Wall Street Reacts to Trump and Mnuchin’s ‘Unforced Errors’ 

(Bloomberg) -- The White House is starting the week with unforced errors.

That’s the assessment of some Wall Street watchers who are concerned that the latest political turmoil could eventually hurt the U.S. economy. From President Donald Trump’s criticism of the Federal Reserve, to Treasury Secretary Steven Mnuchin’s round of phone calls to major bank leaders, checking that they have enough liquidity, the past few days of political headlines have been unnerving.

Bank stocks fell about 2 percent, and the S&P 500 hit a 20-month low amid the turmoil in Washington.

Here’s a sample of what analysts and investors are saying:

Cowen & Co.’s Jaret Seiberg (in a note)

  • “None of these controversies are positive,” the senior policy analyst wrote. “All of them put the economy at risk, which is negative for financial firms and housing. And all three incidents are unforced errors,” Seiberg wrote, referring to Trump’s discussion of Fed Chairman Jerome Powell’s ouster, the partial government shutdown and Mnuchin raising questions about financial stability.
  • “Our broad concern is that Team Trump might trigger the very downturn it wants to avoid.”

Amundi Pioneer Asset Management’s, Paresh Upadhyaya (via email)

  • Mnuchin’s statement about banks “clearly backfired,” Upadhyaya said. “It smacks of desperation and nervousness. I found it odd that he spoke to them about liquidity when it’s obvious that banks would be aware of it. I’m not sure what they planned to achieve with this plunge protection team since none of the agencies involved have legal authority to intervene in the equity markets.”
  • The portfolio manager sees little risk of Powell being ousted. He said that Trump’s undermining of the Fed could reduce the appeal of the U.S. dollar. What’s more troubling is the selloff in bank stocks, which signals distress in the credit market.

MRV Associates Inc.’s Mayra Rodriguez Valladares (in an interview)

  • “The timing is terrible” amid thin markets before a holiday, said Valladares, a former Fed foreign-exchange analyst who conducts training for bankers and regulators. “It’s going to make people in the markets even more nervous.”
  • “When you have a president treating Powell as a pinata, it’s really terrible and undermines the credibility of the central bank as an independent authority.”

Whalen Global Advisors’ Christopher Whalen (via email)

  • Mnuchin’s tweet about his talks with bank CEOs was “not helpful,” Whalen said.
  • “It is normal for a secretary of the Treasury to talk to banks privately, but not on Twitter,” he said, citing a “near disaster” in 2008 when markets cratered after then-Treasury Secretary Henry Paulson discussed buying bad bank assets.

Sullivan & Cromwell LLP’s Rodgin Cohen (via email)

  • Cohen was at the center of the bank bailouts during the 2008 financial crisis. He said he didn’t field calls from finance executives over the weekend, an indication that the industry isn’t facing the same concerns it was a decade ago.
  • “If you ever get contagion, that could sweep away reality and logic,” Cohen said in an email. “But today, we just don’t have anything like 2008. You’ve got banks which have two to three times the capital, and even more importantly -- what really brings banks down -- is a liquidity shortage. And these banks are incredibly liquid.”

Ironsides Macroeconomic Research’s Barry Knapp (in an interview)

  • Knapp, a veteran of Lehman Brothers Holdings Inc. who was later at Guggenheim Partners, said it still feels more like 1987 than 2008. A new Federal Reserve chair and tax bill spur uncertainties in the market, but aren’t likely to cause a full-scale collapse, he said.
  • “The crash of ’87 came and there really wasn’t a liquidity issue per se,” Knapp said. “The magnitude of what happened is quite similar, but ultimately one of the market-stabilizing events was the Federal Reserve providing all the liquidity the market needed. I’m sure that was the nature of Mnuchin’s comments -- to try and replicate that 1987 event.”
  • “It’s a wholly insufficient attempt to try to create the same impact as 1987 -- if the Fed officials did the same thing, it might have had more of an effect,” he said. “There’s very little the Treasury can do, and the Fed would need to acknowledge its balance-sheet contraction.”

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