Is 2019 going to be awful for the US economy?

What to Worry About Today: PM May statement at 10:30 am ET today on the Brexit vote tomorrow.

It seems nuts to allow a vote on a proposal, the Withdrawal plan, when you know the vote will go against you. May is a smart cookie and must have some plan up her sleeve, right? But if there is a Plan B, nobody knows what it is. The Economist say a loss by only 50 votes is a good outcome. A loss by something like 100 would be shattering defeat, and over 100 Tories have already said they will vote against their own party's PM. "The result would be political chaos, perhaps leading to Mrs. May's ousting, a snap election or a second referendum."

We find it strange that some in the financial markets still think the May deal will go through in the end, and "the risk of leaving without a deal has been largely discounted." This is presumably why sterling keeps trying to rally—up to now.

May now says leaving without a deal is okay. Her own party might force her out, though, and pressure would rise for an election. An alternative would be a second referendum, which The Economist examines in detail. It could be a three-part question—the May deal, remain in the EU, and exit without a deal. The polls indicate the likely outcome of any two would be to remain in the EU over no deal, remain in the EU over the May plan, and no deal over the government deal (which we think is the same as remain in the EU, although not explicit). The Guardian says May remains opposed to a second referendum but the Telegraph says some insiders, including her de facto deputy PM and two secretaries (business and justice) are opting for it. The FT is increasingly snotty, using words like "botched."

Well, today at 10:30 am ET we will hear what May has to say about cancelling the vote for a revision or calling a second referendum, the only two options that favor her staying in office. The problem with a revision is that the EU has already said it won't accept much of anything and if any of the big issues go back on the table, like the Irish border, it will face a worse stance on "Spain and fish."

 

Outlook:

The important indicators today are JOLTS and the Canadian housing starts data. Jolts will be interesting because it shows more jobs than qualified people to take them, which is weird in a country the size of the US. You have to wonder if suppression of immigration has anything to do with it... it certainly does in Japan.

We continue to think the US will not fall into recession the minute the new year clock strikes one, but the sentiment is growing by leaps and bounds that 2019 is going to be awful for the US--economy unless something comes along to reverse the trend--and recession is well-night certain for 2020. St. Louis Fed Bullard called for suspension of the hike scheduled for December and Goldman says the probability is high that the March hike will be cancelled.

The geopolitical matters are already overwhelming, with focus on the US-China trade war but the rest of the world seeming to offer only one-at-a-time. Italy went off the radar screen, for example, and in return we got riots in France that go far beyond a higher tax on gasoline and endanger Macron's leadership.

We have started to read the end-of-year stories. The Economist magazine has some dandies. So far the theme we see emerging is "leadership" or rather lack of it. Merkel is leaving. Macron is weak. May is sitting on the edge of the cliff with her feet dangling over. Trump is incompetent and discarding advisors so that only one sane guy is left, Defense Sec Mattis. The new Mexican president AMLO is endangering Mexico's prosperity. The Economist forecasts GDP at 1.9% (too slow) and the peso crashing.

Everyone points out that a falling dollar going forward is good news for emerging markets that borrowed in dollars, but if the engines of world growth seize up, it will be cold comfort. The stock market continuing to fall is a form of seizure—fear. We may get a reprieve tomorrow on pullback Tuesday but the markets seem in the mood to vote with their feet. We'd get out while the getting is good.

Tidbit 1: The "net closing in around Trump" with recent disclosures is wishful thinking. Misusing campaign funds is a crime, to be sure, but more a political issue than justification for impeachment, especially considering the money has a salacious smell. Nobody has the stomach for another impeachment over sex. And so far the small amount of information we have on the Mueller investigation does not add up to impeachability, either. Lots of improper and possibly illegal conduct, but no smoking gun. None of the legal experts on TV can say whether an indictment would be possible after Trump leaves office. Technically, the Constitution does not say the president cannot be indicted, just one court opinion, but it's "generally accepted" that Mueller will not indict. Besides, we know from Watergate experience that it's public outcry that's needed to move Congress. The House is not willing to impeach until it gets some 20 Republican senators who would join the Dems. So, sit tight. It's not even close to being over.

The story told by one cable tv commentator (Maddow) has it that to build the Trump Tower Moscow, Trump needed money from a bank that was under US sanction, hence all the talk—in the party platform, by Flynn and other evidence—of Trump removing the sanctions if he won. Getting the sanctions removed is a Putin goal, so that's why he favored Trump and helped the cause with social media misinformation and hacking the Dem emails. Perfectly logical, but will there ever be Proof that Trump personally was in on removing sanctions specifically to get that bank loan to build the tower?

Nice theory, but just a theory. And it has a glaring hole in it—nobody thought he would win the election, including Trump and Putin. If he wasn't going to get elected, he wouldn't be able to remove sanctions. The sanctions are imposed by Congress, anyway. So if the Russians were helping Trump to get sanctions removed, it had to be a distant prospect and not much effort put into it. And Trump himself thought that he wouldn't win and therefore could not remove sanctions and therefore could not get funding from that Russian bank. Hence his casual attitude toward the Moscow tower, which is credible. As for that penthouse apartment, we already noted he is too cheap to offer a $50 million bribe. This is a guy who cashed a check for 13 cents. The links in the story don't hold. Trump is going to skate on this one. He still committed crimes against decency, good policy and the welfare of the people, but we still await the real story.

Tidbit 2: We moved from Connecticut to Virginia to escape blizzards, hurricanes and tornadoes, only to get a (rare) tornado in Virginia last summer and now a once-in-decades winter storm with eight inches of snow—double the annual average in a single day--black ice and electrical outages. If you do not get reports, it's because the power went out. It was 70 degrees F last week. It will be 45 degrees next week. What the hell is going on?

 

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