Trump vs Powell

It’s fortunate for us traders that at any given time, there are no more than three themes driving the major global macro assets. This allows us to focus our attention on how those three themes are evolving, while keeping a careful eye on potential themes that may come to the foreground. Today, I believe the three themes driving the market are Trump’s tariff threats, US data, and fear of currency debasement.

Tariffs

Paolo Macro made a good point about Trump having more political capital to spend now that the OBBB has been passed and the conflict between Israel and Iran has faded into the background. Stocks are at the highs, and his bloodlust for tariffs and beating up on his trade partners is bubbling up again. This time around the markets are reacting with a shrug and putting their faith in TACO.

Positive July seasonality, tame inflation numbers, and a belief in TACO could propel risk assets higher for the rest of July. However, strong equity markets may embolden Trump into thinking he can get away with bigger tariffs. The Trump of recent weeks is a very different Trump from May, when he and Bessent seemed to be desperate to soothe the markets. I will be tightening my stops going into the August 1 tariff deadline, as the markets may experience an “Oh shit!” moment when the reality of tariffs hit.

US Data

US hard data has been directionally weak, but not weak enough to overcome the Fed’s fear of inflation and alter the Fed’s cutting path meaningfully. US rates have been choppy and directionless. Typically, a Goldilocks environment is characterized by an improvement in the price and supply of liquidity, but this has not been the case over recent months. Instead, the bullish Goldilocks price action has been driven by the fear of currency debasement, which is what brings me to the next driver…

Fear of currency debasement

Trump and Bessent are using a three-pronged approach to forcibly ease monetary policy, and if they succeed, it will be the most significant attack on Fed independence since Arthur Burns. The market is rightfully worried about this, and is piling into speculative assets and hard currencies to express this fear.

First, Trump and Bessent are considering a similar move to what Yellen did back in 2023 - reducing note and coupon issuance and increasing the issuance of Tbills. This would narrow the term premium and bring long term yields closer in line with expectations of monetary policy. This makes the QRA announcement on July 30 a significant one for the markets.

Second, Trump is publicly searching for a new Fed chair who will be dovish and loyal to him. He may announce his pick earlier than usual, and use the succeeding Fed chair to provide forward guidance on where policy rates are going after Powell steps down next spring. As Powell’s position as the chair nears its end, he will increasingly be seen as a lame duck, while the incoming “shadow chair” will have increasing sway on the markets.

Finally, Trump is eroding Powell’s credibility in the public eye - publicly lambasting him for unnecessarily keeping rates on hold and attacking him over the renovation of the Federal Reserve building.

Washington Post: Fed watchers say the current criticism reflects a thinly veiled effort to add to the pressure campaign against the Fed. It could also mark the laying of new scaffolding to create a legal justification for Powell’s removal, they said. The Supreme Court signaled recently that Trump couldn’t fire Powell because of a policy dispute, such as over interest rates, but only for cause, generally interpreted to mean some form of malfeasance or dereliction of duty.

Trump is positioning to get Powell fired, or at the very least, harm his credibility so much that he has to step off the board completely after his position as chair expires. By reducing the supply of notes and coupons and replacing Powell with a dovish Fed chair, Trump has a credible plan to ease the price of liquidity on both the long and short end. The markets are bracing for this scenario and bidding up speculative assets like AI stocks, non-profitable tech, and crypto.

In the next section for paid subscribers, I’ll lay out my views on the American exodus trade (EUR/USD, long end Treasuries, and gold), BTC, and equities.