Is the Trump Dollar Rally Over?

Mix together the dashing of great (plutocratically oriented tax cut) expectations, the complete absence of any plan for infrastructure spending, and mix in some risk, and one gets this:


Figure 1: Dollar index (DXY). Source: Tradingeconomics.

Here is a picture of the VIX over the past few months:


Figure 2: S&P VIX. Source: TradingEconomics.

From Reuters:

From stocks to bonds to the U.S. dollar, a bevy of trades that have been fashionable since Trump’s election last November, were getting dialed back or in some cases shredded as his reform agenda looked increasingly vulnerable amid the fallout from his firing last week of James Comey, the director of the Federal Bureau of Investigation.

The uncertainty about Trump’s future increased in the last 24 hours over allegations Trump had sought to end Comey’s investigation into ties between the president’s first national security adviser, Michael Flynn, and Russia, and even some Republicans were now calling for a deeper probe into possible obstruction of justice.

The result was the harshest sell off yet in U.S. stocks since Trump was elected and a jettisoning of positions that were tied to the notion that his policies would stoke economic growth and inflation.

“The Trump Trade is over as of today,” Ross Gerber, co-founder and CEO of Gerber Kawasaki Wealth and Investment Management, who said they have been selling for the past 45 days and continued to be bearish on risky assets today. “We’ve seen cracks all year, but today, this is the first institutional selling we are seeing.”

Indeed, some “Trump trades” have been unwinding for weeks, especially in the bond and currency markets where bets on inflation risks and economic growth prospects are most prevalent.

Interestingly, all this political uncertainty has not manifested itself in the BBD daily index of economic policy uncertainty.

Appropriately, I’m at this conference on modeling exchange rates today.

41 thoughts on “Is the Trump Dollar Rally Over?

  1. PeakTrader

    There are big differences within the Republican Party how to repeal and replace Obamacare. Once that’s done, a tax overhaul (since most Republicans are fiscal conservatives) or a tax cut will be relatively much easier. It’s still a pro-business and middle class environment. So, the rally may resume soon – perhaps next week.

    Reply
    1. Noneconomist

      Oh, those fiscal conservatives, the ones who wail and gnash teeth when ranting about deficits and debt.
      Their ranks include Ronald Reagan, who once noted the national debt was approaching a trillion dollars,which he deem unfathomable. He left no description of his own historic deficits a debt that had almost tripled during his eight years in office.
      Another debt soldier, George Bush, worked with a GOP Senate and House and oversaw a 50%+ increase from 2002-2007. He once promised the debt would be halved by the time he left office. Such, of course, was not the case as the debt doubled during his watch. The CBO estimated the final Bush deficit at $1.2 Trillion, fairly close to the third ventual figure.
      No doubt a new round of tax cuts, some really nifty dynamic scoring, and some eagle-eyed shrinkage will eliminate the national debt entirely by 2018 at the latest.

      Reply
      1. PeakTrader

        Sure, Democrats, who believe even more spending is needed, regardless of deficits and debt, had nothing to do with it. Blame it all on Republicans.

        It should be noted, winning the Cold War wasn’t cheap and Bush 43 had to give some things to Democrats to win very close elections.

        Reply
        1. chicken_or_egg

          It should be noted, winning the Cold War wasn’t cheap

          Someone else drinking the Reagan Koolaid? Russia’s centrally planned economy collapsed on its own. Reagan had nothing to do with it.

          Bush 43
          More like Cheney. Their go-to supply-side theories are shown to be failed policy. I find it interesting when Obama tried to dramatically increase spending during the depths of the last bubble-induced recession, it was Republicans and a few Democrats reigning in the spending…. And lengthening the recession.

          And then there is the drumbeat of “Democratic spending will ruin us all.” Put a Republican in the Executive office and suddenly it’s preferred to spend like there is no tomorrow.

          Reply
          1. PeakTrader

            So, it was just a coincidence Reagan taking a hard line stance against the Soviets, including the military build-up, which they couldn’t compete with, and the Soviet collapsing? You need to tear down your wall and get real, at least look at Star Wars.

            The long-boom began with Reaganomics. Democrats admitted they had “spending fatigue” after the 2009-11 spending special under Obama-Pelosi-Reid. Have the Republicans went on a spending spree in 2017?

          2. Noneconomist

            Reagan ripped Carter’s deficit spending but proceeded to compile debt at historic rates. The largest Reagan deficit was 4X larger than Carter’s.
            But the, as Cheney so bitingly reputed his Treasury Secretary, “…Reagan proved deficits don’t matter.”

          3. PeakTrader

            Carter was a fiscal conservative. Reagan implemented Keynesian economics.

            Reagan cut taxes and increased defense spending. When the strong expansion was underway, he raised taxes and slowed defense spending (for example, he never reached the goal of a 600 ship navy).

        2. Noneconomist

          Working with virtually the same Congresses, Reagan made big spender Jimmy Carter look like Ebenezer Scrooge’s illegimate free spending son. That near $2 Trillion borrowed under Reagan would be nearing $4.5 Trilllion in today’s dollars.
          Let’s be honest here: while the buck stopped at most President’s desks, it flew past those of Reagan and both Bushes.

          Reply
          1. PeakTrader

            Yes, let’s be honest. Reagan never got the spending cuts promised by the Tip O’Neil House.

    2. Bruce Hall

      I find the question needs reframing from “Is the Trump Dollar Rally Over?” to “Why was there a Trump rally and why are Trump’s opponents elated that they have been able to undermine the rally?”

      https://finance.yahoo.com/quote/%5EGSPC?p=^GSPC (select one year) With the expectation that Hillary Clinton would win and her policies implemented, the market dove at the beginning of November and then rebounded sharply after her loss.

      https://fred.stlouisfed.org/series/DTWEXM Similarly, the U.S. dollar was in a downward holding pattern with the expectation of a Hillary Clinton win and then returned to 4th quarter 2015 levels after Trump’s win.

      So, it would seem that the markets were saying that a Clinton win would be disastrous and a Trump win was a big relief. The Clinton apologists and anti-Trump forces are now gloating that they are undermining Trump’s ability to deliver on the policies that the marketplace deemed positive.

      But somehow, that’s Trump’s fault.

      Reply
      1. Menzie Chinn Post author

        Bruce Hall: I won’t speak (more properly write) for others, but I did not view with glee the appreciation of the dollar in the wake of the election. In point of fact, I have been consistent in voicing my concerns over an excessively strengthened dollar to the extent it hits the tradables sector, and tends to offset the expansionary effects emanating from macro policy.

        I view the collapse of the counterproductive fiscal policy propounded by President Trump as a good thing to the extent that it does not make sense to drastically expand the fiscal impulse when the economy is arguably close to full employment.

        If expansionary fiscal policy had been ratcheted back because of a wise and reasoned analysis of the President, I would be equally happy.
        So…don’t be so touchy. The President’s agenda collapsing because of sheer incompetence, and mendacity of the highest order, is only a side aspect of this episode.

        Reply
        1. Bruce Hall

          There seems to be some disconnect between the 2% or so GDP growth rate under the Obama administration and the “recovery” policies that should have resulting in significantly higher rates. Now, I understand that Trump’s style is abrasive and confrontational, but that really is a sideshow issue with regard to economic policies.

          If we are indeed at “full employment”, then everyone should be perfectly satisfied with their lot in life. On the other hand, perhaps the type of employment is the issue rather than the fact that there is employment. https://fred.stlouisfed.org/series/MEHOINUSA672N

          It may well be that we must do what we’ve been doing because we can’t do any better with a different approach. That would be unfortunate. I’d like to believe that pro-business policies would raise the water level for everyone, but you may be right that we have reached our limit and Trump’s pushing will simply pop the balloon.

          Reply
          1. Menzie Chinn Post author

            Bruce Hall: I use the term “full employment” in the sense that Friedman used it, the non-accelerating inflation rate of unemployment (NAIRU), not at a Pareto optimal Eden. After reading this blog for years, I think you would understand that NAIRU is quite a separate point from folks being “happy”.

        2. PeakTrader

          Menzie Chinn, San Francisco Fed President Williams said the country is at full employment. Yet, “Williams and other Fed officials have said there’s not much more the central bank can do to boost growth. It’s up to Congress, Trump, and businesses, to “unshackle the economy” by finding ways to get more people into the workforce and increase productivity.”

          Last year, real growth expanded only 1.6% and last quarter, it was even slower where per capita real GDP shrunk. In the late ’90s, we moved beyond full employment where people not in the workforce, including bag ladies and guys sleeping in parks, joined the workforce.

          Reply
          1. Menzie Chinn Post author

            Peak Trader: One can believe that monetary policy has reached its limit, and yet also believe that fiscal policy per se is not the way to go — measures to increase the human and physical (private and public) capital stock, increase the participation rate, might boost the natural level of output (also called potential GDP). These measures might have fiscal implications, but might be implemented in a revenue neutral way so that the aggregate demand implications are relatively small.

  2. Emery

    I still look back at Trump’s nomination and election and ask the basic question – How come the American people couldn’t see that this man is totally unsuitable to be President? Staggering.

    Reply
    1. PeakTrader

      Trump is not totally unsuitable. He’s a leader, built and managed a multi-billion dollar corporation, identified the real problems, and connected with the American people, who were fed up with Washington.

      Reply
      1. Emery

        Trump has shown himself to be deeply incurious about public affairs and foreign relations and thus ignorant of both, incapable of absorbing criticism without tantrums in the most criticized office in the world, incapable of delegation to subordinates due to trust issues, and incapable of forming a plan of any complexity. You can get away with that when your business is largely one of self-promotion and real estate deals with a small staff. As a President he is totally out of his depth.

        Reply
    2. baffling

      In our defense, over half the country saw trump for trump. the rest? see peaktrader as an example.

      Reply
      1. PeakTrader

        It’s obvious Trump is Trump and he won anyway. You didn’t see Hillary for Hillary, although it wasn’t as obvious. See Baffling for an example.

        Reply
        1. baffling

          Peak, the best you could come up with is a “I know you are but what am I” response? Sad, really.

          Reply
    3. Steven Kopits

      A certain segment of the population sees Trump in their own likeness, a blue collar billionaire, as I’ve heard in described. It’s about affiliation, not policy.

      Personally, I view it as a peasant revolt, an uprising of the ‘deplorables’ against the coastal elites. Historically, peasants uprisings have been suppressed about 90% of the time in the last 500 years. It will be no different this time around–at least wrt Trump.

      https://en.wikipedia.org/wiki/List_of_peasant_revolts

      Reply
      1. PeakTrader

        It’s nothing more than a political revolt. The Democrats and media against Trump and the Republicans.

        There’s lots of speculation and conspiracy theories treated as facts by the media and Democrats. There’s no proof of a crime, particularly one that justifies impeachment.

        Reply
      2. Emery

        Trump has delivered optimism to a group of people that were pessimistic for the past eight years. Time will tell if their optimism is any more justified than their pessimism was.

        Reply
    4. randomworker

      They saw it. They didn’t care. If I can quote from a commenter (DXM) on another blog I frequent:

      They don’t care because by electing Trump “…the spell of the Kenyan Muslim usurper, and his designated successor, the castrating lesbian bitch-goddess, will finally be broken.”

      It’s hard to believe, but I still read on economic and libertarian blogs wild tales about Clinton and satanic rituals. It’s completely crazy.

      Reply
  3. joseph

    Steven Kopits: “Personally, I view it as a peasant revolt.”

    Depends on how you define “peasant.” If you define peasants as white, male, upper-middle class, primarily evangelical Republicans, then you may be right.

    Election results show that Trump voters were decidedly upper middle class with median income of $70,000.

    Clinton beat Trump by 11 points with households below the median of $50,000 a year. So they aren’t the peasants.

    Clinton beat Trump by 80 points among African-Americans and 35 points among Hispanics. So they aren’t the peasants.

    Clinton beat Trump by 12 points among women. So they aren’t the peasants.

    Clinton lost among white evangelicals by 80 points. Note that one in four Americans consider themselves evangelical. Now you are getting somewhere.

    So, yes, if you define peasants as white, male, upper middle-class, primarily evangelical Republicans, you could call it a peasant revolt. But that is a rather peculiar definition.

    Reply
    1. efcdons

      That’s true because the average republican voter is a white, upper middle-class male so any republican President will get the majority of their votes from people like that. The trump “phenomenon” was traditional or even former white Democratic party voters moving to trump in just barely enough numbers in key states for trump to win.

      I’m still not sure about the reasons. I think it’s a combination of racial grievance but also frustration at what seems to be a stagnant or even backward moving economy in their particular rural/exurban Midwestern areas. I hope it’s more of the latter since the Democratic party can’t out racist the gop. The gop are masters at nurturing racial grievances out of all proportion to the actual problem (if it even really exists).

      It wasn’t a peasant revolt because as you say, the peasants weren’t by themselves what brought trump into power. But took some of the peasantry voting for their masters to get trump the win.

      Reply
      1. PeakTrader

        Those white folks were tired of being called names, including racists, by a party with a long history of racism.

        Reply
  4. spencer

    I look at the trade weighted dollar as a function of the spread between US bond yields and foreign ( average of British, German and Japan) bond yields. As US rates rose this winter the spread widened and the dollar rose. Recently, the spread narrowed and the dollar peaked.

    This very simple approach works about two-thirds of the time, which is pretty good for dollar analysis.

    Reply
  5. joseph

    PeakTrader: “Those white folks were tired of being called names, including racists.”

    I don’t doubt for a minute that white racists are tired of being called racists.

    Part of the appeal of Trump is he finally gave permission to the neo-Nazis, white supremacists and racists to let fly with all the hate speech they can muster without the restraints of being politically correct. Trump was very liberating for them and they love him for it.

    Reply
  6. Anonymous

    How well did you cover the rally as it happened? It seems like you cherrypick things to try to make political slams rather than just curious and objective analysis.

    Reply
      1. Anonymous

        Exactly. That article did not say Trump rally happening. Now title is Trump rally over. Very little remarks about the rise in equities either. Pattern of your posts is to always select what you can to make republicans look bad and democrats good. You’re political rather than analytical.

        Reply
        1. Menzie Chinn Post author

          Anonymous: if the basis for your complaint is the absence of the word “rally”, then that is a truly pathetic basis for accusing a writer of bias. Maybe *the* most pathetic I ever heard.

          Reply
  7. Neil

    Growth expectations for the US have not really changed since the election, at least according to Bloomberg. Sure the USD has reversed post-election gains but real yields haven’t. So, it is an open question just how much fiscal tailwind investors expect. On the other hand, expectations of global growth have recovered somewhat, especially in Europe. Perhaps the USD is selling off has more to do with growth prospects improving outside the US? Just a thought.

    Reply

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