If The Fed Put Is Dead, Will The “Trump Put” Replace It?

Appaloosa founder and president David Tepper – widely regarded as one of the most successful hedge fund managers of this decade – spoke to CNBC following the Federal Reserve rate hike announcement, outlining his thoughts on chairman Powell’s move:

“1. Powell basically told you the Fed put is dead.

2. Everyone is tight. Chinese money growth plummeting. ECB cutting the last of QE. And Fed still in tightening mode.

3. The net biggest issuance of Treasuries and worldwide fixed income is coming next year. Something is going to get crowded out. Bonds stocks etc.

4. Oh and there is this trade war question. I think we should be having a fight with China on different issues. But it is not conducive to confidence. Freezing some worldwide activity.

5. Cash is not so bad. ”

“The Fed doesn’t care about the stock market within 400 SPX (S&P 500) points,” Tepper added in the email. “It’s the real economy stupid.”

In an era where many big names have incurred heavy losses and underperformed the broader market, Appaloosa has outperformed many other big hedge funds, and thus, Tepper’s commentary on the Fed thus holds a degree of credibility above his peers.  But Powell’s interests may not align with Trump’s when it comes to market and economic performance.

Bear in mind, the day that Trump took office, the S&P 500 closed at 2,271.31, and ended 2017 at 2,673.61, reaching a record closing high of 2,930.75 on September 20th, 2018.  Even with the market now in the red for 2018, and likely overvalued even when he took office, the Trump administration has a ways to go before the S&P reaches his administration’s “high water mark” represented in the Inauguration Day closing price.  

Trump has taken a great deal of credit for the market and economic success in the US, and has correspondingly set himself up to take a great deal of blame when the market’s lengthy bull run comes to an end.  However, he seems set to blame Powell’s rate hikes for that, as his Twitter activity indicates:

With Trump relentlessly bashing Obama and Obama administration’s policies (often in response to Obama’s own conduct), he has created an incentive to defend his own administration’s performance, as he will assuredly be attacked whenever the market goes negative for his presidency.

Meanwhile, Powell has no such qualms – instead focused on his own economic indicators and beliefs on monetary policy.  With Trump’s high water mark above where Powell will use Fed policy to attempt to contain a broader collapse, Trump may instead choose to use his own considerable influence to stabilize a market that could be collapsing rather rapidly.

What would Trump do to jawbone the market higher?  Your guess is as good as mine.  It could be anything from a trade deal with China, to relaxing of tariffs, to talk of implementation of a new tax cut.  However, he will all but certainly not sit on his hands and allow the market to tank.

No matter what it is, it is reasonable to presume that Trump would do everything in his power to intervene before Powell does, thus perhaps raising the possibility that the market has a “Trump put” instead of (or even in addition to) the long-touted “Fed put” – or the principle that the Federal Reserve will do everything in its power to stabilize a collapsing market and/or economy.

However, if a market selloff gets bad enough, Powell may be forced to intervene, especially if Trump is blaming Powell’s policies for a market meltdown.  The “Trump put” could even consist of Trump himself compelling Powell and the Fed to act.  Whatever the case, we won’t find out if the Trump put exists at all, or if the Fed put is off the table, until the market selloff accelerates towards Trump’s own “high water mark” of the S&P 500 at 2,271.31.

While conventional wisdom has it that the US (and global) economy is overdue for a major hit, the same conventional wisdom has been singing this tune for years, only to be repeatedly proven wrong by a market that has marched relentlessly higher, undoubtedly buoyed by years of years of QE, ZIRP, and many other monetarily easy Federal Reserve policies.  

A Trump put may exist, and the Fed put might not be gone either.  But even though an economic contraction can be anticipated, it is important to remember that the government has gotten very adept at kicking the can down the road.  Thus, the possibility that market and economic strength could continue longer than expected should not be lost on anyone.