- If Trump doesn’t get this decision right, he’s a one-termer…
- Trump and the curse of Bush 41
- Two Dow stocks soar, another sinks: The right time to buy GE
- Venezuela loses the gold it pawned…
- …while citizens pin their hopes on bitcoin
- Healthcare versus sickcare
Sometime in the next 10 days, the president will name his choice for chair of the Federal Reserve.
Yesterday he told reporters he is “very, very close.” His aides have said he’ll make a decision before he leaves on a trip to Asia Nov. 3.
We’re not going to bother handicapping the race here. You can read that stuff anywhere. Just know that our macro maven Jim Rickards still says the pick will be financier and former Fed governor Kevin Warsh — who by now is a dark horse in the estimation of conventional wisdom.
Today, we have a broader theme we wish to explore…
If Donald Trump doesn’t make the right choice for Fed chairman, he risks becoming the first one-term president in a generation.
That’s how high the stakes are.
Let’s take a short trip through the history of every president who’s been elected since 1980.
We’ll go backward in time and examine when they entered office relative to the “business cycle.” Was the economy in a recession? Was it in an expansion? Was it somewhere in between, and if so, where? Think about your own economic circumstances as each president came into office…
Trump: Entered office seven years and seven months into an economic expansion
Obama: Entered office smack in the middle of the “Great Recession”
Bush the Younger: Entered office weeks before the start of the 2001 recession
Clinton: Entered office about two years into an economic expansion
Bush the Elder: Entered office six years and two months into an economic expansion
Reagan: Entered office six months after the end of one recession and six months before the start of the next.
Maybe you already see where we’re going with this.
Trump and Poppy Bush are the only presidents of the last 35 years who came into office inheriting a years-long economic expansion. Everyone else was either in a recession, going into a recession or coming out of a recession.
Bush the Elder had the misfortune of a recession starting about 18 months after he took office.
It was over in nine months — March 1991, according to the wonks who come up with recession dates at the National Bureau of Economic Research. But by November 1992, the public perception was that the economy was still punk — enough that voters sent Poppy packing. He’s the only one-term president Americans younger than 40 can remember.
Whether or not Trump is aware of this history, he runs the risk of repeating it.
In July 1991, shortly after the end of that 1990–91 recession, Poppy faced the same decision Trump faces now.
He opted to appoint Alan Greenspan to a second term as Federal Reserve chairman. “He has done an outstanding job,” said the president. “… He’s been a fierce fighter against inflation, but I think he also is as strongly committed to growth.”
But an Associated Press account at the time hinted at tension: “Over the past year, as the economy sunk into its first recession in eight years, Bush and his senior advisers have constantly pressured Greenspan and his fellow board members to stimulate an economic recovery by quickly and steeply lowering interest rates.
“Central bank officials, however, have resisted loosening credit as forcefully as the administration had wanted, fearing that would lead to resurgent inflation.”
In October 1990 — shortly after Saddam Hussein invaded Kuwait and gasoline prices jumped — the Greenspan Fed began lowering the fed funds rate. From 8%, the rate came down steadily to 3% by Election Day 1992. But for many of Bush 41’s advisers — especially Treasury Secretary Nicholas Brady — it wasn’t fast enough.
In 1998, Bush himself laid blame for his election loss at the feet of Alan Greenspan.
As he explained it in an interview with the late David Frost, “I think that if the interest rates had been lowered more dramatically that I would have been re-elected president because the [economic] recovery that we were in would have been more visible.”
Not to put too fine a point on it, Bush added, “I reappointed him, and he disappointed me.”
For Trump the stakes are even higher because the Fed is in the midst of a rate-raising cycle.
As you might recall, the Fed enforced a monetary state of emergency from late 2008 until late 2015 — keeping the fed funds rate near zero. It’s been raising the rate in fits and starts the last two years, desperately hoping to load enough “bullets in the chamber” so it can lower the rate again to fight the next recession. (Ain’t monetary policy nutty?)
But as Jim Rickards has been telling us time and again… raising the rate might well choke off the “expansion,” such as it is, and trigger the next recession.
Which brings us back to Jim’s dark-horse pick for Fed chairman. Who would be most appropriate choice for the “disrupter in chief”?
“If you are looking for something disruptive, put Kevin Warsh at the top of the Fed,” Art Hogan tells the BBC. Hogan is chief market strategist at Wunderlich Securities.
The knock on Warsh, and the reason conventional wisdom is down on him, is that he doesn’t have an academic background. But Jim Rickards says that’s a plus: “He’s a lawyer, not an economist. He works for a hedge fund, not a university economics department.
“The early read on Warsh was that he is a hawk and will raise rates,” Jim says. “But Warsh is a pragmatist, not an ideologue. Warsh will do what makes sense under the circumstances. Warsh is less concerned about inflation than Yellen and therefore less likely to raise rates.”
Then again, Fed chairmen don’t always follow the script the president hopes they will. The last one-term president could tell Trump a thing or two about that, huh?
To the markets, where the Dow is soaring to new highs on the strength of earnings from Caterpillar and 3M.
At last check the Big Board is up three-quarters of a percent. It’s now 55 points away from the 23,500 mark.
Not that everything is hunky-dory among industrial giants: General Electric is down about 1%, on top of yesterday’s 6.3% loss. GE’s numbers disappointed last Friday, enough that its 4% dividend might be at risk.
Year to date, GE is down 20%. Does that make it a bargain?
“If you’re looking to scoop up cheap GE shares, your best bet is to wait for one of my favorite Dow trading ‘signals,’” says colleague Greg Guenthner.
“Just wait for GE to get kicked out of the Dow. Then it’s time to buy.”
There’s history on Greg’s side here — Alcoa, which lost its lofty status as one of the Dow 30 stocks in 2013.
“The aluminum company had enjoyed 54 years as a member of the Dow Jones industrial average. But Alcoa’s low share price had become a bit of a problem for the Dow (which, unlike the S&P 500, is a price-weighted index). That means that toward the end of its run, even a major move in Alcoa shares barely registered on the Dow. In that sense, the company had become irrelevant.
“Alcoa’s expulsion was the final straw for this stock. Every bull was chased from the barn. It was just the spark the stock needed to begin a new rally. The week the stock was jettisoned from the Dow was rock bottom for Alcoa. From there, a massive change in trend helped carry this stock to gains of more than 100% in a little more than a year.”
Hmmm… GE is the only company that’s been part of the Dow for the index’s entire 121-year existence. But tradition won’t matter in the face of a share price spiraling downward. Too, in the 21st century, the Dow has never gone longer than about three years without a makeover. And the last one came in March 2015.
GE might be a buy sometime next year.
Venezuela is in such rough shape that it can’t even take back the gold it pawned a while back.
If you’re a really longtime reader, you’ll recall the country’s late caudillo Hugo Chavez repatriated Venezuela’s 160-metric ton gold stash — held overseas with the Bank of England, JPMorgan Chase, the Bank of Nova Scotia and other institutions. Crowds greeted motorcades of armored vehicles on the streets of Caracas in November 2011.
But six more years of socialist misrule (and three years of low oil prices) have put Venezuela in a bind. Per the Troubled Currencies Project at the Cato Institute, inflation is running north of 2,500% a year.
Which brings us to the following Reuters story: “Venezuela this month allowed a $1.7 billion gold swap with Germany’s Deutsche Bank AG to lapse, according to an opposition legislator who said it weakens the balance sheet of the crisis-stricken OPEC nation’s central bank.”
The government put up $1.7 billion of gold as a guarantee in exchange for $1.2 billion cash. It will collect the $500 million difference in cash.
But hey, everyday Venezuelans can try to get rich on bitcoin.
“Bitcoin mining is part of a growing, underground effort in Venezuela to escape the worst effects of a crippling economic and political crisis and runaway inflation,” reports the AFP newswire.
Now, if you’ve been keeping up with our cryptocurrency dispatches this year, you might be wondering, “How? It’s a lot harder to mine bitcoin now than it was a few years ago — all the computer power and all the electricity.”
“Venezuela is something of a mining hotspot,” says the AFP story, “because the electricity needed to run the power-hungry computers is so heavily subsidized as to be almost free.”
Who says socialism doesn’t work?
“Die early to save Social Security?” a reader writes after yesterday’s episode. “Zeke ‘Please Die Early’ Emanuel must be clicking his ghoulish heels over this!
“Of course, to help, the People’s Socialist Republik of California will now — just in time for their favorite holiday, Halloween — allow you to liquefy your corpse. It has the added benefit of stopping faux global warming, as reported by Breitbart.”
According to that story, “California lawmakers are considering a bill that would legalize ‘liquid cremation,’ an ‘environmentally friendly’ process of using a chemical base mixture to destroy human remains as an alternative to cremation, which critics say causes pollution and climate change.”
The reader gets the last word: “No word yet if they will be integrating the solution from this into one of those in vitro meats.”
“Your item pointing out that Americans are dying sooner and the late-50s group having more serious health issues than just five–10 years ago forgot to point something out.
“This is taking place at the same time when that same group is getting more health care than ever before. More checkups, more medicine (aka toxic prescription drugs), more X-rays and on and on. More proof our health care is really sick care, and the more you get the sicker you are.”
The 5: Yup. Not much we can add…
The 5 Min. Forecast
P.S. About Caterpillar’s numbers, briefly mentioned above…
“The firm has posted two triple beats in a row,” says Lou Basenese. “As you recall, a triple beat occurs when a company beats earnings and revenue estimates as well as raises forward guidance.”
This morning, Lou recommended Extreme Alpha readers close out his Caterpillar call option recommendation today for 300% gains.
Yes, there’s more where that came from. In fact, Lou anticipates even better opportunities with tax reform on the horizon. Check out the latest right here.
We received an avalanche of responses to Tuesday’s episode of The 5… So we devote today’s issue to our readers’ perspectives. Read More
It’s totally counterintuitive: Gold throws off no income stream, but in a world where central bankers keep their thumb on interest rates, you need gold. Read More
It’s taken prestige media — and public health officials — about a month to come to grips with a glaring contradiction. Read More
“One of the questions I’m getting,” says Zach Scheidt, “is how can the market be so strong when the economy is so weak?’” Read More
Call it harebrained or genius, Americans might be taking a TRIP courtesy of the federal government. Read More
“There’s a lot of frustration in our country,” says bestselling author Graham Summers, “because we’re seeing a severe breakdown in the social contract.” Read More
Warren Buffett’s empire is under siege in 2020… “but that doesn’t mean there aren’t good deals to be had,” says hedge fund veteran James Altucher. Read More
A large swath of corporate America is sitting out social media — with both economic and political implications — for enabling “hate speech” and “misinformation.” Read More
“Entrepreneurship, technological creativity, is surprising,” says futurist George Gilder. “It’s disorder.” Read More
We return to the phenomenon of the woke left — that revived this June — and mysteriously isn’t clamoring for socialism and the redistribution of wealth. Read More