Steve my friend, you’re entering a world of pain.
I don’t know if Treasury Secretary (and man who probably wonders why he took this job) Steve Mnuchin realized it or not, but he has stepped into a whole world of shit in Davos this week.
As one particularly eloquent blogger put it earlier this year, “whoever comes within Trump’s event horizon becomes afflicted with the same cognitive incapacity as Trump himself [and] now, even former bankers, Cohn and Mnuchin who, one can argue, may be ethically challenged, but are nominally still highly rational, are not making any sense either.”
Walking into a globalist gathering and immediately talking about how a weaker dollar is good for U.S. trade is the rough equivalent of showing up to a women’s march waving a “grab ’em by the pussy” sign. And that’s exactly what Mnuchin did on Wednesday.
Mnuchin’s weak dollar comments came less than two days after Trump slapped tariffs on foreign washing machines and solar equipment. The timing is obviously not a coincidence. Taken together, this would appear to mean that the administration is getting serious about Trump’s campaign trail trade rhetoric – and at just the wrong time. NAFTA negotiations are ongoing and according to Reuters (out this morning), the U.S. “hasn’t moved an inch“. Rumors are circulating that China is considering whether they might be able to hit the U.S. where it hurts in retaliation for any aggressive trade measures by paring purchases of U.S. Treasurys at a time when supply is set to rise (think: the tax bill ballooning the deficit) and the Fed is winding down its balance sheet. Additionally, the dollar is already coming off its worst year since 2003 and is sitting at its lowest level since 2014.
Meanwhile, the ECB and the BoJ are setting up to try and normalize policy as the European and Japanese economies (respectively) heat up and as Draghi and Kuroda become cautiously more optimistic about their inflation targets (obviously Japan is some ways off, but it looks like the deflationary mindset is turning which is a step in the right direction).
Given the backdrop, just about the last thing you want to do right now if you do in fact want the world to begrudgingly accept the whole “America first” narrative without rebelling in unison is do something outlandish like show up in Davos and say what’s either best left unsaid or else is better said behind closed doors.
Not only does that make you look like an inflexible negotiating partner in the eyes of the Chinese, it also adds another layer of contentiousness to the NAFTA situation.
On top of that, it makes the ECB and the BoJ nervous about what’s going to happen to the euro and the yen if they try to catch up with the Fed in terms of scaling back accommodation. Now, any hawkish tilt from Draghi or Kuroda will supercharge the euro and the yen and on Thursday, Mario Draghi actually “went there”, calling out Mnuchin in the post-ECB-meeting press conference. You can read the full account of that here, but suffice to say this was the quote:
The exchange rate has moved in part because of endogenous reasons [but] in part due to exogenous reasons that have to do with communication.
But not by the ECB, by someone else.
This someone else’s communication doesn’t comply with the agreed terms of references.
That is all kinds of dark and foreboding.
In addition to Draghi’s warning, Mnuchin was also tacitly chided by Ray Dalio in a LinkedIn post that found the zen master literally imploring readers to “make sure that you understand what having currency weakness means.” What it amounts to, Ray reminds you, “is a hidden tax on people who are holding dollar-denominated assets and a benefit to those who have dollar-denominated liabilities.
The ramifications of that sound good in a kind of myopic, Trump-ian sense, but if you read Ray’s post, the implication is that this isn’t what’s needed right now and further, it should be considered in the context of a shift that’s already taking place.
Ultimately, Mnuchin looks to have become the latest member of the administration to commit harakiri in the service of furthering an agenda that in the final analysis, is the brainchild of Steve Bannon and a reality TV show host/WWE hall of fame inductee.
This isn’t great for Steve and unlike Donald Trump, he’s actually going to have to hear about how not great it is from a veritable laundry list of powerful people including, apparently, none other than the most powerful central banker on the planet in Mario Draghi.
So Steve, “you’re entering a world of pain.”