his best Plaxico Burress impression every chance he gets. To be sure, markets don’t react every time he shoots himself in the groin - if they did, the Dow would be hovering at around 750 right now.
The market’s resilience is either a good thing in the sense that it suggests America’s capital markets are resilient in the face of abject buffoonery, or it’s a bad thing in the sense it suggests that not only have we still not “corrected for the data point that Donald Trump is the fucking President of the United States,” we have in fact made new highs even as the administration continues to make new lows.
And see that latter possibility becomes especially disconcerting when you realize that we’re now seeing the revival of the bizarre “Trump bump” mentioned above. Small-caps are outperforming, there’s been a rotation to value from growth, 10Y yields have risen some 35bps off the lows hit early last month, the dollar had its first winning month since February in September. And on, and on.
Well guess what? Everyone is making the same mistake again. All of this is predicated on the idea that the “plan” we got from Trump and the GOP last month represents “progress” on tax reform. That came at just the right time for markets. The Fed was getting ready to start normalizing the balance sheet and the committee indicated it’s still leaning towards one more hike in 2017. Meanwhile, on the Friday before Hurricane Irma hit, the dollar was looking like it might never catch another bid (USDJPY 107 handle) and 10Y yields had broken below 2.02%. It was just a matter of time before equities snapped.
And then: a tax plan. Or what counts as a “plan” with this administration. Cue the revival of the “Trump trade” and the triumphant return of the reflation narrative, just in time to save us from a hawkish Fed and the prospect that the previously bulletproof growth rally (particularly tech) was running of steam.
What could go wrong, right? I mean, in the worst case scenario, the GOP manages to ram a watered down version of the tax proposal down everyone’s throats thus cementing Trump’s first legislative victory, the market will cheer, taking us up another [fill in the blank] percent by year-end. Meanwhile, analysts will lift earnings estimates to incorporate (get it?) tax reform, thus providing a nice tailwind into 2018.
Enter Donald Trump on Sunday morning:
Corker fired back, calling the White House an “adult day care center” and then, for good measure, gave an interview to The New York Times in which the Tennessee Senator literally said Trump could “start World War III” before implicitly asking America to just admit that Trump is out of his mind. To wit:
Look, except for a few people, the vast majority of our caucus understands what we’re dealing with here. Of course they understand the volatility that we’re dealing with and the tremendous amount of work that it takes by people around him to keep him in the middle of the road. I don’t know why the president tweets out things that are not true. You know he does it, everyone knows he does it.
If you’re Gary Cohn, your job just got a lot harder. Trump has potentially torpedoed tax reform in the interest of defending his honor (a while back, Corker became the first Senator to openly question the President’s competence and last week, Bob mused that the only thing separating America from “chaos” is the trio of John Kelly, Jim Mattis, and Rex Tillerson).
Although most analysts have been mum on this so far (presumably because they’re still trying to determine if what happened on Sunday is real), Cowen’s Chris Krueger offered this on Monday morning:
Either Trump realizes that Corker can sink the remainder of the Trump/GOP legislative effort and is upset by that reality, or he didn’t/doesn’t know and just made it a reality. Either way, we see ZERO upside for the budget process/tax reform in this Twitter tantrum with the policy downside limit-down.
Yes, as it turns out, there is “ZERO” (and the all-caps are in the original note) upside to the President instigating a Twitter battle with a Senator from his own party by calling said Senator a gutless beggar on a Sunday morning.
So coming full circle, this is another one of those times when it would behoove you to go back into Excel and try to incorporate the only data point that matters: Donald Trump.
Catch more Heisenberg over at Heisenberg Report.