We have a tightly wound political situation in the US. On the one hand, we have a president who speaks and behaves impulsively. On the other, we have the Democratic Party and their lapdogs in the mainstream media, who are cocked and ready to do whatever is necessary to bring this presidency down. Last week, Donald Trump threw gasoline on an already smoldering fire when he fired FBI Director James Comey, at a time when the agency is investigating allegations of Russian interference with the 2016 election. The end result of that firing may well be that Trump is toast.
It?s almost ironic too. Thus far there?s been no constructive evidence of Russian meddling in the election. Had Trump just let this investigation run its course, the whole matter probably would?ve died out. But by firing Comey, the president may have set up the very ?scandal? that the Democrats and their allies have been waiting for. After all, the firing gives every appearance of a rearguard effort to short-circuit the investigation, perhaps even giving a hint that Trump knows that there?s something to be worried about.
Trump is Clumsy ? And That?s Why Trump is Toast
Donald Trump often acts like a child with ADHD. He?s amazingly impulsive and unrestrained for a 70-year-old businessman. Of course, given his lifetime occupation ? that of a real estate investor/promoter ? that personality is hardly out of character. In that industry, chutzpah and bluster often carry the day.
What?s confusing is that on his ?reality? business show, The Apprentice, Trump often came across as a knowledgeable, mature and polished businessman. This is totally unlike the performance he?s now giving in the White House.
His coarse statements and pronouncements, and whipsawing back and forth on various positions are making him look unstable. If someone wanted to bring down the Trump presidency in a scandal, he?s providing them with a rich target.
I Predicted Trump Wouldn?t Complete His First Term But This is Much Sooner than Expected
Just last month I wrote that this White House is under seige and in danger of not surviving the first term. But I completely underestimated how quickly that could happen.
In that article, I touched on how this situation will not be good for anyone?s finances. But the whole process is fast forwarding, and will likely be the major big picture story in the coming months and years. Even his own Republican party is ready to abandon him, and have been since the primaries.
Rest assured, it will not be pleasant ? even if you despise Donald Trump and believe that all of the country?s ills will be solved upon his departure.
Congratulations President Pence ? But Trump?s Enemies Will Target You Next
There will be two phases to the runoff of the president (as in run out of office). The first will be the lead up ? that?s the time between now and the president?s actual departure from office. That will be a time of deep divisions, fierce and emotional political debates, and rising uncertainty. This can go on for many months, and even a year or more before culminating.
People will eventually come to believe that the problems will disappear once the president is out of office. That will usher in Phase 2 – the actual departure of the president.
But it probably won?t get any better at that point.
Most of the people who are mortally opposed to the Trump presidency were equally disturbed at the prospect of Mike Pence as vice president. The same people who are now taking aim at Donald Trump will simply switch targets once Pence is president. After all, if they can bring down an elected president, think what they can do to his unelected successor.
This will set up two possibilities. The first is that Mike Pence is similarly run out of office. Expect a constitutional crisis if that happens, and possibly even civil unrest as the various powerbrokers and factions battle for supremacy.
The second is that we have a comatose White House between now and January 2021. That won?t be good for anyone.
The 2018 midterm elections should prove to be a disaster for the Republicans, no matter how the current debacle plays out. At a minimum, we will have an embattled Republican White House, at constant odds with an overwhelmingly Democratic-controlled Congress, teeming with aggressive and obnoxious politicians, pre-positioning themselves for a White House run in 2020.
Any matters of substance ? including dealing with a major crisis ? will be overwhelmed by the political circus.
How Chaos in the White House is Likely to Play out in the Economy and Financial Markets
People are discussing the departure of Donald Trump from the presidency as though it?s a engaging spectator sport. At least the people of a general left-wing persuasion are. Those on the right are viewing events nervously, well aware that their political and economic philosophies are in danger of falling into a sinkhole for at least the next 20 years.
But no matter what your political preference, rest assured that nearly everybody is going to take a hit from these developments.
The best example that we can look to is the 1970s. Few people remember that Richard Nixon won the 1972 election in a landslide. But within months of that victory, his presidency was beset by the Watergate scandal. As that took root, the presidency became effectively powerless. The country was increasingly run by the rabble in Congress, none of whom had any real concern about improving the American condition.
After Nixon resigned in August 1974, his vice president, Gerald Ford, ascended to the presidency. Considered an illegitimate president, since he wasn?t elected, Ford did little more than manage the government in the 2 ? years that he was in office.
In 1976, Ford lost a close election to Jimmy Carter, a president many view as one of the weakest in US history.
That shouldn?t be considered some sort of historic anomaly either. When a country loses faith in its leaders, it can become incapable of electing or even recognizing strong leadership. A history professor that I had in college even said that from 1963 until 1980 the US was essentially leaderless (the administration of Lyndon Johnson in the 1960s quickly became hamstrung by its devotion to the failed effort in the Vietnam War). I think that was a slight exaggeration, only because Nixon actually was an effective leader in his first term.
But the events that unfolded in the 1970s are a matter of historic record. Essentially, the economy and the social state of the country went from bad to worse as the decade moved forward. We had to come to grips with the failed war in Vietnam, the Arab oil embargo in 1973 and subsequent dramatic increases in the price of oil, double-digit inflation, multiple deep recessions, political instability and the decline of America?s standing as the leader of the world.
Along the way, the Soviet Union took advantage of the chaos by invading Afganistan, and radicals ousted a US backed leader in Iran and returned the country to a medieval theocracy. Both are events that we’re still struggling to deal with nearly 40 years later.
No one should doubt that the experience of the 1970s couldn?t be repeated today. Everything in the economy and the financial markets rests on the perception of stability. But when the office of the chief executive is rocked by scandal and political challenges, the entire country can descend into chaos.
Even if Donald Trump richly deserves to be impeached, it will not be a painless process. Yes, Bill Clinton faced impeachment in the 1990s and the country moved past it effortlessly. But the 1990s were an incredibly stable time, and Democrats never wavered in their support of Clinton. (It?s also important to remember that as a Democrat, Clinton didn?t have to face the wrath of the mainstream media, and even enjoyed their protection.)
The Likely Affect of Trump?s Departure on the Stock Market ? Two Possible Scenarios
During the 1970s the stock market essentially moved sideways. That is, it traded within a fairly narrow range. It would run up to 1000+ on the Dow, then fall back into the 800s. Along the way, it fell more than 45% from January 1973 through December 1974.
Will that pattern be repeated if Trump is run out of office? I can see two possible scenarios here:
Scenario #1 ? The Market Tanks on Uncertainty and the Tax Cuts that Weren?t
There?s some evidence, or perhaps speculation, that the stock market has been rising on expectation of the Trump tax cuts. Should Trump be run out of office, the whole concept of tax cuts will be dead for years.
But more significantly, the stock market thrives on stability and certainty. The hog tying of the presidency for most of the next four years will run counter to that condition.
As a result, we may experience a prolonged bear market, one that ultimately reverses the gains that the market has seen since the Financial Meltdown. There may even be an outright crash or two along the way. The effect of a prolonged bear market on pension plans alone will be an unmitigated disaster.
Scenario #2 ? The Market Continues it?s Relentless Rise Because the Fed is More Important than the White House
If uncertainty is the enemy of the stock market, how could the market ignore political instability at the top and continue rising? That?s actually a real possibility in the current environment. In the past few decades, the stock market has been focused primarily on the activities of the Federal Reserve, and not the White House.
For better or for worse, the Federal Reserve is seen as the power behind the throne in America. They can exert incredible influence on the financial markets through monetary policy and the manipulation of interest rates. For example, the current super bull market that began in 1982, has also been accompanied by a 35 year pattern of decreasing or stagnant (at very low levels) interest rates. As long as the market believes that interest rates will remain low, stocks may continue to rise despite political chaos. The faith that the Fed is essentially omnipotent may be considered all the stability that?s needed.
(This is a major factor, since interest-bearing assets are the primary competition against stocks. As long as interest-bearing investments yield no more than 1% – 2%, stocks will remain attractive since they hold the potential for higher returns. This is almost certainly the primary reason for the 35 year bull market, and not the much touted narrative of an improvement in economic fundamentals.)
We can only guess which of these two scenarios will likely dominate in the coming chaos.
The Likely Affect of Trump?s Departure on the Housing Market
One of the interesting anomalies in the 1970s was that house prices continued to rise throughout the decade, despite the goings-on in Washington. However, this may not be a reliable indicator of future events. In the 1970s, mortgage rates were capped by law. That meant that we could have 8% mortgage rates in an environment with 10% inflation. That made real estate the perfect inflation hedge (and was also largely why stocks were abandoned during the decade).
That cozy arrangement doesn?t exist in 2017, and is unlikely to be restored. That means the effect of political chaos on the housing market is a true crapshoot.
What we do know is that house prices have been rising steadily, if unevenly, for the past few years. Like a charging locomotive, that situation is unlikely to end overnight. We could see continued housing appreciation well into a political crisis. And once again, low interest rates are the driving factor in the housing market, much as they are in the stock market.
But watch out when the trend reverses ? and it eventually will. All bull markets eventually run out of steam. With housing, it happens because rising prices reduce affordability. When you add political instability to the mix, the fall can be especially nasty and long-lasting.
The Likely Affect of Trump?s Departure on Business and the Job Market
This is where the rubber will meet the road for the majority of us. Just as the stock market likes stability, so does business.
Political instability will affect business decisions, and almost entirely in a negative way. Business growth is heavily dependent upon capital expenditures. That?s when businesses invest in future expansion. It can include investments in technology, new facilities, and new product lines. But all of those investments require time to play out. A company makes a new investment, and then it can take several years before the venture becomes profitable.
During a time of political instability, businesses will refrain from making those investments. That will cause both new hiring and promotions to grind to a halt.
We also need to factor the disaster that is Obamacare into the mix. I believe that one of the primary reasons why Donald Trump was elected was because of his promise to dismantle and replace Obamacare. That?s the main reason I voted for Trump. While it already looks like that effort has been abandoned, Trump?s departure from the White House almost certainly means that there will be no reform in the foreseeable future.
Given that the cost of Obamacare ? to individuals, employers and the federal government ? is an unmitigated negative, that effect will be magnified by political instability. The cost of simply maintaining the trajectory that Obamacare is on will exaggerate all of the negative effects on businesses and employment.
Still another possibility, and one that?s hardly beyond imagination, is the likelihood that inaction on health care reform will likely result in Obamacare blowing up on its own. That by itself will prove to be a national catastrophe and one that will require firm White House leadership.
Now multiply the implosion of Obamacare by a politically impaired presidency, and tell me if you get any answer other than disaster?
Am I exaggerating the situation? Do you think Donald Trump will survive this latest blowup? Do you see this playing out any other way?
This is another one of these scenarios where I desperately hope to be wrong. But events don?t seem to be cooperating with that hope.