How will the markets respond if Trump’s authority flags further?

14 mins. to read
How will the markets respond if Trump’s authority flags further?

Is the Trump Bump over?

President Trump’s Washington is paralysed. It has proven impossible to repeal Obamacare and to replace it with something more amenable to America’s skilled working class who resented paying more for medical insurance. These were the people who propelled Donald Trump to power. Top personnel are being hired and fired with bewildering rapidity. There is no convincing strategy to address the twin deficits. And where are Secretary Mnuchin’s tax reforms and the promised infrastructure package? President Trump’s election was a symptom of America’s divisions. But his policies are unlikely to heal them. The betting odds on Trump making it to 2021 are falling. How will the markets respond if his authority flags further?

The outsider problem

Last year Mrs May pitched herself to the Tory Party as a sensible woman who did not do small talk in the House of Commons bar. She was not clubbable – and that was supposedly an asset. In a much more raucous way, Donald Trump sold himself to the American people as an outsider – a man who had never been part of the Washington establishment.

One year later, The Tories question whether a more clubbable leader who is alive to bar room banter may have made fewer mistakes in the British general election campaign. And in Washington, it is clear that, whatever the popular mandate and force of personality of a president, he cannot get his way unless he knows how to work the Washington machine.

These are classic examples of the outsider problem. Insiders tend to get things done because they know all the right people and know how to get controversial legislation through legislatures by a judicious combination of arm-twisting, bribery and charm. President George W Bush, for all his limitations, was a classic insider. Outsiders often imagine that they can bypass the elites within the democratic system – and fail. Presidents Andrew Jackson and Herbert Hoover were two such, though few remember them today.

A question of leadership

On the latest cover of Newsweek magazine, Donald Trump is cast as the “lazy boy”. Donald Trump is bored and tired, Newsweek proclaims, imagine what it would be like if he did any work. Of course, as the Reaction website observed, workaholics do not necessarily make good presidents. Ronald Reagan, who is regarded by many conservatives on both sides of the Atlantic as one of the greatest of US presidents, put in a nine to five working day (with a very light lunch) and famously refused to read memos that were longer than one page of A4. (Both work practices I personally much admire).

Mr Trump’s real problem is that he doesn’t really understand the office he occupies. He is not only the Chief Executive but also the Head of State of the USA. As such he is president of all Americans, not just those who wish to make America great again (whatever that means). He is also the Commander in Chief of the world’s mightiest military machine and, unofficially the leader of the free world. Yet his deportment and language – not to mention his often inflammatory and insulting tweets – suggest that he does not think himself obliged to uphold the dignity of his office.

For his supporters, that is fine. They didn’t want a prim Obama-style president who would spend his tenure making edifying – and entirely vacuous – speechlets. They wanted a deal-maker who could kick backsides – a billionaire businessman with cojones, not a master of flowery prose.

That’s all fine except that Trump was never even a businessman in the conventional American sense – a corporate leader who had to keep his directors on-side, to manage the AGM adeptly and sweet-talk the banks. His businesses were all private and were run – much more in the Russian style – as proprietorial fiefdoms where it was always advisable to accede to the CEO’s every whim and where anyone who screwed up or who displeased was told: You’re fired! To that extent he isn’t – and never was – a manager in the progressive sense of the word.

There was a school of thought way back in distant January that Mr Trump was a quick learner who would soon master the tools of his new trade. I think we can now say with some certainty that that was optimistic. If anything, President Trump gets worse at his job as each month passes: to the extent that many, if not most, Washington watchers doubt that he will ever be able to fulfil his programme (such as it was).

Last month, the President’s efforts in Congress to undo Obamacare were themselves undone. Republican Senator John McCain, so egregiously mocked during the election campaign for having been captured in the Vietnam War, obtained cold revenge. He quietly cast the deciding vote on Trump-care on the floor of the US Senate: No.

Defied by Congress, Trump declared war on them. He fired his Chief of Staff Reince Priebus (who officially “resigned” on 27 July), and appointed a general in his place (on which more below). Then he held a rally where he explained to the adoring multitude that he is great and that everyone else was to blame.

The Russia files

Since even before his inauguration last January, President Trump’s administration has been occluded by the pervasive suspicion that during his election campaign he, and or senior members of his team, had improper contacts with senior members of Mr Putin’s government – and that Russia may have masterminded attacks on Mrs Clinton’s campaign in order to favour Trump.

Suffice to say that, depending on your point of view, Mr Trump has been the subject of a vicious vendetta orchestrated by elements within the Democratic Party out of pique and spite; or the President – or people very close to him, not least his own son – are guilty of treason. Other, more moderate interpretations are available – but do not receive the air time of these two extreme views.

President Trump could not even meet with President Putin at the G20 Summit in July in private session without allegations that there was something “dodgy” afoot. Most of us believe that it is essential for the Presidents of America and Russia to have an effective and trustful working relationship – something that seemed like a competitive advantage in the Trump presidential bid. Now all contacts between Washington and Moscow are subject to suspicion.

Last week, things came to a head. Robert Mueller (another former Marine who served in Vietnam), the Special Counsel appointed by the Deputy Attorney General, convoked a Grand Jury – something that does not exist in Britain or Europe – made up of 23 ordinary citizens. The Grand Jury will hear evidence on allegations of collusion between the Trump campaign and Russia. Witnesses will be ordered to appear and critical documents subpoenaed. Mr Mueller seems determined to probe the financial ties between the Trump Empire and its associates in Moscow.

It is not illegal for a media spokesperson or a Chief of Staff to lie to a press conference – in fact that happens all the time in Trump’s Washington, and probably always did. But for anyone to be accused of lying to a Grand Jury is extremely serious. Perjury and obstruction of justice merit jail sentences.

All this adds an additional dimension of uncertainty and instability for an administration that looks increasingly out-of-control and unpredictable.

You’re fired!

When Sean Spicer was released from his post as Communications Secretary on 21 July he was swiftly replaced by the deliciously named Anthony Scaramucci (he sounded and looked like he had stepped straight off the set of The Sopranos). The Mooch lasted all of ten days. After displaying a talent for rich invective exceptional even in Trump’s White House, he then unleashed a torrent of on-the-record abuse about colleagues (including Priebus) to a reporter which left even the jaded Washington hacks stunned.

At the time of writing, the post of Communications Secretary is still vacant. That is not the only vacant post. Last month, the Washington Post reported that, five months into the Trump’s presidency, of 562 key positions in the administration 390 remain without a nominee.

Thank God for the generals

As they say in Washington, people are policy. After the collapse of Trump-care, Mr Trump turned to a retired Marine general as his chief of staff. John Kelly, out of uniform for just a year after retiring as head of US Southern Command, had been running the Department of Homeland Security (DHS) since January.

This is the first time since the Ford administration that a general has served as the White House Chief of Staff. Kelly shares power with three other generals: Secretary of Defence James Mattis is another retired Marine general, though with a reputation for bookishness; Joseph Dunford, is Chairman of the Joint Chiefs of Staff and another Marine general; and National Security Adviser HR McMaster, still a uniformed Lieutenant General in the US Army, replaced Lieutenant General Michael Flynn, who was fired after less than a month in the job. Not since Dwight D Eisenhower (34th President), himself a retired general, have senior military officers wielded so much influence in the White House.

Amongst the administration’s senior foreign policy leadership, only Secretary of State Rex Tillerson is a civilian. Some have expressed fears about the prospective militarisation of US foreign policy. Especially since, in February, Mr Trump announced large increases in defence-spending while proposing to reduce the State Department’s budget by 30 percent.

On my reading of history, it is not generals who usually start wars, but politicians – so we should not be too concerned. During the first six months of the Trump administration, the generals have emerged as a force for restraint in foreign-policy. Generals tend to be pragmatists and are committed to the United States’ leadership role in the world. Therefore they have become a counterweight to the alt-Right faction in the White House led by Chief Strategist Steve Bannon, who pioneered the initial immigration ban, the rejection of the Paris climate change accord, and proposed steel tariffs that could yet trigger a trade war with China.

Trump’s generals see their mission as twofold. Firstly, they must reverse what senior military officers see as the key error of the Obama administration: a hesitancy to use force or commit troops that many foes and allies alike perceived as weakness. Secondly, according to Politico, they see their role as to restrain their boss.

President Trump has been disposed to irritate allies with uncomplimentary tweets and bullying phone calls. The generals, with Rex Tillerson as a junior partner, have sought to reassure the outside world. They have persuaded the President to pull back from some of his most controversial foreign policy positions, such as branding NATO obsolete, moving the US Embassy in Israel from Tel Aviv to Jerusalem, revoking NAFTA, cancelling the Iran nuclear deal, and reconsidering the long-standing One China policy by terms of which America does not recognise Taiwan.

General McMaster has recently let go of a number of senior national security appointees who were close to his predecessor Mike Flynn as well as to Steve Bannon. As a result, McMaster is now under attack by Steve Bannon’s gift to the world, Breitbart, which has been covering his purge with lurid headlines. It is the generals who are trying to get a grip on a dysfunctional White House.

The art of diplomacy – Trump style

Last week the Washington Post published transcripts of President Trump’s two telephone conversations, one with Mexican President Enrique Peña Nieto on 27 January and the other with Australian Prime Minister Malcolm Turnbull the next day.

Reading through the transcripts, I was struck by two things. The first is that Mr Trump, while blunt, is no buffoon; rather he seems well briefed. In the case of the call with PM Turnbull, it is clear that the Australian can be equally blunt. The second thing is that Trump does not mention Rex Tillerson or any other members of his cabinet. Instead, he refers to conversations undertaken by Jared Kushner with numerous Mexican and Australian foreign policy chiefs. This confirms that the key intermediary in Trump’s White House is his son-in-law, Mr Kushner.

It’s the economy, stupid

According to The Economist[i], although the President wants a level of corporation tax of 15 percent, corporate America thinks it will only go as low as 28 percent, given the fiscal outlook and the mood in Congress. The main reform will be a simplification of the rules regarding the taxation of overseas profits. This will facilitate the repatriation of some of American corporations’ overseas cash pile of an estimated US$1 trillion (about a quarter of which belongs to Apple Inc. (NASDAQ:AAPL)).

But what will corporate America do with this windfall? Will it – as President Trump wishes – build new factories? It might very well fuel even more share buy-backs – already running at US$1 trillion a year.

The loony tunes

Now throw in a few jokers: a North Korea run by a Camembert-gobbling psychopath who is hell bent on arming ballistic missiles with nuclear warheads. Russia is unhappy (nothing new about that); but that makes it extremely difficult to anticipate how Russia would respond in any global crisis. The Islamic State has been defeated in Mosul but the entire Arab world has never looked so fragile.

Just in the space of the last week a North Korean newspaper warned America to prepare for devastating destruction – and Mr Trump responded on 08 August with a promise to wreak fire and fury that the world has never seen on the hermit state. A Turkish newspaper with close links to President Erdoğan has warned France and Germany that they could be crushed in days in the event if war. Mr Trump’s administration coincides with the end of an era of relative security, as we enter a period of much greater geopolitical risk. Future historians might conclude that that was the fundamental reason why he was elected.

The next presidential election

Six months into the Trump administration there is already talk of the need for a competence candidate next time round. Mark Zuckerberg (CEO of Facebook (NASDAQ:FB)) and Howard Schulz (CEO of Starbucks (NASDAQ:SBUX)) are already touring the country running exploratory campaigns. Jamie Dimon of JP Morgan Chase (OTCMKTS:JFTTL) is also in the frame. The next president may well be another celebrity – but one with experience of negotiating with different interest groups. According to Wednesday’s New Yorker, Vice President Pence also fancies himself as the next President – in 2020 (if not before).

But the very fact that people are already thinking about 2020 suggests that something important has gone wrong with 2017. In that respect, once again, Britain and the USA are in similar places.

Market murmurs

I am not expecting an imminent collapse of the US markets, but there are many reasons to suggest that they have peaked and may already have begun a slow decline. Downside risk now outweighs upside potential. I don’t think that stock markets can be sustained indefinitely by share buy-backs which exceed the net level of productive investment. Despite good corporate earnings, valuations still look toppy. And if the loony tunes kicked off, the markets would come under extreme pressure.

The fact that share buy-backs have been sustained for so long suggests that the long-term rate of return on investment is in serious decline[ii]. But then, of course it is in an era of Near Zero Interest Rates. The really historic, game-changing reform that Mr Trump could make would be to cull the central bankers. But he won’t do that because he has surrounded himself by alumni from Goldman Sachs, which remains at the centre of the global Davos-Bilderberg-Jackson Hole financial spider’s web.

The jury is still out on whether the Trump administration can really make a difference to the trajectory of US growth – his fundamental promise. The S&P is still up nearly 17 percent since 04 November 2016. But if the administration doesn’t offer some realistic prospect of more dynamic growth soon the markets might decide that the Trump Bump was all hot air.


America is much in my thoughts right now for another reason (even though I’m still in France). I’m going to spend October there – travelling from sea to shining sea. (Not on a Harley Davidson, like Peter Fonda in Easy Rider; nor in a 1949 Buick Roadmaster convertible like Tom Cruise in Rain Man: I’ll keep you guessing). I’ll hopefully be filing some investment insights along the way. I am pretty sure that Mr Trump will still be President this October; but I’d wager that his chances of a second term are already negligible.


[i] Schumpeter, The Economist, 01 July 2017.
[ii] Technically, Return on Invested Capital is inferior to the Cost of Capital.

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