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“I am Tariff Man”
-President Donald Trump

So, this week has been fun.   

As we again stare down the Ides of May and wait for our now daily dose of (market) Dramamine to kick in, let’s keep the good times rollin’ and indulge in everyone’s favorite Friday macro-political past-time:  Name That Autocrat!  

It’s simple:  I give you four leading, but somewhat ambiguous clues. You tell me what global leader is being described.  

  1. Unorthodox approach to policy.
  2. Overt attempts to exert undue influence over monetary policy.
  3. Proclivity to appoint family and/or sycophants to positions of influence.
  4. Predisposed to wrap messaging in hyperbolic, conspiratorial and/or protectionist/populist terms.

Pencils down!  

Still need a hint? …. It starts with a “T”. 

The answer, of course, is Turkish President Recep Tayyip Erdogan.  

Did you have a different President in mind? 

I’m fairly politically agnostic, so don’t take the above as some kind of biased political potshot …. although we are tilting at obvious Presidential parallels for comedic value while offering a gentle reminder that:

  1. Aspiring Autocrats needn’t look far to find the real-time authoritarian playbook.
  2. There are real and regrettable social and economic outcomes for the families and citizenry forced to endure the slow descent into misguided authoritarianism whose implicit, primary mandate is self-preservation and status quo maintenance.  

We’ve chronicled the tragicomical, slow-moving Turkish train wreck over the last couple years, but if your interest has been newly piqued alongside the latest, cross-asset cratering, the “best of” below captures most of what you need to know concerning Erdogan’s economic and policy approach. 

Turkish Train Wreck Timeline:

  1. 2018 (pretty much any speech):  “Higher Interest Rates Cause Inflation”
  2. May 11th, 2018:  “my belief is: interest rates are the mother and father of all evil.”
  3. May 15, 2018:  “I’m going to take over the central bank”
  4. July 10, 2018:  Names Son-in-law as finance minister  … cementing power grab over monetary policy
  5. May 6, 2019:  Nullifies Instanbul Mayoral election due to the opposition party winning alleged fraud and irregularities. 

The Lira rebounded moderately yesterday in response to the latest theatrical half-measures out of the Turkish central bank.  In the context of the beliefs and policy puppeteering highlighted above, the continued careening in Turkish equities and with a view towards how the currency has ultimately responded to similar, prior hand-waves to stem devaluation and capital outflow (see Chart of the Day below), I’ll leave it up to you to decide if yesterday’s rebound should be faded.  

May-hem? - z 08.13.2018 Turkish Lira cartoon

In any case, the Turkish experience offers a convenient opportunity to redux how currency crises play out, prototypically: 

Some political, economic or policy related development serves as the catalytic agent for rising uncertainty/lost confidence/deteriorating outlook → Currency depreciates and capital flight intensifies → asset prices deflate, credits gets tighter, investment and consumption both decline → Inflation rises locally (particularly if you need to import stuff priced in dollars) while debt/deficits & BoP issues worsen …(and slowing growth and rising inflation handcuff any meaningful monetary policy response) → which propagates more capital flight and currency depreciation in a (negative) self-reinforcing spiral.  

That is a somewhat stylized version but some similar variant characterizes almost every such crisis event.   Of course, when your currency is crashing and inflation is rising, but the President and de facto Central Bank head is operating under the notion that higher rates will only serve to exacerbate the problem well, then, let’s just say it complicates things. 

Moving on.

The news flow has been heavy this week but the high frequency data flow has been relatively light so to close out here, let’s just re-iterate and crystallize a few macro realities, bullet-point style: 

Tariffs 101

The contention that tariffs are filling the U.S. Treasury coffers, offsetting deficit funded fiscal stimulus and are somehow set to dramatically reduce the debt/deficit is a mischaracterization, at best.   While Chinese exporters may agree to lower prices and/or shoulder part of the tariff burden, U.S. importers and consumers overwhelming absorb those higher costs in the form of lower margins (business) and/or higher retail prices (consumers).  See last year’s +12% Y/Y increase in washing machines/dryer prices as a case study for prospective impact as the tariff list increasingly broadens out to consumer products. 

Lose-Lose

“We will not use Currency Devaluation as a weapon in the trade war.”   Chinese Premier Li Keqiang offered that beauty last year after the Yuan had already depreciated -9% again the dollar in response to the first Trade War volleys, effectively negating the entire tariff impact.  The Yuan has weakened by around -2% the last couple weeks and further softness wouldn’t be unsurprising.  Remember, China can claim plausible deniability with respect to state sponsored currency manipulation and contend that its simply “market forces” and the fear of slowing growth that are pushing the currency lower.  

Peter & Paul Policy

Last year’s experience is also illustrative of how the administration’s policies have a tendency to work at cross-purposes.  The tariffs don’t have the desired effect if the Yuan is weakening, but it will still have price consequences in the form of rising prices on imported goods which puts upward pressure on inflation domestically. That potentially forces the Fed to lean hawkish, which also supports the $USD and goes in the face of Trump’s stimulus and weak dollar agenda.  

Macro Dominoes

Here’s where the macro dominoes and derivative impacts start to layer.  To the extent the tariffs impact Chinese Industrial activity, there are flow through implications for EM more broadly and/or anyone hostage to the Chinse industrial supply chain.   Whatever your inclination, the pike formation in Dr. Copper, the Korean Won, Aussie Dollar, KOSPI and the EM equity and currency Indices are not particularly inspiring.    

Quad 4

At the risk of oversimplifying it, the Macro Domino dynamics cultivate a global macro condition set that goes something like this:   Trade Tension ↑  = risk of re-propagating further global Quad 4 conditions ↑ = resilient $USD = EM risk (among other things) ↑.  And if  you are an export economy (or worse a twin, deficit export economy) levered to China and/or global trade then you are not the pilot, you are along for the ride and party to the collateral damage.  As Keith highlighted yesterday, it’s no accident that the Shanghai Comp, Hang Seng, Kospi, Nikkei and Bovespa have all moved to Bearish TRADE and TREND. Inclusive of the morning’s bounce, Chinese equites remain Bearish TREND.  

CPI

This morning’s CPI data is mildly more interesting, if only because of Powell’s “transitory” commentary and Clarida’s purposeful parroting of that sentiment in the apparent attempt to solidify the “equal balance of risks” and “don’t get ahead of yourself” rate cut expectations messaging. Under the hood, we’ll get to see if the BLS’s big data implementation (recall, the BLS incorporated big data pricing for apparel for the first time last month which resulted in big disinflationary print) further drags on the headline while we hurry up and wait to see the magnitude of new tariff impacts in the May/June data (ala the washing machine example above).  And, as always, there are macro network effects.  In light of recent Fed messaging and the prospective price impacts stemming from Tariff implementation, the evolution of the inflation data will remain center to policy expectations, and to rates and the $USDE by extension … and to EM/ROW assets by further extension.

Amidst all the price oscillations and acute volatility clustering and as we head into the weekend, let us all remember and revel in the incontrovertible decree that “Trade wars are good and easy to win!” 

Happy Friday and a Happy Mother Day’s to all the mom’s who give selflessly and go underappreciated.  We do appreciate you and we need to say it more and more often. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are as follows: 

UST 10yr Yield 2.42-2.57% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 56.61-58.91 (bullish)
REITS (VNQ) 84.33-87.95 (bullish)
Energy (XLE) 62.53-66.68 (bullish)
Financials (XLF) 26.56-28.28 (bearish) 
Shanghai Comp 2 (bearish)
Nikkei 215 (bearish)
DAX 118 (bullish)
VIX 14.21-21.49 (bullish)
USD 96.64-98.12 (bullish)
EUR/USD 1.11-1.13 (bearish)
USD/YEN 109.50-111.21 (bearish)
GBP/USD 1.29-1.31 (bearish)
Oil (WTI) 60.00-64.49 (bullish)
Nat Gas 2.45-2.66 (bearish)
Gold 1 (bullish)
Copper 2.71-2.86 (bearish)

Christian B. Drake
Macro Analyst

May-hem? - CoD Turkish Trainwreck