To President Donald J. Trump: An open market letter
It appears this week could be another rough one for the markets and investors here in the U.S. and abroad are worried.
The other night, I saw an online article which suggested that you, the President, were “glued” to action in the stock markets, and that you were consulting with your advisors to see if your trade policies were responsible for the volatility that we have seen in the markets in recent weeks.
I don’t know whether this is true or not that you are watching the markets so closely, but knowing that you are a man of business I am going to assume that either it’s true or that it should be true, because the situation is concerning and needs to be addressed.
I publish a piece five times a week talking about the markets, macroeconomics, and the world at large and today, I am writing to my clients and to you, to talk about what’s going on out there, and what perhaps, you as President, could look to do to address this issue.
Let’s start with the item that most longtime market watchers would say is the main determinant of what goes on in markets: the economic data.
Like one campaign strategist once said, “It’s the economy, stupid.” Is the economy causing the market to go lower? That’s a yes and no.
On the one hand, the jobs data on Friday was not terrible. Unemployment is still at the lowest in nearly fifty years at 3.7%. And Average Hourly Earnings grew at 3.1% year over year in November, which has it on a nice trajectory higher.
But the addition to Nonfarm Payrolls, while decent at +155k, was lower than consensus of +198k. And that number, while it’s still positive, has been decelerating. Job growth is hitting a wall, then. As is housing – where the data has been slowing for months. The Atlanta Fed lowered its Q4 GDP growth estimate on Friday from +2.7% to +2.4%.
That’s not terrible, but A) it’s moving in the wrong direction; and B) it’s a far cry from the 4-5% growth that we want.
Now – the traditional economists would argue that the economy is slowing down – and that we are late in the business cycle and heading for recession in the intermediate term. While the data is slowing down, I am not sure I agree with this.
The business cycle – and as a man who has spent time in Atlantic City, you should appreciate this – has been stretched out like salt water taffy. That’s what happens when the Fed keeps rates low as do the other central banks, and public policy twists everything to and fro.
My joke to my clients is that I see the economy as very late in a cycle that will never end. The point is, I’ve been hearing for four years that the cycle’s end is nigh. No one knows what a cycle is anymore. That’s reality.
There are bright spots in the economy here. Consumer Confidence is off of highs but remains elevated. Unemployment is the lowest since 1969 and wages are rising.
The latest Beige Book, released last Wednesday, still reported modest to moderate growth in the U.S. economy overall, and even talked about how housing may be stabilizing. So it’s not terrible, but it could be better. What can you do to help the economy?
Let’s talk about wages. We’ve been hearing about how tight labor markets are for years, but if so, why aren’t wages even higher? I am in the camp that says that wages will go higher if and only if productivity rises. Data received on Thursday showed a 2.3% rise in nonfarm productivity in Q3. That’s good but not good enough.
How can we make wages go higher? My research in the space says that increasing productivity of workers is the only way to create true and lasting wage growth.
Increasing productivity is the answer. How do you make that happen, this needed rise in productivity that leads to higher wages and higher prosperity for the American people? How do we win?
Last year you signed a sweeping new tax bill into law, and it lowered taxes for a wide range of American corporations.
While lower taxes are great, I argued then (I recall doing so on Trish Regan’s show on Fox Business publicly) that a better solution might have been tying those tax cuts in some part to corporate actions that would increase productivity and wages.
What if the tax cuts were used as a reward for companies that used that money to increase R&D geared towards higher productivity? Or to train workers to increase their skills and productivity? What if that job skills training could also include spending to train high school students, to build them into the more productive employees and business owners of tomorrow?
All of that would increase corporate margins and worker productivity and allow higher wages and then more money to buy houses, cars, and to start new businesses – it would drive the growth organically and it would get wages higher. Winning.
So there’s an opportunity here. A revision – a bipartisan one perhaps – to the current tax code to tie lower tax rates to measures that would naturally (rather than just giving out pay raises willy nilly) lead to higher wages – that would go a big way towards getting growth moving.
Otherwise, all we have is a tax law that mainly inspires companies to buy back stock and pay dividends. There’s nothing wrong with that but it’s not the winning solution.
And unfortunately, that’s what happened. It’s a sugar pill and not the cure. The change I suggest could be the cure.
Let’s talk about that housing data too. Like I said earlier, it’s showing signs of stabilizing but one reason why it has faltered has to do with your tax changes.
By eliminating/lowering the SALT deduction a year ago, the government has unfortunately stultified demand in the housing market. It’s only one reason (along with interest rates, the uncertainty on trade, and the fall in asset prices generally) for housing’s current predicament, but it’s a reason and it’s something to consider.
Allowing this SALT deduction again would help housing in the states most affected.
One of the other issues for housing is interest rates, so let’s move on to talk about the Federal Reserve.
You’ve talked a lot about the Fed on Twitter and with the press, so I want to address that and where I think the Fed is and perhaps should be going. For a long time, I’ve been an advocate of lower rates for longer. If growth is slowing a bit and wages are challenged, and inflation is not rising precipitously, the Fed should not be in a hurry to raise rates. I’ve been in the dovish camp overall for a while.
I don’t think Jay Powell has done anything wrong. But now, we are at a serious inflection point. Markets are confused, and it’s become part of the Fed’s job to hold a hand up and say, “Everything is going to be OK.”
To his credit, by recognizing the market volatility and talking down future rate hikes, Powell is doing his job. Most advisors and market experts say the Fed is only data dependent. I am here to tell you that they are both data AND market dependent. That is out of necessity. And now we need to let Powell do his job.
How does Powell do his job? By keeping him and the FOMC independent and letting them assess markets and the data.
The Treasury yield curve has gone haywire and Powell sees that – I have suggested that the Fed take a cue from the Bank of Japan and perhaps use their balance sheet to help fix this. That could mean buying and selling certain maturities to help bring markets under control – like an emergency brake and a navigation system on a car or truck all built into one neat plan.
The BOJ does this. As for rates, if Powell does his job and assesses what’s going to be best to promote employment and full growth AND to maintain stability in markets, we should see the benefits of that. And that includes more confidence and more activity in our housing market.
We’ve segued into policy so let’s talk more about fiscal policy. The recent midterm elections saw the House go back into Democratic hands, but I’ve been encouraged by your conciliatory gestures towards the other party.
The recent passing of President H.W. Bush reminded me that there was a time not so long ago when alleged rivals and adversaries would regularly reach across the aisle to get things done for the good of the American people.
That opportunity is here now. It was once said that only Nixon could go to China. Maybe only Trump can forge a new New Deal for America via bipartisanship.
What would help most, in addition to the tax reform I laid out earlier? An infrastructure stimulus plan for roads and bridges would solve our crumbling infrastructure problem, create jobs, and would do much to instill confidence not only among consumers, but also business owners who have been all too ready to hoard cash or buy back stock rather than invest in the future.
If you and the GOP leadership can make this a priority and work with Nancy Pelosi and the rest to make it happen, it bodes well for the economy and for 2020.
It’s going to mean working past distractions, and perhaps compromising a bit. Easier said than done, but if it was easy to be President, everyone would do it.
Part of your job is to rise above the backbiting and partisan part of the business when it’s time to get things done. That time is now.
The other big policy peccadillo is trade, and obviously, as they say in Missouri, this is a show me story.
It’s great that you and Chinese President Xi had a good meeting in Argentina, and that China is taking steps to allow soybean and LNG imports, but much remains to be done.
And while I admire your negotiating tactics, I am here to tell you that declaring yourself a “Tariff Man” has not helped markets here. I would have preferred if you had said “I’m a Business Man.” As Calvin Coolidge said in 1925, “the chief business of the American people is business.”
If that means tax cuts to spur growth, great. But markets love free trade. This doesn’t mean making bad deals or rolling over and playing dead or letting China steal intellectual property. But it does mean making deals, protecting oneself, and letting the money and the goods flow. Do that, and the stock market makes new highs.
I’m a big believer in reflexivity and here that means markets influence the data which influence the markets which… you get the point. It’s a circle or a cycle. Getting a trade deal done increases consumer confidence, purchasing manager sentiment, and also gets other countries more interested in spending, which helps drive our exports higher. The markets rally on the good news for the economy and the companies in it, and that affects the data, which drives the market higher, and helps the data… that’s reflexivity in action.
How do we get that positive reflexivity? You have a great team of advisors like Larry Kudlow and David Malpass working for you – guys who know the real world as well as the policy world.
Let them do their job. Let them make a deal to wipe out tariffs on all sides. And let’s get rid of the distractions. Brinksmanship is a big part of the negotiating game – but this needs to be defused.
It IS giving markets the wrong message. While sanctions against Iran must be enforced and intellectual property rights must be protected, the timing of this Huawei CFO arrest is unfortunate. We need less stories about that, and more stories about how auto tariff barriers are coming down.
Business Man, not Tariff Man. My contacts in China say that not only does China want a trade deal, they also want to clean up their act, and invest in the U.S. They want to invest in American business, American housing, and that means good things for the American people. And they want us to invest in them too. They want our LNG and propane and soybeans and corn. We all want to get this done.
Get trade right and the markets will follow – top priority. Voters love jingoism – but they love a full wallet more. Unfortunately, and this is the last piece of explanation I have for markets, the investment community is feeling a bit poor going into Christmas.
It has been a hard year for markets, and that fact in and of itself is perhaps THE biggest reason for the recent selloff.
I know you like talking about the “fake news” and perhaps I am more empathetic towards journalists than you are, but it does make me snicker when I see the financial journalists try to explain this selloff by saying it’s due to the “worries about an economic slowdown.”
As if on Tuesday morning, after a big rally on Monday, the Dow down 500 points can be explained by some sudden change of heart. Like the economy was fine on Monday, but bad on Tuesday. Folks actually write that, and that’s laughable. The economic slowdown has contributed to what asset prices are doing, but it’s not the whole picture. That picture includes the data, the policy, but also the picture itself.
What’s caused this roller coaster in the markets? Here’s what I can tell you from where I am sitting as a market expert and a guy involved in the private markets and alternative investment world.
As the third quarter came to a close and markets were at highs, investors who short stocks (like large hedge funds) largely threw in the towel on their technology stock shorts and covered those at a loss. They kept their long positions in stocks, though.
They did this at exactly the wrong time, and when markets fell in October and November, their losses on their long positions mounted. Given that the asset management sector is already in the middle of disruptive change and that banks do not use their balance sheets to take risk and provide liquidity in situations like this anymore, all of this pressure has come to a head and now hedge funds and other investment firms were trapped, and now they are facing losses and redemptions.
When there are losses and redemptions like this, they snowball. Quantitative investors and other “smart” folks spend a lot of time trying to figure out correlations between data and stock price movements to explain this stuff, but they have it wrong.
The correlation that matters is who owns what stocks. Because when pain in those stocks is felt, they have to be sold… and that hurts the other folks who own those stocks.
Then the question becomes, how much pain are those stockholders in? And the next question is, what are they going to do (or what do they HAVE to do) about it? That is what we are seeing right now. What’s going on in the stock market can be summed up in one word: PAIN. Pain begets pain. This is all about survival in the money management world. Right now that matters more for markets than the data, policy, geopolitics, or anything being said on TV.
I know that’s not what the economists and the peanut gallery are telling you. They are blaming housing, or exports, or China. That’s all well and good and that all contributes to the big picture. But right now, it’s this pain correlation that is the big factor. And this is a big problem.
The American people own stocks in their 401(k)’s and pensions, and when stocks don’t do well, it hurts the housing market and it hurts the rate of formation of new businesses because they are feeling that pain too.
What can you do about that? Not much unless you were to instruct the government or the Fed to buy stocks. I’m not suggesting that (even though it’s evident that other countries like China do that.) It’s going to take time for this mess to clean up, and it may not be pretty. But it will clean up and the gloomy sentiment I am seeing tells me that we could see the clouds part soon. When everyone is singing funeral dirges, I press the buy button.
You may not be able to or want to prop up the market through outright buying (and again I am not suggesting that.) But there are other things you can do. Let me sum it up:
- Tax reform to tie tax cuts to measures that will increase productivity and wages, and perhaps ease pressure on housing;
- Infrastructure spending forged across the aisle to boost growth and confidence; and
- Focus on a positive resolution to trade deals without brinksmanship. Be a Business Man, not a Tariff Man.
Expectations are everything. If you can talk up all of this and forget the other distractions, the market will overcome its pain and it will respond positively. Growth is challenged but a rallying market and the right policies could go a long way to stretch and pull the Atlantic City salt water taffy-like cycle even further. I know this sounds challenging, but that’s why you’re the President.
I hope this is helpful. Good luck, Mr. President, and oh… as I like to say… TIME TO WIN.
Sincerely,
Michael Block
Michael Block is Managing Director and Market Strategist at Third Seven Advisors and is a well-known authority on macroeconomics and markets and often appears as an expert panelist on Fox Business, CNBC, Bloomberg TV, and CNN, and is cited in publications like CNNMoney, Barron's, the Wall Street Journal, and the Washington Post. He advises clients on market tactics, asset allocation, risk management, and investment themes via one on one consulting and through his daily publication. Before joining TSG in June 2018, Michael was Chief Strategist at two other broker/dealers in New York, and prior to that he served in a variety of leadership roles in strategy, trading, and research for ten years at hedge funds like Sandell Asset Management and Magnetar Capital.
He received an MBA in Finance from the Kenan Flager School of Business at UNC-Chapel Hill where he was a Dean's Scholar and Hugh McColl Fellow, and a dual Bachelor's degree from the University of Pennsylvania and the Wharton School where he graduated magna cum laude and was a Benjamin Franklin Scholar.