In the face of much cynicism and pessimism about the outlook for the Trump Administration’s agenda, we have repeatedly pointed out the resilience of the system of checks and balances. Many of the more extreme positions have been tempered, either on their own accord, such as naming China a currency manipulator or pulling out of NAFTA or KORUS, or the judiciary branch, such as on immigration curbs, or the legislative branch itself, as in limiting the President’s ability to rollback new sanctions on Russia (and Iran and North Korea).  

The most important shift since last November’s election has taken place recently. After increasing frustrations with Republican legislators, who despite their majority, have ideological differences, that have stymied the Administration’s agenda, Trump has switched gears. He is seeking, at least in some areas, to work with a Democrats, with the hope of peeling off enough Republicans to forge a majority. This worked to buy more time, insofar as the debt limit and spending authorization were extended until mid-December to ensure smooth emergency aid funding after the recent weather calamities. 

It looks like this new course can be extended in a few issue-specific areas, including DACA, and possibly health care and tax reform. It may be premature to reach any hard and fast conclusions, but the point is that the dance between the fractious and small Republican legislative majority, a maverick President, and strident Democrat minority has changed tunes, and many investors do not appear prepared for this.  

Given prices, market positioning, and sense of market psychology, we think the market is ill-prepared for any one of these scenarios: tax reform, the continuation of the Fed’s gradual removal of accommodation through increasing the Fed funds target range, and Yellen being reappointed. We suspect the first is two are more dollar bullish than the third, but the reappointment of Yellen, assuming she would accept, would provide continuity at an important time for the administration. Many in the media have emphasized the importance of loyalty for the White House, but in the Fed’s case, dependability may be almost as good. She is a known quantity, there is a nearly 40-year old tradition of two term for the Fed chair, and her views on regulation are very much what one would expect from one of the most important regulators.