intelligencer chats

Is the Market Underplaying the Risk Trump Poses?

Others might not be laughing by the time he’s through. Photo: Brendan Smialowski/AFP via Getty Images

Ben: You wrote today that to the extent markets are concerned about the probably-imminent impeachment of President Trump, it’s not so much because of the political crisis aspect of the situation — it’s more that a cornered Trump might enact even more damaging trade and other economic policies than he has already put into place. What would such policies look like, do you think?

Josh: They could look like some of the things we have seen in the past — higher tariffs on Chinese goods, a floated idea to block U.S. investments in Chinese firms, escalation in the trade disputes with the E.U. (including the valid, WTO-certified dispute over subsidies to Airbus), Trump’s periodically threatened tariffs on European cars.

Trump has also periodically threatened to withdraw from NAFTA. He’s been appeased on NAFTA because he negotiated the USMCA, the NAFTA replacement deal that is very similar to NAFTA but “his.” Impeachment makes it less likely the House will pass USMCA, and he could get mad and withdraw from NAFTA, though he pointedly declined to threaten that last week when a Fox Business reporter asked him at the U.N.

There are also periodic bills to keep the government open, which he could veto. Or he could take other actions that would cause disruptions in international markets, such as military escalations in or around the Persian Gulf.

Of course, these are all things he could do anyway. But I think the concern is that impeachment might leave him inflamed, or seeking ways to demonstrate he still has power, or looking for distractions.

The countervailing force is that, under political threat, his greatest asset and one he really needs to retain is a strong economy. That’s likely why he sent some softening signals on China last week and passed on the option to threaten NAFTA withdrawal. But if the economy starts to weaken more anyway (which looks like a distinct possibility) he could decide his advisers were wrong to talk him out of his instincts on trade, and he could take some of these steps in the mistaken belief that he would boost the economy and the markets by taking them. Basically, the idea is that impeachment could push Trump to be more chaotic, and the markets like chaotic Trump much less than they like the Trump who signs corporate tax cuts.

Ben: It seems unlikely to me that any of these actions would help Trump’s reelection prospects, and some of them, like initiating a military attack, would be REALLY unpopular. But I guess the trade war itself isn’t popular, and that hasn’t stopped him. As we’ve noted, it’s one of the few issues that seems core to his DNA.

Josh: It is. And he’s pretty effectively deployed subsidies to blunt the direct, negative effects of the tariffs in places that depend heavily on agriculture. The problem is we’re starting now to see the deeper effects — the tariffs and the retaliatory tariffs, along with unrelated economic weakness that’s emerged in China and Europe, are hurting U.S. manufacturing output. People may or may not view that directly as an effect of the tariffs, but the economic weakness still hurts the president politically.

I should note: The tariffs hurt manufacturing in two ways. One is that other countries impose retaliatory tariffs and it becomes harder for U.S. firms to export their goods. Another is that a lot of manufacturers rely on raw materials, like steel and aluminum, that have gotten more expensive because of the tariffs.

Ben: This is kind of a broad question. I’m trying to imagine a political crisis the likes of which we haven’t seen before — something like Trump being convicted in the Senate and refusing to leave office, as unlikely as that is. Would such a crisis automatically be terrible for the economic picture, or is it something that markets could pretty quickly rebound from? Is mere uncertainty about what’s going on enough to throw things into disarray?

Josh: So let me preface by saying I don’t think that’s likely for a few reasons. One is that, for Trump to be in a position where at least 20 Senate Republicans are going to vote against him, there would have to be major underlying changes, likely including a significant erosion in economic performance that has undermined his popularity and made it possible for Republicans to break with him. And if the Republican Party has fractured enough for him to be convicted, Trump would not be able to meaningfully resist removal from office. He wouldn’t have enough internal support within the party (as demonstrated by 20 votes for removal), let alone enough support from the military and bureaucratic apparatus. So at that point we’re talking about a man ranting and raving on Twitter that he’s still president while Mike Pence runs the country.

So, no, I don’t think that affects the economy at the margin, though again, to have gotten to that place, something bad probably already happened to the economy. To the extent it affects the markets, I think it’s more likely because that level of disarray in the GOP signals the likelihood of a very strong Democratic victory, with enough of a mandate to do things like raise the corporate income tax or strengthen antitrust laws or do other things that equity investors would consider to be negative.

But to take your question more broadly: If we had some sort of constitutional crisis that was likely to lead to civil unrest, yes, obviously, that would be bad for the economic and market picture. You can just look at what’s happening in Hong Kong. The economy isn’t Hong Kong’s biggest problem right now, but it probably is heading into recession.

Ben: From your perspective, does the general market stance toward impeachment make sense?

Josh: Yes. With the caveat that I don’t think the market is that shaken by impeachment, there is no upside in impeachment for stocks, and it is possible to articulate some possible downsides. So yeah, it makes sense that impeachment would be negative for the market, by a little. But I think they’re mostly shaken by other factors.

Ben: Like all the bearish economic indicators that keep mounting?

Josh: Right. Now, of course, you could make a case that rule of law is good for equities in the long run, and impeachment is an assertion of rule of law, so shouldn’t that be good for stocks? But I think the links there are too tenuous, especially the latter one. I don’t think Trump being impeached materially changes the odds that, say, courts will enforce private contracts in the future.

Ben: Yeah, that seems like a stretch. Again, on the off-chance Trump was removed from office, I assume Pence would be a completely acceptable replacement from a Big Business perspective.

Josh: Yes, presumably a better replacement — much less likely to be erratic or to impose a lot of tariffs. But again, see above: other, negative things have to happen for stocks to get to a point where we’re replacing Trump with Pence. And with the GOP chaos that would entail, markets might be expecting Pence now but Warren in a year.

I want to note one aside about Elizabeth Warren, by the way. If she is the nominee, it is in her best interest that the market becomes convinced that she will win and be horrible, and get its tantrum out of the way while she is still a candidate. Then she can say the market is falling because of Trump’s shitty economic management, not markets’ fear of her policies. And then she can come into the transition with all the fears about her already priced into stocks, and if the economy and stocks are then less harmed by her policies than Wall Street fears, that will drive stock prices up.

Ben: I’m envisioning a lot of broker quotes directly tying fear of her presidency to a market decline, though.

Josh: Sure, which gives her another opportunity to attack Wall Street. People don’t feel sympathy for the brokers.

Ben: No, every one of those quotes is like an ad for her. But that might change if people become convinced, rightly or wrongly, that her presidency could lead to economic turmoil.

Josh: It could, but people tend to give the sitting president more credit and more blame for the economy than he deserves, especially with Trump, whose central pitch was that he was a business guy who could make the economy work. It is a tough sell to say economic (or even financial market) problems are being caused by the person who isn’t even president yet.

Is the Market Underplaying the Risk Trump Poses?