The idea that Donald Trump is “crazy like a fox” when it comes to the nexus between the Fed, the trade wars and the US equity market is gathering adherents.
The thesis is simple, and we’ve been over it countless times in these pages. Trump, the story goes, is deliberately escalating trade tensions in an effort to sow so much doubt about the outlook for the global economy that the Fed has no choice but to cut rates. Once Jerome Powell acquiesces, Trump will deescalate trade tensions, roll back the tariffs and admire his handy work as stocks explode into the stratosphere.
Read more: ‘Maybe Trump Is A Genius After All’
The last two weeks have brought fresh evidence to support that theory. Rate cut bets were pressed (hard) following the Mexico tariff threat, which marked an escalation on top of an escalation, coming as it did on the heels of May’s friction with China. You could argue that China’s late edits to the 150-page draft deal afforded Trump an opportunity to rekindle the fight. Equities stumbled hard in May after he announced, on Twitter, that the trade war with Beijing was back on and the slide in stocks tightened financial conditions, ostensibly bolstering the case for Fed cuts.
Then, Trump fired a shot at Mexico, an escalation which, in the minds of markets and at least a half-dozen analysts at major banks, sealed the deal for preemptive easing. Stocks rose for five days in a row through Monday, before finally taking a break over the past two sessions.
At the last minute, Trump announced a vacuous “deal” that averted the Mexico tariffs and market pricing for cuts has come off a bit. But, as the chart shows, those easing bets proved sticky, even as stocks surged. According to plan – maybe.
One person who’s buying the idea that this is by design is Chen Zhao, co-founder of Montreal-based Alpine Macro and a former co-director of macro research at Brandywine Global Investment Management, who Bloomberg reminds you is “known for his prescient bets against tech stocks in 1998 and in favor of U.S. equities in March 2009.”
“Trump is probably playing a shrewd game”, he’s quoted on Wednesday as saying. “Once the Fed cuts, tariffs will get lowered. All risk assets will benefit. We’ll have no trade war, and stocks from the US to China will go up. There’s a very high probability of that.”
That’s the “crazy like a fox” theory and Zhao claims his faith in that narrative is based at least in part on the accounts of people he attended school with Beijing who are now Party officials in China and also on his connections in Washington.
If this is all a ruse cooked up by Trump, the Mexico charade might have given everyone a window into how the strategy will unfold with China. Indeed, this week the president has renewed his verbal attacks on Beijing during the Fed’s blackout week ahead of the June FOMC.
Let’s assume we really are witnessing a “genius” strategist patiently executing a plan to force Fed cuts by threatening to blow up international trade and plunge the world into recession. Even if that’s the case – that is, even if there is, in fact, a “method” to this “madness” – the strategy is fraught with peril.
For one thing, the Fed could simply call Trump’s bluff by not cutting rates, implicitly daring him to doom his reelection prospects by sticking to a hardline stance on trade until the economy careens into recession. In that scenario, no amount of Twitter balderdash and recriminatory bombast is going to convince Americans that it’s all the Fed’s fault.
But let’s assume that, unlike Trump, the Fed actually cares about America and would rather chance allegations of politicization than risk a deep recession by not cutting. If Powell resolves to cut, but decides to wait just a little longer for further evidence that the domestic economy is slowing, it’s possible that by the time the Fed pulls the trigger, the die will be cast – it will be too late, if not for the US, at least for the global economy, which is much more fragile and thereby susceptible to falling off a cliff in the event of further escalations.
Needless to say, the chances of the Fed waiting too long are amplified by the fact that Trump’s incessant public badgering of Powell means any rate cuts will be viewed with skepticism by Democrats, and also by market participants, who will worry the Fed has been commandeered.
The point: “Shrewd game” or no, “crazy like a fox” or just plain crazy, this is a dangerous gamble and the margin for error appears to be quite thin. While protectionist policies can always be walked back, the damage to sentiment would be harder to heal if somebody makes a mistake along the way, dragging global equities down in the process.