Trump Blinked:

Donald Trump  blinked with regard to China. Like the Fed blinked, as discussed below, Trump just bought some time before either full capitulation or a full trade war with China. 

One can wonder why Trump blinked. After all, didn't he have the advantage in future tariffs? 

Truth is, the USA has painted itself into a corner. China just has to wait that painting out. The ancient civilization has plenty of time. The joint statement issued by the Trilateral Commission really is illegal. It is backed by the USA, Japan and Europe. But that doesn't matter. 

Clearly, file industrial spying is illegal, transfers of technology between industries and China for the privilege of trading in China is not illegal. China can rope-a-dope, as is North Korea on getting rid of its nukes. The Americans can negotiate and fool the markets into thinking progress is being made, on an issue with China where it has no legal standing. But that changes nothing. 

Meanwhile, China can continue to consolidate and business know this settlement with Xi on December 1 is not permanent. Either businesses will continue to withhold investment, or they will set up supply chains without the US involvement.  

Fed Blinked:

Fed leaders have said repeatedly that they would exceed the natural rate of interest in raising of interest rates. But now the natural rate appears to be lower. Chairman Powell says that data drove this estimate of lowering of the natural rate. In the face of withering criticism from Donald Trump, the natural rate, which is an estimated rate, suddenly lowered. 

I don't think one can fault the Fed for watching the data. Wages are certainly not exploding in any meaningful way, but are a little hot, while credit spreads may be exploding. But Powell gave mixed information in the question and answer period after his speech. He said that something will come to knock down the economy. But he also said that Australia has not had a downturn for 27 years.

So, we are back to the Yellen efforts to stop a downturn. She wanted inflation to run a little hot, remember? And I think, while it has run a little hot, wage and compensation as a percentage of GDP is still a dismal chart. We do await the 2018 numbers of course:

But, Mish Shedlock was less than impressed. He said that the Fed is allowing a massive stock market bubble and that the Fed should do something. He said:

The Fed blew major bubbles in 2000, 2007, and again now.

• Greenspan failed to recognize the dotcom bubble. Instead, he embraced a "productivity miracle".

• Bernanke repeatedly denied there was a housing bubble.

• Yellen and Powell both failed to spot obvious stock market bubbles.

Mish is saying that the Fed really will do everything to protect the stock market. I happen to agree. The Fed will do everything possible to protect the stock market because of the way things are structured. This will not necessarily help home buying. Wall Street makes money off of rentals these days. It doesn't care about a bunch of mortgages to main street, anymore. I said back in 2017:

So, the Fed will likely kill housing to protect stocks. Rents are now going up in open access cities as well as high priced closed access cities. From Cincinnati to NW Arkansas, rents are soaring as housing becomes a commodity everywhere. This is a cash cow for Wall Street. The Fed will ride this, most likely, and try to save the stock market.
It seems like pure insanity, because at some point, the consumer economy will break with these policies in place. But Wall Street has always created wealth off the backs of labor.
Will stocks continue to climb as long as there is ample liquidity, a strong derivatives market, and a Fed seemingly willing to help the financials regardless of what else happens? It could happen that way because some say derivatives are now written based upon a strong stock market. The Fed knows that like water rolling downhill, interest rates will decline on the long end if it does nothing. 

Powell knows this is is a casino game. He is not wired, IMO, to believe that the USA will have that 27th year of economic growth. But he has a choice, take it down now, or take it down in a more painful environment later. I think he is buying time. Kevin O'Leary said as much on CNBC.

But Mark Zandi said in the same CNBC discussion, on 11/28, that growth will push unemployment down to 3 percent next year, so that eventually the Fed will have to act. Wilbur Ross says we already do not have enough workers in America. Too many potential workers are staying home. This is a massive threat to growth.

But there is more to Fed data than this. New home sales may assert more importance over time. And commodity prices may also do the same. Right now, oil is too low for some producers and producing nations. The Fed really has a whack a mole job going forward.

But Tim Duy says what a lot of people now know. The Fed sometimes lies. John Williams lied when he said the R-Star is no longer important. It is important. That natural rate is still key to Fed behavior. Nothing has changed, only the estimate of it.

Duy said:

I do find it interesting that Powell & Co. remain tied to the current range of neutral estimates after New York Federal Reserve President John Williams tried to downplay the whole r-star story a couple of months ago. Williams left the impression that the r-star estimates weren’t all that important. But they are.

and:

Bottom Line: Where does this leave us? Waiting for more data. Assuming inflation remains under control, I think the Fed will pause when they see that economic momentum has faded sufficiently to stabilize the unemployment rate. More on that later.

Duy implies that the reflation of the economy is waning. At least he sees economic momentum slowing going forward. And this may or may not be exacerbated by the trade successes or failures of Donald Trump. 

As the reflation wanes, you have to wonder what will replace it. The tax cuts went to the wealthy people and companies primarily. So, the reflation will be dependent on labor, which is not rolling in higher wages. There is some higher wage growth, but historically, it is very low. Zandi and others can't see a drop of inflation in wages. 

Fed Put:

Scott Sumner said on his blog that the Fed should provide a put. He said that it should not be for stocks, but should be for asset prices. I think that is right. The Fed could have replaced the commercial paper destruction in the Great Recession that led to house prices declining. Market monetarists like Sumner are pretty clear that the Fed tightened in the Great Recession. 

But the Fed seems more preoccupied with the stock markets rather than the dying housing market, and that may be the wrong focus.

The question Sumner had was whether the NGDP was going to slow in 2019 because there is not slowing yet. Powell blinked, so as to give the Fed more time. In that sense Powell was like Trump, just buying time until policy decisions have to go forward. Unlike Trump, Powell will drive policy in one direction. Trump may fear driving policy to a worldwide trade war. He should fear.

The Fed will exceed the natural rate of interest, but that natural rate is lower, meaning maybe fewer hikes in rates in 2019. 

End Game:

The End Game is that China will have more time to unite Asia against the United States now that Trump has blinked. It should take that time seriously, because Donald Trump cannot be trusted. He could change policy between bathroom breaks. 

The End Game is that the Fed will have to raise rates as salaries will eventually explode, not yet, but eventually, and the stock market will look dangerously high in the face of the world slowing. The USA is the most independent nation in the world, economically. So, it can still have a white hot  jobs market while the world diminishes and multinational stocks are undermined.

But the real End Game is that it is inevitable that Asia wins and Europe and the USA lose the economic war, long term, if the Trilateral Policy prevails. The more that Europe and the USA, and to a lesser degree, Japan, refuse to fold into world trade, Asia style, the more they will lose. 

The Trilateral requirements are really anti prosperity, and if China doesn't want an industry, what is it to the world? America excludes industries all the time. Europe does the same. The hypocritical world view of an aging West is pathetic, to be honest.

And there is nothing that Donald Trump can really do about Asian economic supremacy short of war. The Trilateral nations complain about lack of worker opportunity, meanwhile everyone who wants to work apparently is working in the USA and the Fed may be insuring that goal is reached by blinking.  

Stagflation is the economy slowing while inflation is rising. Trump may have put off stagflation for a time. The inflation side of tariffs may be minimized, for now. But steel tariffs are still in place in the USA, and that gives China and Asia a huge advantage, going forward. After all, the Australian expansion of 27 years is due to its relationship with China! Long term investors may want to book profits now.