Jerome “Jay” Powell must be having a tough time sleeping these days.
Big rallies in the stock market… only to be followed by huge drops.
All this volatility must be stressing him out!
See, when the market does well, Donald Trump takes the credit.
He shouts about it on Twitter.
Calls press conferences to boast about it…
To tell his people (and the rest of the world) how he’s making America great again.
But when the market falls, hapless old Jay Powell, head of the Fed, gets it in the neck from the President.
How the market scores Trump’s performance
After all, one of the Fed’s priorities is to keep markets running smoothly.
Well, at least in Donald Trump’s eyes it is.
(The Fed’s official ‘dual’ remit is to maximize employment and target 2 percent inflation… and let the markets do what they do…)
See, a strong stock market is a visible sign that Trump’s policies and leadership are working.
He needs that.
So that people keep voting for him.
A weak stock market says investors aren’t buying into Trump’s ‘miracle economy’ story.
If they think the President’s policies aren’t working… he’ll lose votes.
And Donald Trump is desperate to stay in power.
He’s had a taste of being the most powerful man in the world… and he likes it.
There’s no way he’s going to give it up if he can help it.
Trump’s big regret
So, when markets fall, Trump reacts… and takes it out on the Fed.
He sends out Tweets attacking Fed policy, like this one in June:
He badmouths Powell in the press.
This from USA Today in October, ahead of the midterm elections:
“President Donald Trump blamed the central bank for a stock market selloff Wednesday that was among the worst of his presidency.
“The Fed has gone crazy,” Trump told reporters in Pennsylvania, where he is holding a campaign rally.
“No, I think the Fed is making a mistake,” Trump said. “They’re so tight.”
And just last week, in the wake of the 2,044-point sell-off in the Dow from 8th to 23rd November, Trump told The Washington Post…
“that rising interest rates and other Fed policies were damaging the economy – as evidenced by GM’s announcement this week that it was laying off 15 per cent of its workforce – though he insisted that he is not worried about a recession…”
Trump’s even gone as far as suggesting he regrets appointing Powell.
“So far, I’m not even a little bit happy with my selection of Jay. Not even a little bit. And I’m not blaming anybody, but I’m just telling you I think that the Fed is way off-base with what they’re doing.”
Untouchable? Maybe not…
So yes, Powell must have restless nights…
Like a marketing manager who’s delivered an ineffective campaign that’s come nowhere near achieving sales targets…
… with a strategy that’s at odds with his company’s vision.
Lying in bed at night… dreading work the next day… just in case it’s his last.
There is an assumption that the President has no power to fire the Chair of the Federal Reserve.
Ellen Zentner of Morgan Stanley explains:
“The President can nominate a chair but once the chair is confirmed, the president is out of it and the only way you can remove a chair from office is literally if they broke the law. Congress will have to find a cause to remove them from office through a vote and a procedure…”
Jay should be safe then, right?
But then again, he knows something we all know…
Rules are there to be broken
That Donald Trump doesn’t necessarily pay attention to the rules… if they are inconvenient for him.
An example is this tweet, from August 2017, just seven months after taking office:
Seems innocuous, right?
Bog-standard Trump bragging.
The problem is, he wasn’t allowed to do it – not at that time of day.
Turns out that by sending that tweet within an hour of the jobs report being published, he violated an obscure US federal rule.
According to The Independent, this rule:
“[prevents] all executive branch employees, which includes the President, from publicly commenting on important economic indicators before the one-hour embargo is reached.”
OK, it’s a small thing.
But it does show a disregard for the rule of law.
Then there’s Trump’s run-in with the courts in May this year for blocking a bunch of critics from his Twitter account.
The Register has the story:
“District judge Naomi Buchwald ruled that Trump’s blocking of critics from his Twitter account @realDonaldTrump is illegal since it is “properly characterized as a designated public forum” given his public position… As such, he is breaking the First Amendment on free speech by preventing people from being able to see his posts…”
Again, it seems trivial enough.
But at the end of the day, it’s the President breaking the US Constitution.
Trump to FBI chief: You’re fired!
What else would he do to stamp out something that’s causing him problems?
How about firing the head of the intelligence service?
Done that!
Within months of Trump taking office, FBI Director, James Comey, spoke to a Senate committee about “his agency’s investigation into Russian meddling in the US presidential election – and possible Russian ties to the Trump campaign.”
A week later, Comey had been fired by Trump.
The point is, Trump is not afraid to break precedent to get what he wants… or get rid of what he doesn’t want.
Does that mean the Head of the Fed is at risk?
Patrick W. Watson at Mauldin Economics believes so…
“The Federal Reserve Act doesn’t explicitly give the U.S. president power to fire the Fed board members. But section 10 has a mysterious little phrase indicating it’s at least possible.”
Here’s the extract from the Act:
“…thereafter each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.”
Given Trump’s willingness to ‘break the rules’ to get what he wants, Watson believes he could find a way to mould the Fed to his advantage…
“So, if he wants to remove Jerome Powell, I think he will do it. No one can stop him. Would Congress object? Probably, but its members have yet to impose any meaningful constraints on Trump. All he has to do is dream up some “cause” and most will fall in line.”
It might seem unlikely. But then a lot of stuff that has happened under Trump’s presidency seemed unlikely.
It’s up to the markets
I guess a lot will depend on how markets behave.
If US stocks stay within the clear (albeit wide) range they’ve been in lately and then break out to the upside, Jay will be fine…
And he’ll be happy to see Trump take the glory if stocks hit new highs.
But if the bottom of that range doesn’t hold… and the Dow breaks down to new lows, he could be facing sweaty, sleepless nights.
Because his ‘boss’ is going to be furious.
Right now, it looks like stocks are being driven largely by the US/China trade war narrative.
Stocks rallied hard over the weekend and into Monday when the world thought the Trump/Xi handshake/ceasefire could lead to resolution.
Then they dumped when “Tariff Man” tweeted that he’d revert to tariffs if no deal could be reached with China.
But with the G20 meeting out of the way, focus will now be on old sleep-deprived Jay Powell.
The Fed’s next policy meeting takes place on December 18th/19th.
The market already expects a 25-basis point rate hike. That’s in the script the Fed has put out over the past few months.
Expect more BIG market moves ahead
But given how skittish markets are right now, there could be more violent moves ahead and following that decision – even more so if Powell deviates from his plans.
In this kind of febrile environment, it won’t take much bad news to trigger a big stock market collapse… or good news to spark a delirious market rally.
A 568-point “flash crash” in the Dow Jones futures market at around 11pm UK time last night led to intervention by the exchange, as Business Insider reports:
“… CME Group intervened to manage the volatile trading activity, putting a stop to algorithms closing orders.
“The price action caused several CME “Velocity Logic” events, which are triggers to halt futures trading when price movements move too far, or too fast in a given direction.
“CME announced this morning that it intervened to prevent steeper falls in US equity futures.”
The market recovered a large chunk of that fall within minutes.
But the US futures markets are still looking weak… and the panic has spread to Asian and European markets.
As I write this, the FTSE’s down 140 points (-2%)… the German DAX is 250-points (-2.2%) in the red… Italy, France, Spain… all falling.
That’s not to say markets can’t rally from here – they could.
When US markets reopen after being closed yesterday for George Bush’s funeral, they could easily leap on any positive snippet of news Trump or anyone else throws at them.
But they could also fall hard to test the bottom of that range I mentioned on the chart above at around 24,140 on the Dow.
That’s only about 2% below where the futures are trading as I write this.
And if that 24,140 level on the Dow or 2,600 on the S&P 500 doesn’t hold, we can expect more panic selling… and the bear market case becomes a lot clearer.
Interestingly, the price of gold is making higher highs and higher lows – a sign that the uptrend is gathering steam.
That makes sense. Capital is seeking a place to take cover as uncertainty over trade wars, the Fed and the future of the global economy rocks the regular financial markets.
It’s a theme that could well get stronger in the months ahead – rising gold/falling stock markets.
Think about positioning yourself accordingly.