RaboBank: “Another Remarkable Day Of Drama”

Submitted by Michael Every of RaboBank

Another remarkable day of drama. Amazingly, the summit between US President Trump and North Korea’s Kim doesn’t get top billing anywhere in most media. Partly that’s the political equivalent of “the difficult second album” problem, and partly it’s what is going on elsewhere.

In the US Congress we had three sets of remarkably testy testimony. First was Trump’s ex-lawyer Michael Cohen, who delivered allegations that in another time would have been so politically devastating no president could be expected to survive them: that Trump is a racist conman who has committed crimes while in office, and that Cohen fears he won’t leave office if he loses the 2020 presidential election. However, these are not ordinary times, this is not an ordinary president, Cohen is not an ordinary lawyer given he is facing jail as a perjurer…and a dispassionate view does not suggest there was actually anything new in any of those sometimes very wild charges.

Crucially, even though we heard there are fresh investigations into Trump on-going in New York, there were no new smoking guns on Russia in particular, and perhaps the most explosive material was a cheque signed by Trump apparently used to reimburse Cohen for his pay-off to porn star Stormy Daniels – but even that appears to be a minor (USD35,000) campaign finance violation. In short, this was hardly a good day for Trump, but was it actually enough to say he will be impeached or fail to win again in 2020 due to it? That still looks very unlikely at this stage. At this stage, is any US voter’s opinion on Trump going to be swung either way? Really? And is there a genuine legal threat? Not until after 2020, apparently. In fact from a legal perspective this kind of backdrop deeply incentivises Trump to win again as he is in a far stronger position to face down various legal challenges while in office. Nonetheless, we can be assured that these kind of events are going to be a permanent fixture into 2020. Cohen is back tomorrow behind closed doors, for example.

Second was US Trade Representative Lighthizer, who shot down hopes for a US-China trade deal. Lighthizer noted that plans to hike tariffs on USD200bn of Chinese goods from 10% to 25% are now suspended, which the same Wall Street Journal trade journalists that are always telling us a deal is close seems to think is again a sign that a deal is close. However, Lighthizer also said more Chinese purchases of US agri and gas are not enough and that structural issues are key. Moreover, we heard that the proposed enforcement mechanism to make sure China is “subject to corrective action should it fall short of its commitments”. Apparently this would mean monthly, quarterly, and semi-annual meetings at various levels of government, and companies would have the chance to make complaints anonymously: failure of the Chinese to address these would then see the US take appropriate unilateral action. Seriously, does anyone think Beijing is going to allow itself to be held to outside standards like this? Consider that Beijing makes crystal clear that it does not allow independent judiciaries as the Communist Party remains supreme: is it going to let US trade bureaucrats tell it what to do? Markets are still in denial about this – or at least emerging markets are. Lighthizer also stressed the importance of Congress passing the USMCA, because out of sight out of mind that hasn’t happened yet.

Third was the Fed’s Powell, who was repeating his semi-annual testimony but didn’t generate the kind of fireworks one might have expected in Q&A from Democratic Representatives. Instead, Powell noted that QT won’t run too much further and will end this year, decried the rise in student debt, and underlined the US needs higher productivity. In short, nothing really exciting, but positive in as much as the threat of QT will end later in 2019.

Naturally, the backdrop of India and Pakistan moving close to the brink of war pushed Trump and Kim down the news agenda too – although CNN, etc., still felt that Michael Cohen’s testimony was vastly more important. While Pakistani Prime Minister Imran Khan has made a nudge-nudge wink-wink reference to the two countries’ nuclear weapons and has offered India a potential off-ramp from further escalation after his own military response to Indian airstrikes (and a video has shown a captured Indian pilot saying “The tea is fantastic”) it is still not assured this crisis is contained.

Meanwhile, apart from a laudatory tweet from Trump on Vietnam’s economic dynamism, and suggestions that this is the future that is apparently on offer from the US if Kim will become its friend, we have little concrete to trade off. Apparently there will be a joint agreement signing ceremony today: will that see something dramatic? Certainly Trump could do with the good press just as much as Kim.

And back in the UK

What an unbelievable world we live in: even more so given that Bohemian Rhapsody won several Oscars for what was basically a high-budget school play on my viewing of it. If you want to watch Queen’s Live Aid triumph just go to YouTube: why bother with a facsimile?