1. Greenspan “Put,” Bernanke “Put,” Trump “Put” Explained
2. With the Fed in Neutral, Here Comes the “Trump Put”
3. Trump Wants to Reshape China Culture – Good Luck With That!
4. US-China Trade Deal Could Fall Apart – Look Out Below!
Greenspan “Put,” Bernanke “Put,” Trump “Put” Explained
In talking with clients, colleagues and friends, it occurs to me that a lot of adults (especially investors) have heard terms like the “Greenspan Put” or the “Bernanke Put,” but I also observed that most people don’t really know what they mean. Investors should know what they mean and what they do not mean. It could be very important if our trade war with China escalates.
The term Greenspan Put was coined in the late 1980s as a result of certain policies implemented by then Federal Reserve Chairman Alan Greenspan. He was Fed Chairman from 1987 to 2006, followed by Ben Bernanke from 2006 to 2014 when the term changed to the Bernanke Put.
Throughout both men’s terms as Fed Chair, they routinely lowered the Fed Funds rate to help support the economy, which in turn helped the stock markets. As this practice went on, investors came to view the Fed’s policy of lowering interest rates to shore up the economy and risk assets as something akin to a “put” option.
A “put” is a type of option security that lets people put a floor under their losses. If you buy stock for $50 a share and also a put option with a $40 strike price, you are protected from losing more than $10 per share. If the stock price drops to $40, you can exercise the put option to protect from any further losses (until the option expires).
The Federal Funds rate is the interest rate at which depository institutions (banks, S&Ls, credit unions, etc.) lend reserve balances to other depository institutions overnight to meet their reserve requirements.
As you can see above, the Fed Funds rate was around 10% when Greenspan took over the Fed in 1987. His first rate cut after becoming Fed Chair came just after the 1987 stock market plunge, and he implied that the Fed would similarly intervene in times of crisis. He continued to lower the rate overall for the next 19 years.
Greenspan’s policy of intervening to support the economy (and thus the stock market) included the savings and loan crisis, the Gulf War, the Mexican crisis, the Asian financial crisis, the Long-Term Capital Management crisis, Y2K and the bursting of the dot.com bubble following its peak in 2000. Bernanke continued this practice until the Fed Funds rate was “zero-bound” in 2009 where it remained until late 2017.
The Fed Open Market Committee raised the Fed Funds rate four times in 2018 to a range of 2.25% to 2.50% and was expected to raise it 2-3 times this year. However, in December of last year, Fed Chair Jerome Powell hinted there might be fewer rate hikes in 2019. Then in January, he said the Fed would “wait and watch” before raising the Fed Funds rate further. Investors took that to mean no rate hikes in 2019, and stocks vaulted to new record highs.
With the Fed in Neutral, Here Comes the “Trump Put”
In his 28 months in office, and with the Fed “on-hold,” President Trump has created a sense in the markets that he will play that “put” role for the economy as a whole. A prime example came late last year when the financial markets were plunging and the risk of recession rising. Mr. Trump reportedly made some minor concessions to get trade talks with China back on track. Markets rallied.
A similar breakthrough reportedly occurred in a February 22, 2019 Oval Office meeting resulting in the resumption of constructive trade negotiations between American and Chinese officials. That was a key factor in the rally that has driven stocks up 15% in 2019.
Another example of the Trump Put occurred just last week. US stocks came under heavy pressure right off the bat on news that China had retaliated to Trump’s increased tariffs with 20-25% tariffs on $60 billion of goods we sell them. Stocks plunged on Monday and early Tuesday. Things looked really bad.
Yet before noon in Washington on Tuesday, the Trump administration announced the president had decided to postpone additional tariffs on imported cars and trucks. The stock markets immediately reversed from sharply lower to sharply higher.
If you’re trying to bet on where markets will be six months or a year from now, there are a few things we know. President Trump cares a lot about what happens to the economy and the stock market, as his tweets make clear. He will be running for re-election in 18 months, so having a strong economy and a healthy stock market is very important to him.
The market reversal last week demonstrated that the Trump Put still has some muscle, but let us not forget that the Trump Put only works until it doesn’t. The latest breakdown of the US-China trade talks is serious. If it continues, it could derail the Trump Put.
Trump Wants to Reshape China Culture – Good Luck With That!
President Trump is more confident in taking an aggressive negotiating stand with China because the stock market is up a lot this year and the American economy is looking very solid. Mr. Trump’s objective is not just to win trade concessions, but to force a change in China’s overall economic and industrial policy approach.
The president is demanding that China cease its theft of intellectual property, stop requiring foreign companies to share their technology with Chinese companies, many of which are state owned, significantly increase its purchase of US goods and services and stop manipulating its currency.
For years China has defended these practices on the grounds that it was a “developing country.”However, now that China has grown to become the world’s second-largest economy, a consensus is building in the US that Beijing can no longer go on thumbing its nose at the international order by pursuing such blatantly self-serving policies.
Yet China has a very long history of resisting change. Furthermore, China’s leaders and indeed its people are angry and embarrassed by President Trump’s open criticism of the Middle Kingdom in repeated tweets. Whether the US can succeed in its broad objectives is very questionable.
In fact, Beijing shows every sign that it will react to US pressure by intensifying its “Made in China 2025” import substitution program, which promises to lavish vast state subsidies worth hundreds of billions of US dollars on favored industries in order to seize the global lead in emerging hi-tech sectors like artificial intelligence and robotics.
In other words, Washington’s attempts to get China to open its markets and adopt international best practices may achieve exactly the opposite. Instead of scrapping subsidies and opening up, Beijing may double down on centrally planned mercantilism and reduce its dependence on the US.
US-China Trade Deal Could Fall Apart – Look Out Below!
I recognize there is a broad consensus among the pundits that a major trade deal with China will get done just ahead. Some feel it could happen before June 1 when China’s tariffs on US goods are set to go into effect. Others are confident it will happen before Trump can get 25% tariffs on the other $300+ billion we import from China – effectively everything they sell us.
If not, many believe a deal will get done this summer or fall at the latest. Virtually everyone believes a deal will be made before the 2020 presidential election – Trump needs it, right? Yet I’m not so sure!
I believe there is a very real chance this deal could still fall apart completely. I think President Trump may not understand how angry and embarrassed the Chinese are by being roundly criticized as the bad guys on the world stage (even though they are).
We have to understand that China can walk away from this deal. Remember that they are a Communist dictatorship – the people don’t get a vote. Their leaders could tell the people that they tried hard to get a deal with the US, but Trump demanded too much.
They could admit to their people that the 25% tariffs are going to hurt for a while, but they have to hold out. They would remind the people that there’s a presidential election in the US in 2020 and hope that Trump doesn’t win. I think it’s fair to say that Joe Biden would be much easier for them to deal with than Trump.
In any event, it’s clear that China’s leaders are preparing the populace that this could be a long fight (see the WAPO column on this in Special Articles below).
If this trade deal falls apart, I mean really falls apart, I believe it will be very bearish for stocks and not just in the US.
Gary D. Halbert
© Halbert Wealth Management
© Halbert Wealth Management
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