How could one not be appalled by what occurred in Charlottesville, Virginia, with the failure of our President to take a firm stand against the bigotry and hatred from the white supremacists, Neo Nazis and Klansmen.
His lack of a firm response led to corporate executives leaving his economic councils, which he subsequently disbanded, and outcry from all factions against him and his administration.
His ability to govern is in question including his ability to pass his pro-growth, pro-business economic agenda as we wondered if instrumental members of his cabinet would resign. Thankfully, the week ended with Trump firing Stephen Bannon who fought for the ultra conservatives and was the architect of America First at the exclusion of our long- term relationships with countries abroad. He was the bull in the china shop and fought with the more moderate in the White House inner circle including Gary Cohn, Steve Mnchin, Trump's daughter and son-in law.
Will Bannon's firing lead to a reset in the administration? I wrote weeks ago that the President had to fire both Priebus and Bannon who were obstructionists and hurt Trump's administration ability to pass his agenda. Clearly White House Chief of Staff John Kelly is in firm control and real change is occurring within the Trump inner circle and administration. Both Carl Icahn and Ken Langone, close friends and business confidents of Trump, said on Friday that Trump would regroup and come back from this setback stronger and with purpose. Let's hope so!
While the financial markets rallied in the beginning of the week relieved that the Northern Korean crisis had eased, Trump's ill placed and absurd comments about the riots in Charlottesville led to a total lack of confidence in Trump and his administration's ability to govern. Is the Trump agenda dead? I mentioned a few weeks ago that the Trump rally was totally out of the market. Could Trump now actually be a negative for the financial markets going forward or can he come back as he has done so many times before? While the jury is out, I have to believe that the dismissal of Priebus and Bannon; the elevation of Kelly as Chief of Staff; and the increased influence of Cohn will stabilize the administration and put it back on track in the fall. Success or failure now rests in Trump's hands, as he has no one to blame now but himself.
On another note, I want to say how upset I was to see two terrorist attacks in Spain last week. Our sympathies go out to the families and people of Spain. We just can't let the terrorists alter our way of life.
Global economic data continued on the strong side last week without on any inflationary pressures:
1. The U.S economic landscape for the foreseeable future will be bolstered by strong consumer demand which still accounts for over 60% of GNP: consumer sentiment increased to 97.6 in August, a sixth month high; consumer expectations rose to 89.0 from 80.5 the previous month; and retail sales rose 0.6% in July, the biggest monthly gain since December. A weak dollar is also boosting our domestic economy. The dollar index is down about 8% since the beginning of the year with larger declines against the euro, 11%, and the Mexican peso,14%. Exports rose 7% in June from a year ago compared with a 9% decline from 2014-1016. A weak dollar is not only benefitting domestic manufacturers but it is also boosting multinational earnings as reported in dollars. Don't forget the benefit to our economy from so many foreign companies building new plants here too.
The Fed minutes came out last week, which reinforced our belief that the Fed will be slow raising rates until inflation begins to move back to their 2% target. The truth remains that the Fed has been wrong that low inflation and low energy prices were only "transitory." We continue to believe that the Fed will begin to reduce its portfolio in the fall but very slowly; future rate hikes are on hold until inflation picks up despite falling unemployment and the Fed will stay one step behind permitting the economy to pick up some real momentum before starting to take the punchbowl away later next year. Not a bad picture for financial assets.
2. The flip side of a weak dollar has been a strong Euro. The ECB minutes came out last week and indicated their concern that if they began to reduce their stimulus then the Euro could appreciate even further which could impede economic growth and reduce inflationary pressures even more than is happening even now. Inflation rose at only a 1.3% annualized rate in July, which is well below their forecast of 1.5% for the year. It is clear that the ECB will maintain its entire monetary stimulus for the foreseeable future despite economic growth exceeding prior forecasts. Here again, the ECB will stay one step behind. Germany has the most to lose from a strengthening Euro. It was no surprise to us that their June economic performance came in below forecasts.