The tide has turned for Mr Trump’s political fortunes. Thus far his credibility has been inextricably linked with the fortunes of the stock market. Which will fall first – Mr Trump or the US equity market?
The beginning of the end?
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Washington is normally hot and sultry in late summer – and the week of 20 August was, politically speaking, the most uncomfortable of Mr Trump’s presidency. The conviction of Mr Trump’s campaign chief of staff Paul Manafort for bank and tax fraud which pre-dated the presidential election campaign was embarrassing enough. But on the very same day Mr Trump’s Mr Fixit and long-time lawyer, Michael Cohen, pleaded guilty to violating campaign finance rules.
Mr Cohen was already known to have arranged bungs to numerous of Mr Trump’s jilted lady friends out of campaign coffers – which is illegal. But, given that he faces a lengthy jail sentence and could be offered a plea bargain, the bird might sing. Who knows what bodies (figuratively speaking) he might remember burying on Mr Trump’s behalf? Moreover, Mr Manafort might feed Robert Mueller’s famished investigation into Russian interference in the presidential election some raw meat at last.
For Mr Trump’s army of supporters out there in the states between, this all smacks of a Washington witch hunt – the swamp bites back. They couldn’t care less about Messrs Manafort and Cohen’s peccadilloes. But the liberal Democrat Washington elite smelt blood. Suddenly, the mainstream media was pullulating with speculation about impeaching the President. There was talk about the beginning of Mr Trump’s end…especially if Congress turns Democrat in the mid-term elections of 06 November – just 60 days from today, when all 440 seats in the House of Representatives and 35 seats in the Senate are up for grabs.
The mood on the ground
Most Americans will judge Mr Trump come November on the wages and jobs front. Between April and June the US economy grew by 4.1 percent compared to 2.3 percent in the previous quarter. Some say this figure was inflated by a one-off surge of soybean exports to China, orders for which were accelerated to avoid new tariffs.
The overall growth rate for 2018 as a whole is likely to be about 3 percent – a level never achieved under the Obama administration. This was partly due no doubt to the caffeine-inducing effect of the package of tax cuts signed off in January. Wages rose by 2.7 percent during the year to July – though with inflation running at 2.8 percent they were flat in real terms. Unemployment has ticked down to 3.9 percent. The once declining manufacturing sector has generated 300,000 new jobs over the last 12 months. Retail sales are buoyant and consumer confidence is high. Most important of all from the point of view of the equity markets, corporate profits are still resurgent.
Americans, who drive big cars, are acutely sensitive to “gas” (petrol) prices. With oil at over $77 as I write, gas prices are up substantially over 12 months. That will not go down well in small town America. But, on the other hand, as a Wall Street Journal editorial noted recently, there is a severe nationwide shortage of truck drivers. Since truck drivers are, to a man and woman, ardent Trumpistas, their salaries will be rising and they will be thanking The Donald. That bodes well for Mr Trump, come November.
CNN and the WSJ may not be delighted about that: they point out that once the tax cut stimulus slackens, growth will regress to the mean – only with higher deficits. The US Treasury Department forecasts that the deficit will hit $1 trillion by 2022 and only then will start to fall. But that assumes that the current growth momentum can be sustained – which is unlikely.
The other issue that will dominate the mid-term elections is the thorny question of immigration. Mr Trump’s promise of a Great Wall along the Mexican border still has huge appeal.
The Fed in his sights
The dollar fell on 21 August – against the trend – after the President tweeted that he “was not thrilled” by the Fed and its Chairman Jay (Jerome) Powell raising rates. Mr Trump appointed Mr Powell in February to replace Janet Yellen about whom he had been consistently rude. The Fed has raised rates twice since Mr Powell’s appointment with the result that the dollar has surged. That makes imports cheaper and US exports more expensive, thus exacerbating the trade deficit. The markets expect two further rate hikes this year and four more in 2019. Mr Trump fears that if the Fed raises rates too quickly then that will spook the markets.
One other outcome of rising rates is that America’s debt burden will become more expensive to service. So long as the economy grows at a decent clip the deficit doesn’t really matter. But governments should make hay while the sun shines – they should reduce deficits in booms precisely so that they can increase them in recessions.
Mr Trump doesn’t buy that. In his career as a property magnate he extolled the virtues of debt. Supposedly, his mantra was borrow as much as you can for as long as you can. Mr Trump understood very well Keynes’s dictum when he went bankrupt in the 1990s: If you owe your bank £100 and can’t repay it – you have a problem; if you owe your bank £1 million and can’t repay it – the bank has a problem.
Star Wars: the sequel
Defence related US stocks are doing well under Mr Trump. 35 years after President Ronald Reagan first launched the concept of Star Wars – an anti-missile defence shield in space – Donald Trump has called for “American dominance in space”. He has proposed establishing a Space Force, which would be the US military’s sixth service – the first new one since the establishment of the US Air Force in 1947. However, this will require congressional approval. That is not a done deal: some senators oppose it on cost grounds; others think that a Space Force would be a rival to the USAF.
It seems that the Defense Advanced Research Projects Agency (DARPA – an agency of the Pentagon), though it has a much lower profile than NASA, has been working with Boeing (NYSE:BA) to develop a reusable space plane known as the Phantom Express. This could deploy small satellites in space at very short notice, or ferry astronauts to a space station. The other strategic goal is – as the Russians and the Chinese are doing – to develop hypersonic missiles which could travel at five times the speed of sound. Washington has reportedly awarded a $480 million project to Lockheed Martin (NYSE:LMT) for this purpose. Overall, the Pentagon is expected to spend about $11.4 billion on space this year.
In June this year Northrup Grumman Corporation (NYSE:NOC) bought rocket maker Orbital ATK in a $7.8 billion deal, renaming the company Northrop Grumman Innovation Systems[i]. SpaceX (Elon Musk’s other brainchild) is also thought to be a beneficiary of the Pentagon’s drive into space. Other winners could be Raytheon (NYSE:RTN), Maxar Technologies (NYSE:MAXR) and Aerojet Rocketdyne Holdings (NYSE:AJRD).
Trade war news
Just as Britain looks forward to joining the currently 164-member World Trade organisation (WTO) in its own right for the first time, the USA is threatening to leave it. On 31 August President Trump said that the USA was being treated badly by WTO rules, adding that if the multinational body “does not shape up, I could withdraw”.
What Mr Trump hates about the WTO is its appeals system by means of which bilateral trade disputes are resolved. In point of fact the US has won more of these disputes than it has lost. Moreover, one of the appeal body’s seven members is always an American. Ironically, the USA filed a complaint against the EU with the WTO as recently as July.
Mr Trump then told Bloomberg that the US would beat China in a full-blown trade war. “We are a much stronger country” he said. He repeated his theme that China was a currency manipulator – and the EU was “almost as bad as China”. He indicated that the ceasefire deal struck with Herr Juncker on 25 July to end import tariffs on cars traded between the US and the EU was “not good enough”. The markets reacted negatively to this interview – with automobile stocks faring worst.
The President believes that his strategy of slapping new tariffs on trading partners and then offering to negotiate will result in more trade liberalisation, ultimately stimulating growth. A Reuters poll of economists, however, was highly sceptical about this. It seems likely that higher tariffs on consumer goods will stimulate inflation which, in turn, will incite the Fed to raise rates further. Moreover, there are already signs of manufacturers moving abroad – such as Harley-Davidson (NYSE:HOG) which has decided to shift some production to Thailand. Even Tesla (NASDAQ:TSLA) has been thinking about building their cars in Shanghai.
China’s central bank was ordered to lend a further 500 billion yuan ($56 billion) to banks at the end of July – despite concerns about excessive debt in the country. The Chinese CSI300 index is down over 19 percent year-to-date. If US tariffs on Chinese goods rise further, at least by more than the fall in the value of its currency in recent months, a reluctant China may yet come to the negotiating table. On the other hand, it will certainly make life as difficult as possible for American exporters – mostly with bureaucratic, non-tariff barriers.
Irrational exuberance?
The S&P Index meanwhile has been on a sustained upward trajectory since March 2009, its post-crisis nadir – since when it has quadrupled. It is up by 25 percent since Mr Trump was elected. This has greatly benefited ordinary Americans who have 401K pension pots. A sharp fall in the US markets would therefore not only damage consumer confidence but also puncture Mr Trump’s electoral balloon.
Much of the rise of the US markets was driven by quantitative easing (QE – printing money by the central bank) which is now defunct. The other force which has driven the outperformance of the US markets is the rise and rise of the tech sector – the FAANG stocks plus Microsoft (NASDAQ:MSFT) and others. On the basis of the Shiller P/E ratio (Cyclically Adjusted Price Earnings or CAPE ratio, which uses 10-year inflation-adjusted earnings) the US market is trading at around 32-times earnings. According to the economist Liam Halligan, the CAPE has only been at that level or above three times before: in 1929, in 2002 (the dot com bubble) and in 2008[ii].
This has now been the longest stock market boom ever – around 3,500 days long. How much longer can it last?
Trump and tech
President Trump has said some very unkind things about technology companies recently – even though it is tech that has powered much of the stock market boom. This is partly because the big tech bosses are overwhelmingly liberals who supported Mrs Clinton in 2016 and who are “soft” on immigration. Amazon founder and CEO Jeff Bezos also owns the Washington Post, which has been highly unflattering about Mr Trump.
On 29 August the President, in a tweet, attacked Google (Alphabet (NASDAQ:GOOGL) further to a disputed report to the effect that Google searches about the President generate results which are overwhelmingly negative about him. He accused the company of being “rigged” and promised that the situation “will be addressed”. Mr Trump then accused Twitter (NASDAQ:TWTR) of silencing right-wing voices. In a coup de grâce he described Facebook as a monopoly.
On Tuesday (04 September) Twitter’s CEO, Jack Dorsey, denied political bias ahead of a grilling on Capitol Hill. He said Twitter was committed to being impartial and did not apply political ideology to “shadow ban” tweets. On Wednesday, he appeared before the US Senate Intelligence Committee in the company of Facebook COO Sheryl Sandberg. Google refused a request to send its CEO, Larry Page, and instead sent its top lawyer, Kent Walker – much to the Committee’s chagrin.
This is ironic as it is technology and social media that have made the Trump phenomenon possible. Where would Donald Trump be without Twitter? The tech giants themselves have seen their share prices soar under Mr Trump’s presidency. Moreover, Mr Trump has assiduously sought to protect American technology, preventing Chinese companies from making acquisitions in the sector. When the EU imposed a massive fine on Google last year he described it as “one of our great companies”.
On Tuesday (04 September) Amazon (NASDAQ:AMZN) became only the second trillion dollar company besides Apple (NASDAQ:AAPL) – just as I predicted it would last month. Its share price has nearly doubled in 12 months. Mr Bezos is now worth $167 billion. He has done well under Mr Trump.
More revelations: living in Crazytown
Bob Woodward, the veteran journalist who played a major role in bringing down President Richard Nixon in 1974[iii], is about to publish a new book about the Trump White House. It is called Fear: Trump in the White House. The book is supposedly based on a series of interviews with White House staffers and leading members of the administration.
John Kelly, the President’s Chief-of-Staff is supposed to have said about Mr Trump: “He’s an idiot. It is pointless to try to convince him of anything. He’s gone off the rails. We’re in Crazytown…” And there is much more in this vein. The picture painted is one of a deeply dysfunctional presidency where people like Generals Kelly and Mattis have to humour the President, occasionally removing documents from his desk in order to prevent the Chief from making a new policy on the hoof.
Once again, this book will only reinforce people’s prejudices about Mr Trump – for and against. Trumpistas will see it as evidence of the President’s anti-establishment style; detractors will determine that the President is an even more dangerous threat than they thought. Mr Trump has already dismissed the book as fake news.
Then things got worse. On Thursday (06 September) an anonymous editorial in the New York Times, purportedly written by a senior member of the Trump administration, claimed that elements inside the administration had taken measures to undermine Mr Trump for the good of the nation. The editorial suggested that some members of the administration had studied the 25th Amendment to the US Constitution, by terms of which a president can be declared unfit for office. Mr Trump reacted furiously on Twitter: he accused the author of the editorial of treason and demanded to know his or her identity.
Tolstoy’s train
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Tolstoy held that history was a train that carried its uncomprehending passengers to an ineluctable destination regardless of where they wanted to go.
Across the sweep of history, one can’t help feeling that most “unconventional” regimes end badly. One of the most innocuous things that the Emperor Caligula (12-41 AD) ever did was to appoint his horse to the Senate – but that was too much for the Imperial Guard, who hacked him to death. Poor Charles IV of France (1294-1328) thought that he was made of glass: he was the last monarch of the House of Capet. And the unfortunate Tsar Paul I (1754-1801) came to a sticky end when a group of aggrieved officers murdered him in his bedroom after, bored with their company, he had retired for the night.
On the other hand, Mr Trump may continue to confound his critics and the world for some time to come. The chances that Congress will have sufficient evidence for high crimes and misdemeanours, the will and the numbers to impeach the President are small, in my view. The Republicans will probably retain control of the Senate on 06 November, even if the Democrats narrowly take control of the House. Impeachment would require a two-thirds majority in the Senate, meaning that most Republican senators would have to plunge their daggers into Caesar’s back – with all the endless recrimination that would ensue.
But the continued trickle of disaffection coming from inside the administration itself is likely, over time, to erode his authority and make his re-election in 2020 all but impossible. The one thing that will sustain him going forward is a buoyant stock market. If that falls, he falls too.
Ironically, it is the tech sector – so reviled by Mr Trump – that has driven the Dow Jones Industrial Average so high: it is above 26,000 as I write. If the tech giants retreat, the market will go with them. This leaves Trump and tech locked in an endless Judas kiss of co-dependent antipathy.
One fine day, eventually, it will all end in tears. But for now the Trump train and the US market move breezily on their metalled ways, unconscious of their fate.
[ii]Trump’s future hinges on the stock market, The Sunday Telegraph, 31 August 2018.
[iii]Bob Woodford wrote All the President’s Men with Carl Berstein, a fellow Washington Post Reporter in 1973. This was later made into a film with Robert Redford plating Woodford. The book set in train the events that led to Nixon’s resignation.