The Fight for 2020 Has Begun

Trump has already exerted more influence over one institution than any other president in over 100 years — the Federal Reserve.

That’s because Trump has had more control over Fed personnel than any president since the Fed was founded in 1913. As I’ve written before, Trump now “owns” the Fed.

When Trump was sworn in, he inherited two vacant seats on the seven-person board of governors of the Federal Reserve System. Holders of those two seats are also members of the Federal Open Market Committee (FOMC), the group that sets U.S. interest rates and monetary policies.

President Obama also had the same vacancies, but he did not nominate anyone to fill the seats because he doubted his chances of getting the nominees past the Republican-controlled Senate and he was sure “President Hillary” would do the right thing and appoint pro-Democratic nominees.

In the end, Trump beat Clinton and the vacancies fell to Trump. Then Trump got another windfall. Within 14 months of becoming president, three additional Fed governors resigned (Dan Tarullo, Stan Fischer and Janet Yellen), and Trump suddenly had five vacancies to fill, or 70% of the entire Fed board.

Trump promoted Jay Powell to chair and appointed Richard Clarida as vice chair, Randy Quarles as vice chair for regulation and Michelle Bowman to fill a seat reserved for community bankers.

All of those appointments were well regarded by Wall Street and the media. But that still left Trump with the two original vacancies.

Trump indicated he wanted to appoint Herman Cain and Steve Moore to fill those seats. Cain is a former presidential candidate, chair of the board of the Federal Reserve Bank of Kansas City and CEO of the Godfather’s Pizza chain. Moore is a think tank analyst, founder of the Club for Growth and a former member of the editorial board of The Wall Street Journal.

Cain has now withdrawn his nomination after running into opposition from Senate Republicans based in part on old allegations of sexual misconduct. Moore is also being opposed by those who fault him for not having a Ph.D. in economics.

Whatever the merits, the real reason they have been opposed by monetary elites is that they are “friends of Trump” and will hold Jay Powell’s feet to the fire to cut interest rates and keep the economic expansion going ahead of the 2020 election.

But if Moore withdraws next or if his nomination is defeated, no worries. There’s some indication that Trump’s next nominee will be Judy Shelton.

She does have a Ph.D. and is a well-known advocate of a new gold standard. Just this Sunday she wrote an article in The Wall Street Journal, “The Case for Monetary Regime Change,” that challenged the current system and defended the classical gold standard.

She has also defended Trump’s trade policies, arguing that those who embrace unfettered free trade dogma “disregard the fact that the ‘rules’ are not working for many American workers and companies.”

For those who want Moore to step aside next, the best advice may be “Be careful what you wish for.”

Regardless, the 2020 presidential election is already beginning to take shape.

A few weeks ago, I unveiled my first forecast on the outcome of the 2020 presidential race. My estimate was that Trump had a 60% chance of winning.

I was also careful to explain that my forecasting model includes constant updating and would no doubt change between now and Election Day on Nov. 3, 2020.

That’s normal. Politics is a highly volatile process and it’s foolish to put a stake in the ground this early. My model has quite a few factors, but the leading factor right now is that Trump’s chances are the inverse of the probability of a recession before the third quarter of 2020.

If recession odds by 2020 are 40%, then Trump’s chances are the inverse of that, or 60%. With the passage of time, Trump’s odds go up because the odds of a recession go down.

If a recession does hit, then Trump’s odds go way down. This dynamic can be used to explain and forecast Trump’s economic policies, including calls for interest rate cuts and efforts to place close friends on the Fed Board of Governors.

It’s all connected.

As usual, I found myself out on a limb with my forecast; the mainstream media are sure Trump will lose in 2020, if he’s not impeached sooner. So it was nice to get some company who sees things my way…

A new Goldman Sachs research report also projects that Trump will win in 2020. Goldman shows a narrower margin of victory than my model, but a win is a win.

Of course, their forecast will be updated (like mine) but we’re starting to see more signs from other professional analysts that Trump is a likely winner after all.

The focus of the anti-Trump forces has shifted. Trump was not removed from office as his opponents had hoped. And the long-awaited Mueller report on “collusion” by Trump with Russia has turned out to be an anticlimax showing no collusion. In fact, Trump is on track to complete a mainly successful first term.

Instead, the “resistance,” aided by the deep state and the media, have turned their attention to the 2020 election. Efforts to harass and distract Trump are now mainly for the purpose of weakening Trump’s reelection prospects and promoting the election of an opponent from among a field of Democratic candidates.

The greatest question facing President Trump over the next 18 months is whether or not he can avoid a recession. If he can, he stands an excellent chance of reelection. If he doesn’t, then a Democrat will likely win.

Trump supporters will be the first to tell you that the stock market has rallied from 18,529 on the Dow Jones industrial average index the day before Trump was elected to about 26,680 as of today. That’s nearly a 45% gain in 29 months.

Unemployment is near 50-year lows. African-American and Hispanic unemployment is at an all-time low. Labor force participation is steady after falling during the Obama years. Food stamp usage is down. Housing prices are up. Inflation is under control.

Growth in 2018 was above the 10-year trend since the end of the last recession and 2018 was the best full-year growth of that entire period. Real wages have shown their best gains in over 10 years.

While the economy is not booming by historical standards, it is producing its best performance since the global financial crisis. The U.S. economy looks particularly strong when compared with major trading partners such as the U.K., France, Italy, Japan and Germany. Even China is slowing dramatically as the U.S. continues to perform as a reliable engine of world growth.

The foregoing economic track record is repeated by Trump supporters and their (few) media allies on a daily basis. Most of the media simply ignore these data and continue the Trump bashing about the Mueller report and Trump’s business practices. These dueling narratives are by now business as usual when it comes to Trump.

But behind the media spin curtain, there is some reason to be concerned about the economy.

Manufacturing output is declining, both on a month-over-month and year-over-year basis. U.S. capacity utilisation is showing a recent slight decline. Certain indexes of new orders and shipments are also showing declines. Imports and trade deficits have both increased sharply. The yield curve is slightly inverted in the 2–5-year sector.

None of these indicators are declining to extreme levels and there are other indicators showing positive results. None is pointing to a recession in the short run, but all should be worrisome to Trump.

His supporters continually recite the claim that this is “the best economy ever.” It’s not.

The Fed continues to tighten (through balance sheet normalisation if not rate hikes) despite signs of a slowing economy. The problem is that monetary policy acts with a lag of 12–18 months. The economy is slowing now, not because of the December 2018 rate hike, but because of rate hikes in December 2017 and March 2018. The Fed’s later rate hikes in 2018 have yet to take hold.

They will soon and the economy will slow further. This dynamic can be seen clearly in Chart 1 below:


When the trend is not your friend. While GDP got a bump in the second quarter of 2018 as a result of the Trump tax cuts (4.2% annual growth), it appears that growth is declining rapidly toward the 2.24% average annual growth since the end of the last recession in June 2009. Obama also achieved several quarters of over 4% growth, but those strong quarters quickly reverted to the 2% level or lower. 

Trump boosters pointed to the 4.2% annual growth in the second quarter of 2018 as “proof” that the president’s economic policies were returning the U.S. to sustainable above-trend growth. My view at the time was that Q2 growth was a temporary pop from the late–2017 tax cuts (effective Jan. 1, 2018), but we needed more data before drawing conclusions.

Now the data are in. Growth dropped from 4.2% to 3.4% in the third quarter and dropped again to 2.6% in the fourth quarter. Estimates for the first quarter of 2019 by the Atlanta Fed call for annual growth of only 2.8%. In short, the “Trump bump” is over and U.S. growth is trending towards the post-2009 trend of 2.24% (well below the post-1980 long-term trend of 3.23%).

None of these trends (tight money, inverted yield curve, slower growth, etc.) is a sure predictor of recession, but all give some cause for concern. The current expansion (118 months long) is just a few months short of being the longest expansion in U.S. history. However, it is also the weakest expansion in U.S. history. The current expansion shows none of the inflation, labor shortages or capacity shortages that historically cause the Fed to raise rates and trigger a recession.

The Fed is conducting a balancing act between higher rates (to get ready for the next recession) and rate hike “pauses” (to avoid causing a recession now). So far, this finesse has worked, but it’s a delicate balance that could easily tip into recession. In addition, there are other factors (trade wars, global slowdown, financial panic) that are beyond the Fed’s control and could also lead to a recession.

Essentially, the difference between no recession and a recession over the next 18 months is also the difference between Trump’s re-election and the election of a Democrat in 2020.

But recession is the hardest to forecast with great accuracy and is therefore the biggest wild card. Trump was elected in large part, despite his off-putting demeanor, because he promised a better economy. He has delivered in part, but has to keep delivering.

In effect, Trump’s probability of victory is simply the inverse of the probability of a recession in the next 18 months. If recession odds are 40%, then Trump’s chance of losing is also 40%. The inverse is a 60% chance of winning. As goes the economy, so goes Trump.

If the economy goes into a recession, that could translate into a voter search for a new economic solution and that could lead straight to the Democratic promise of “free everything.”

Will the present odds change? You bet. As investors, the key is to stay nimble and stay alert to updates. As a UK Uncensored reader, you’ll be the first to know.

The impact of this election cycle on markets will be profound and the stakes for investors have never been higher. The time for investors to prepare is today.

That means you’ll want to be ready with a portfolio of gold, silver, fine art, land, cash, intermediate-term Treasury notes, and private equity.

And buckle in. It could be a very bumpy ride ahead.

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