After a rock and roll August for the Trump administration – with North Korean missiles appearing, disappearing and then reappearing like a “whack-a-mole” amidst charges of racial “insensitivity” and public insubordination among cabinet members, Red Scare 2.0, – September offers an opportunity to turn the page and focus on a legislative agenda. CLSA’s famous strategist, Christopher Wood, observes the delicate dance around tax reform that former Goldman Sachs Chief Operating Officer Gary Cohn is engaged in, pointing to the potential for tax relief before the end of the year – just in time for his potential nomination as Fed Chair. But what is happening in China, with its stock market trending higher in the face of geopolitical tremors, is also worthy of investor attention.
Get ready to hear the phrase "Fed Chair Gary Cohn"
The debt ceiling negotiations have the potential to be problematic with a short September 30 deadline approaching and an unpredictable White House at one point tying the negotiations to pay for a controversial border wall, the betting money says a deal will be struck. With the September 29 date set by Treasury Secretary Steven Mnuchin looming, and a statutory debt ceiling at $19.81 trillion and total public debt just $25 million below that, Wood thinks the deadline will be met – so long as an unpredictable administration doesn’t run off script.
Looking past the debt ceiling, Wood appears transfixed by the “Game of Thrones” drama where Trump administration Director of the National Economic Council Cohn is jostling with the now apparent submissive rival and incumbent Fed Chair Janet Yellen.
Looking at Fed Chair Yellen’s recent comments in Jackson Hole, where she strongly stated the case for meaningful regulations following the 2008 global financial crisis, Wood thinks this is sending a message. By defying President Trump, who is advocating for scrapping much of Dodd-Frank’s 2,300+ pages of dense and obfuscating directives, Yellen is likely signaling she doesn’t want to be reappointed Fed Chair. Or if she would like to remain as Fed Chair, she doesn’t think it is a probability and thus let loose her vocal defense of financial regulations.
For Wood, this opens the door for Cohn to slip in as the leader of a top bank regulator, a rare feat yet to be attained by a former executive at the “famous investment bank” that has held a litany of financial posts in government but has yet to climb to the top of the Federal Reserve pyramid as Fed Chair.
The key for Cohn is bringing home a victory on tax relief, which Republicans need in their pocket approaching the 2018 midterm elections. To get that victory, the administration is likely to abandon the “revenue neutral” principle that fiscally conservative Republicans have been demanding. Wood thinks the backgrounds of the Batman and Robin team of Cohn and Mnuchin suggest they are really “liberal democrats posing as conservatives in a Republican administration,” and being fiscally conservative and holding down government debt – a key issue Trump raised on the campaign trail – is not on their agenda.
Keeping a lid on debt is an issue that will be ignored much like Trump’s request for tariffs is being ignored. If they do go for additional revenues to pay for tax cuts, Wood thinks Cohn and Mnuchin are likely to end the deduction for state and local taxes, which hits Democratically controlled regions hardest. Now that’s bipartisanship with an edge.
However, the pick of a former Goldman Sachs exec for Fed Chief will likely be unpopular among Trump's populist base who will view it as more "crony capitalism".
Follow the trend in China
China’s stock market has been exhibiting a noteworthy degree of relative value mean divergence.
The MSCI China Index bolted ahead recently, up by 12.8% (USD) on the quarter and 39.5% year-to-date. Compare this to the MSCI AC Asia Pacific ex-Japan Index, up a relatively paltry 5.3% on the quarter and 24.6% on the year and wonder why this is happening with all the missile mania in the region?
Like many market moves, the trend cannot be entirely explained in fundamental terms. This is why recognizing “the trend is your friend” until it changes could be an appropriate strategy.
Wood points to a technical breakout among the region’s banks and an important correlation between China’s property stocks, which also have been surging alongside the overall market.
This price action only confirms Wood’s belief that an important bottom has been reached and “markets have commenced a period of extended outperformance.”
Buckle up, the China bull market is roaring ahead.