There was much to like and dislike in President Donald Trump’s Address to a Joint Session of Congress. Click on the link for a complete transcript. Here are the good, bad, and ugly highlights.

Trump: We have undertaken a historic effort to massively reduce job‑crushing regulations, creating a deregulation task force inside of every Government agency; imposing a new rule which mandates that for every 1 new regulation, 2 old regulations must be eliminated.
Mish: Excellent idea

Trump: We have withdrawn the United States from the job-killing Trans-Pacific Partnership.
Mish: That is the right idea for the wrong reason. TTP was anything but a free trade agreement and it was horribly constructed.

Trump: We will stop the drugs from pouring into our country and poisoning our youth.
Mish: The war on drugs is a miserable failure. We should halt it immediately.

Trump: Our obligation is to serve, protect, and defend the citizens of the United States.
Mish: Correct. And waging war in Syria, Iraq, Libya, and Vietnam had nothing to do with any of those obligations.

Trump: We cannot allow a beachhead of terrorism to form inside America — we cannot allow our Nation to become a sanctuary for extremists.
Mish: Fair enough. But the best way to stop terrorism is to not start mindless wars. ISIS is a US creation.

Trump: Over 43 million people are now living in poverty, and over 43 million Americans are on food stamps. More than 1 in 5 people in their prime working years are not working. We have the worst financial recovery in 65 years. In the last 8 years, the past Administration has put on more new debt than nearly all other Presidents combined.
Mish: Those are the ugly truths. But Trump never placed the blame where it belongs: On the Fed, on Congressional overspending, on fractional reserve lending, and on the lack of a gold standard.

Trump: We’ve lost more than one-fourth of our manufacturing jobs since NAFTA was approved, and we’ve lost 60,000 factories since China joined the World Trade Organization in 2001.
Mish: NAFTA had nothing to do with the loss of manufacturing jobs. See links below for a detailed explanation.

Trump: Our trade deficit in goods with the world last year was nearly $800 billion dollars.
Mish: Correct. Blame Nixon taking the US off the gold standard, not NAFTA.

Trump: Overseas, we have inherited a series of tragic foreign policy disasters.
Mish: Correct. Don’t make them worse.

Trump: My economic team is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone. At the same time, we will provide massive tax relief for the middle class. Currently, when we ship products out of America, many other countries make us pay very high tariffs and taxes — but when foreign companies ship their products into America, we charge them almost nothing.
Mish: This is a strong hint at a border adjustment tax, and it’s a terrible idea. In contrast, simply cutting the corporate tax rate would be a good idea.

Trump: I am going to bring back millions of jobs.
Mish: No you won’t. Those manufacturing jobs are lost and gone forever.

Trump: Nations around the world, like Canada, Australia and many others — have a merit-based immigration system. It is a basic principle that those seeking to enter a country ought to be able to support themselves financially. Yet, in America, we do not enforce this rule, straining the very public resources that our poorest citizens rely upon. According to the National Academy of Sciences, our current immigration system costs America’s taxpayers many billions of dollars a year.
Mish: Agree. And free benefits are the problem.

Trump: America has spent approximately six trillion dollars in the Middle East, all this while our infrastructure at home is crumbling. With this six trillion dollars we could have rebuilt our country — twice. And maybe even three times if we had people who had the ability to negotiate.
Mish: Another ugly truth. So why don’t we stop the stupid wars and bring all of our troops home?

Trump: To launch our national rebuilding, I will be asking the Congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States — financed through both public and private capital — creating millions of new jobs. This effort will be guided by two core principles: Buy American, and Hire American.
Mish: How are we going to pay for this? I propose reduce military spending, bring all US troops home, scrap Davis-Bacon, kill all prevailing wage laws, and institute national right-to-work legislation.

Trump: Tonight, I am also calling on this Congress to repeal and replace Obamacare with reforms that expand choice, increase access, lower costs, and at the same time, provide better Healthcare.
Mish: Let’s see the details. Keeping it affordable while honoring pre-existing conditions will not be easy.

Trump: The time has come to give Americans the freedom to purchase health insurance across State lines.
Mish: Agree completely.

Trump: But our slow and burdensome approval process at the Food and Drug Administration keeps too many advances from reaching those in need.
Mish: Agree completely.

Trump: I am calling upon Members of both parties to pass an education bill that funds school choice for disadvantaged youth, including millions of African-American and Latino children. These families should be free to choose the public, private, charter, magnet, religious or home school that is right for them.
Mish: This will become another monstrous boondoggle if it passes.

Trump: We strongly support NATO, an alliance forged through the bonds of two World Wars that dethroned fascism, and a Cold War that defeated communism. But our partners must meet their financial obligations. And now, based on our very strong and frank discussions, they are beginning to do just that. We expect our partners, whether in NATO, in the Middle East, or the Pacific — to take a direct and meaningful role in both strategic and military operations, and pay their fair share of the cost.
Mish: What if they don’t?

Trump: Believe in yourselves. Believe in your future. And believe, once more, in America. Thank you, God bless you, and God Bless these United States.
Mish: All in all that was a good speech. Many will find more to like than dislike, but details are scant, and some of the dislikes are extremely distasteful.

Was Trump Preempted by the Fed?

Ahead of Trump’s speech, treasury yields soared and March rate hike odds more than doubled as noted in March Rate Hike Odds Surge to 80 Percent: New Standard for “Surprisingly Strong” Economy.

The short story is two Fed governors came out on Tuesday afternoon out of the blue singing the praises of a strong economy and a need to hike rates. William Dudley, head of the New York Federal Reserve, a typical dove, and John Williams, president of the San Francisco Fed were Tuesday’s dynamic duo.

They cited “surprisingly strong economic data”.

Data does not support the Fed’s message. GDP and housing stats were anemic.

What happened?

The most logical explanation is the Fed did not like Trump’s message and got a copy in advance. Alternatively, the Fed simply decided to take a stance against Trump’s expected message.

As supporting evidence for this possibility, please consider the New York Fed February 24 article Why the Proposed Border Tax Adjustment Is Unlikely to Promote U.S. Exports.

Consider imports first. The border tax adjustment, which only allows for a tax deduction on domestically produced inputs, will increase the effective price of foreign-produced inputs that U.S. firms will have to pay. So firms that rely on imported inputs and sell predominantly in the U.S. market will be worse off, as intended by the policy. The appreciation of the U.S. dollar will have only a small impact to offset these cost increases, because U.S. imports are predominantly invoiced in U.S. dollars and the pass-through from currency changes into U.S. import prices is quite low, with estimates at around 30 percent or lower.

Higher prices on imported inputs are likely to result in higher domestic prices by both importing and non-importing firms. We provide evidence of “strategic complementarities” for Belgian firms, showing that a 10 percent increase in competitor prices leads to a 5 percent increase in domestic prices of large firms. This channel is also likely to be present in other market economies, such as the United States. For example, if there is a tax on imported steel, local steel producers can also increase their prices and still stay competitive relative to foreign-produced inputs. This will further increase the costs for U.S. firms and consumers.

How will U.S. exporters fare? An unintended consequence of the proposed border tax is that it is likely to depress rather than stimulate exports. As export prices are also invoiced in U.S. dollars, the tax exemption on export revenue will mostly boost exporters’ profit margins rather than increase their export sales. And with the accompanying partial appreciation in the U.S. dollar, the prices of U.S. exports in foreign currencies will rise. This will provide incentives for our trading partners to switch their demand away from U.S.-produced goods, resulting in lower U.S. export sales.

The sudden notion there is “surprisingly strong economic data” just hours before Trump speaks does not wash.

The most logical explanation for these out of the blue announcements is the Fed decided to preempt Trump.

Had they done so after Trump’s speech, he would have accused them of playing politics.

Related Articles

  1. Disputing Trump’s NAFTA “Catastrophe” with Pictures: What’s the True Source of Trade Imbalances?
  2. Killing the Trade Golden Goose: Farmers Rattled by Trump’s NAFTA Rescinding Plans
  3. GDP Unexpectedly Undershoots Consensus: What’s Ahead?
  4. New Home Sales Rise Half of Economists’ Expectations, Supply Surges
  5. Trade Deficit Unexpectedly Widens: Exports Sink, Imports Up Sharply

Those who think rate hikes are necessarily bad for gold need to consider Rate Hike Cycles vs. the US Dollar: Rate Hikes Bad for Gold?

Mike “Mish” Shedlock