Peter Schiff proposed a 4D chess play regarding President Trump forcing the Federal Reserve’s hand. I think it is interesting since I have been saying that the Federal Reserve will not admit that their policies have failed. They will want some sort of event to blame and to save face.
For President Trump, he can then say “see I was saying we needed lower rates and QE. I was right” when markets do fall.
Almost like a good cop, bad cop routine between President Trump and the Federal Reserve.
The only reason I bring up Peter Schiff to your attention, is that he is a bear that no financial media really has on. Right now, the darling bear for financial media is Jeffrey Gundlach. He echoes a lot of things Peter Schiff has said on his podcast.
Gundlach was just on CNBC yesterday (May.7th 2019) and he said that he believes we are now in a bear market for stocks, that the China-US deal is 50-50 (an unstoppable force meeting an immovable object- both sides want to try to come out with a victory), and that we are living in a twilight zone with President Trump and Larry Kudlow saying the economy is so strong and the best it has ever been, while in the same breathe, saying how the economy needs rate cuts and more QE.
So Peter Schiff has said that he believes that President Trump wanted markets to fall, but in a managed way. He believes this trade war story is the way to cause this and then with markets lower, the Fed will cut rates. Again, many Fed observers will disagree with this because they believe the Fed still follows its mandate of maximizing employment and controlling inflation…but I believe, as well as many others, that the Fed’s sole mandate in this world is to keep assets propped up at all costs.
The reason why President Trump would risk this move? That a recession is coming, and a rate cut can stave off a recession until after the 2020 election. President Trump will win the 2020 election barring some sort of economic crisis. He needs rates lower.
However, I think this is quite the risk that the President is taking because of the leverage China has. I have outlined many times that the Chinese can remain patient. They want to wait for a weaker President. The Chinese and the Russians loved President Obama because he was weak in terms of facing the Russians and the Chinese. Both powers extended their geopolitical ambitions during Obama’s term, and it was only in his final year did he acknowledge this and the pivot to Asia began.
After the Mueller probe came out stating there was no Russian collusion, President Trump’s chances of winning the next election increased even more… and the Chinese realized they had to deal with him. Also, there is no chance of the President getting impeached. It is no coincidence that after this no collusion ruling came out, we have seen President Trump finally begin to up the pressure because the he knows that the Chinese have to deal with him now.
However, China holds one card which I have mentioned many times. They are a holder of American debt. In order for the selling of the debt to have a pressure, China (and Russia) need to bring the demand for the dollar down, which I believe they are attempting with Maduro in Venezuela (they want him to remain so he can officially declare Venezuela is not accepting Dollars for Oil), and of course, Iran. Interestingly enough, America DID send a carrier group to Iran after receiving intelligence from the Israeli’s regarding an Iranian plan to strike American troops.
It seems the Americans know what is at stake here. They will protect the US Dollar, and the US military is essentially a branch of the Fed. As long as the Dollar retains reserve status, the Americans can print as much as they want (because there will always be artificial demand for it) and do not need to worry about their debts and deficits.
It came out today that US 10 year bond auctions were the worst in a decade. The Chinese essentially boycotting buying any debt. This is worrying.
As of today, President Trump is expected to raise tariffs to 25% by Friday. With today’s bond action, I am not so sure some sort of deal will even be agreed upon. I have always maintained China holds the leverage. If a deal were to be agreed upon, it would be more of a pause and or ceasefire, which would send stocks lower (perhaps this is what President Trump is aiming for…)
The deal with state: China has promised to buy more American exports by the year 2025 etc. Really more of a pause or ceasefire for both sides to present as a win…but no progress really. Do not let trade talks distract you from the fact that China is attempting to curb US Dollar demand along with the Russians.
I mentioned the bond market so let’s us take a quick look at equities and bonds:
The S&P playing at an important support/flip zone. A big battle going on here. We did have the break, but was immediately bought up. Watch this zone.
The sell off in Bonds told me to watch for the markets to either sell off or remain under pressure. The ten year yield gets a bit more worrying once the 2.55-2.60 levels get breached.
I have stated this many times but watch the bond market! The debt market is the largest market in the world.
Finally, the US Dollar is still playing with the resistance now turned support zone which it is retesting. On the 4 hour chart, you can see somewhat of a triangle pattern forming with lower highs but support holding. This is generally a bullish sign where we may see a catapult higher in the Dollar…It could occur if no deal is reached as money will run into the dollar for safety.
A very important week, and we shall find out by Friday what the future holds for the US and China.