Don’t Bet on Trump Rescuing the Stock Market

If the president cares so much about the stock market, why is he pursuing trade policies that are anathema to Wall Street?

Should investors rely on Donald Trump underpinning the stock market by backing away from trade threats as stocks fall? In short: not as much as they seem to.

Many market watchers believe the pattern of the administration announcing progress on trade talks after falls in the S&P 500 amounts to a “ Trump put,” similar to a derivative that pays out when prices drop to a certain level.

The Trump put was on full display last week, when Mr. Trump delayed some tariffs due to be imposed on China next month, pushing up the S&P by 1.5%. The move followed a tumble in stock prices that had briefly taken the S&P down more than 6%—although the fall was triggered by his own action in imposing those tariffs in the first place.

There’s no doubting that Mr. Trump’s tweets have the power to move markets both up and down. It’s also obvious that Mr. Trump regards a strong stock market as a measure of success, something he has repeatedly referred to when it’s doing well. That’s led many to think that Mr. Trump will do what’s necessary to keep the market strong ahead of the 2020 election to win votes.

“Every investor I talk to, virtually without exception, gives me the identical argument that Trump cares about the stock market and will get a [trade] deal that will boost the economy and him in the elections,” said Tina Fordham, chief global political analyst at Citigroup.

She thinks investors are overconfident about the Trump put, though. “It’s better for him from an electoral perspective to force concessions and be seen to be tough, and to have that happen much closer to the elections in 2020,” Ms. Fordham said.

Another risk to the power of the “put” is that Mr. Trump keeps trying to support the market, but fails. Andrew Milligan, Edinburgh-based head of global strategy for Aberdeen Standard Investments, thinks the market is one of a number of “Make America Great key indicators” for the president, along with jobs and Fox News’s reports of corporate earnings. But even if Mr. Trump’s rhetoric offers support, the other countries involved in his trade fights might not play along, and stocks still suffer.

“There’s the possibility of policy error here by both sides,” Mr. Milligan said.

A Trump ‘Put’ in ActionDonald Trump often seems to ease off ontrade threats when the market is down.S&P 500Source: FactSetAs of Aug. 20, 12:33 p.m. ET
Some tariffs on China delayedAug. 7Aug. 12Aug. 15Aug. 20282528502875290029252950

Last week might be an example of the Trump put having little lasting power—it took just one day for stocks to reverse all the gains from the tariff delay.

The logic of the Trump put is questionable, too. If Mr. Trump cares so much about the stock market, why is he pursuing trade policies that are anathema to Wall Street in the first place? The obvious answer is that he has multiple goals, some of which differ from those of global investors; he’s also unpredictable, which increases uncertainty about government policy.

Making things still more complex, Mr. Trump’s actions overlap with the Federal Reserve and the more-powerful “Powell put,” the idea that Fed Chair Jerome Powell will ease monetary policy to rescue a falling stock market. This is both controversial—the Fed should be driven by the economy, not the wealth of stockholders!—and obvious: If the market’s falling because investors fear a slowdown, the Fed probably fears a slowdown too, and should act. Falling stock prices can also crimp consumer confidence and household wealth, and so slow the economy.

Donald J. Trump

@realDonaldTrump

Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to “will” the Economy to be bad for purposes of the 2020 Election.  Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world…

Donald J. Trump

@realDonaldTrump

…..The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!

21.6K people are talking about this

At the moment, the Powell put works when the Trump put doesn’t. The Fed is concerned that Mr. Trump’s trade fights are a risk to the economy, and has already cut rates once. Futures traders are pricing as certain a cut next month, with a further one or two cuts likely by the end of the year. The more Mr. Trump talks tough on trade, hurting the market, the more the Fed is likely to cut rates. Equally, if Mr. Trump can persuade the Fed to slash rates—as he recommended in a tweet on Monday—it is less risky for him to ramp up the action on trade.

This creates some perverse signals. Lower rates can help stocks by boosting the valuation of future profits, even if profits are likely to be lower in an economy held back by rising tariffs. Disentangling exactly how much stocks would be down by if the Fed wasn’t expected to respond is impossible, but prices would surely be lower.

Put this together and the Trump put is less reliable than many think, especially when combined with Fed moves. Even if the Trump put exists, the president could be freed to become more aggressive on trade if the Fed helps out with lower rates. At least as likely is that the Trump put fails, either because the president thinks electoral success rests more with bashing trade partners than supporting stocks, or because trade partners fail to play along. Be wary.

Why We Should Fear Easy Money

Cutting interest rates now could set the stage for a collapse in the financial markets.

To widespread applause in the markets and the news media, from conservatives and liberals alike, the Federal Reserve appears poised to cut interest rates for the first time since the global financial crisis a decade ago. Adjusted for inflation, the Fed’s benchmark rate is now just half a percent and the cost of borrowing has rarely been closer to free, but the clamor for more easy money keeps growing.

Everyone wants the recovery to last and more easy money seems like the obvious way to achieve that goal. With trade wars threatening the global economy, Federal Reserve officials say rate cuts are needed to keep the slowdown from spilling into the United States, and to prevent doggedly low inflation from sliding into outright deflation.

Few words are more dreaded among economists than “deflation.” For centuries, deflation was a common and mostly benign phenomenon, with prices falling because of technological innovations that lowered the cost of producing and distributing goods. But the widespread deflation of the 1930s and the more recent experience of Japan have given the word a uniquely bad name.

After Japan’s housing and stock market bubbles burst in the early 1990s, demand fell and prices started to decline, as heavily indebted consumers began to delay purchases of everything from TV sets to cars, waiting for prices to fall further. The economy slowed to a crawl. Hoping to jar consumers into spending again, the central bank pumped money into the economy, but to no avail. Critics said Japan took action too gradually, and so its economy remained stuck in a deflationary trap for years.

Yet, in this expansion, the United States economy has grown at half the pace of the postwar recoveries. Inflation has failed to rise to the Fed’s target of a sustained 2 percent. Meanwhile, every new hint of easy money inspires fresh optimism in the financial markets, which have swollen to three times the size of the real economy.

In this environment, cutting rates could hasten exactly the outcome that the Fed is trying to avoid. By further driving up the prices of stocks, bonds and real estate, and encouraging risky borrowing, more easy money could set the stage for a collapse in the financial markets. And that could be followed by an economic downturn and falling prices — much as in Japan in the 1990s. The more expensive these financial assets become, the more precarious the situation, and the more difficult it will be to defuse without setting off a downturn.

The key lesson from Japan was that central banks can print all the money they want, but can’t dictate where it will go. Easy credit could not force over-indebted Japanese consumers to borrow and spend, and much of it ended up going to wastefinancing “bridges to nowhere” and the rise of debt-laden “zombie companies that still weigh on the economy.

Today, politicians on the right and left have come to embrace easy money, each camp for its own reasons, both ignoring the risks. President Trump has been pushing the Fed for a large rate cut to help him bring back the postwar miracle growth rates of 3 percent to 4 percent.

At the same time, liberals like Bernie Sanders and Alexandria Ocasio-Cortez are turning to unconventional easy money theories as a way to pay for ambitious social programs. But they might want to take a closer look at who has benefited most after a decade of easy money: the wealthy, monopolies, corporate debtors. Not exactly liberal causes.

By fueling a record bull run in the financial markets, easy money is increasing inequality, since the wealthy own the bulk of stocks and bonds. Research also shows that very low interest rates have helped large corporations increase their dominance across United States industries, squeezing out small companies and start-ups. Once seen as a threat only in Japan, zombie firms — which don’t earn enough profit to cover their interest payments — have been rising in the United States, where they account for one in six publicly traded companies.

All these creatures of easy credit erode the economy’s long-term growth potential by undermining productivity, and raise the risk of a global recession emanating from debt-soaked financial and housing markets. A 2015 study of 17 major economies showed that before World War II, about one in four recessions followed a collapse in stock or home prices (or both). Since the war, that number has jumped to roughly two out of three, including the economic meltdowns in Japan after 1990, Asia after 1998 and the world after 2008.

Recessions tend to be longer and deeper when the preceding boom was fueled by borrowing, because after the boom goes bust, flattened debtors struggle for years to dig out from under their loans. And lately, easy money has been enabling debt binges all over the world, particularly in corporate sectors.

As the Fed prepares to announce a decision this week, growing bipartisan support for a rate cut is fraught with irony. Slashing rates to avoid deflation made sense in the crisis atmosphere of 2008, and cutting again may seem like a logical response to weakening global growth now. But with the price of borrowing already so low, more easy money will raise a more serious threat.

By further lifting stock and bond prices and encouraging people to take on more debt, lowering rates could set the stage for the kind of debt-fueled market collapse that has preceded the economic downturns of recent decades. Our economy is hooked on easy money — and it is a dangerous addiction.

Nigel Farage Is the Most Dangerous Man in Britain

He’s the most effective demagogue in a generation. Now he sets the agenda.

LONDON — Nigel Farage is the British crisis in human form. His party, the unambiguously named Brexit Party, which is hardly a party and didn’t exist six months ago, won nearly a third of the British vote in the recent European Parliament elections, putting it in first place and driving the shattered Conservative Party into fifth. Long underestimated, Mr. Farage has done more than any politician in a generation to yank British politics to the hard, nationalist right. He is one of the most effective and dangerous demagogues Britain has ever seen.

With his last political vehicle, the U.K. Independence Party, or UKIP, Mr. Farage took an assortment of Tory retirees and a smattering of ex-fascists and other right-wing cranks, and welded them into a devastating political weapon: a significant national party. That weapon tore such chunks out of the Conservatives’ share of the vote that the party leadership felt compelled to call a referendum on Europe — which it then lost. Mr. Farage declared victory and went into semiretirement as a pundit.

Now, almost three years after the Brexit vote, he’s back. His timing could hardly be better. After a “lost decade” of declining living standards and flat wage growth, trust in Parliament and the news media is at rock bottom. The Conservatives are disintegrating; Prime Minister Theresa May is on her way out of office, having failed to secure a parliamentary majority for her Brexit deal. She failed because, rather than seeking cross-party consensus, she tried to placate her own hard right and prevent voters from abandoning the party — again. Unable to do so, she has simply hardened public opinion.

A poll in April found that given a choice between remaining in the European Union, and leaving with no deal, 44 percent of Britons support “no deal.” The vast majority of these voters previously supported the Conservatives. But since they are the party of business, they can’t seriously contemplate leaving without a deal. Nor can Parliament.

The resulting stalemate, combined with an election in which the main parties barely campaign, presented Mr. Farage with an easy target. And thanks to his success, there is enormous pressure on the Conservatives to deliver Brexit in October, deal or no dealBoris Johnson, likely to replace Mrs. May as prime minister, is now pledging to do just that.

The Brexit Party’s campaign was a one-man show. While it has a sophisticated digital strategy, the party has no members and no manifesto, and none of its candidates were democratically selected. It offered only one policy: a “No Deal” Brexit. Its rallies focus on star performances by Mr. Farage, introduced with thundering motivational music. He is a gifted communicator, verbally dexterous, with a sense of humor.

Like many English reactionaries — including Mr. Johnson — he speaks in a nostalgic, “old world” register. He doesn’t talk about taxes or privatization. He talks about unfairness and loss, about the sovereignty supposedly ceded to Europe, immigration and elite cosmopolitans. And he names a placebo solution within reach: Brexit. The great escape. It’s a powerful antidepressant.

It is ironic that Mr. Farage appeals to people who are besieged by precisely the kind of volatile financial capitalism that he champions. He is, like President Trump, that paradoxical figure: the capitalist populist. He made his money as a City trader during the boom years of the 1980s, reveling in its adrenaline-fueled, heavy-drinking culture. He is the Gordon Gekko of British politics. It’s striking, to those who care to look, just how much his agenda is about class interest: He opposes extended maternity leave, raising the minimum wage and reducing the retirement age — anything that inconveniences his nouveau riche confederates. If he had his way, many of his supporters would be working harder, longer, for less money, with less protection. That, indeed, is his Brexit dream: Singapore on the Thames.

Even his racism is class-bound. Mr. Farage’s problem is not just with immigrants, it seems, but with poor immigrants especially: those from Eastern Europe, or Muslim countries, or those with H.I.V. He has said he would be uncomfortable with Romanians as neighbors, but he married a woman from Germany. He hates the European Union because its moderate social legislation and free movement defy what he thinks is a Darwinian cultural ecology through which some rise and others fall.

It is a mistake to overstate his “white working-class” base — UKIP included plenty of professionals and managers — but he has wooed many older, white workers, remote from the center of financial power where he built his career. Some were ex-Labour voters in manual jobs. His offer to them is that, in a society of dog-eat-dog competition, they will not have to compete with foreign workers. This is why the liberal press’s muckraking about his racism and far-right connections, by itself, generally doesn’t work. Far from impeding Mr. Farage, racism is his ticket to success. It puts him on the same side as his poorest voters.

With Parliament deadlocked and the Conservatives nearing their death throes, Mr. Farage has spotted an opportunity: a new political model, inspired by the Five Star Movement in Italy. A “digital platform” that harnesses the free labor of its “users,” allowing them “participation” through content-sharing and online polls, rather than rights. Parliamentary democracy is slow at the best of times, and these are not the best of times. Such platforms, however, introduce volatility to the system. Dropping UKIP, a traditional membership party, he launched something like a venture capitalist start-up, with crowdfunders rather than members, and a chief executive rather than a leader.

Hence, the Brexit Party. Unlike older party models, it doesn’t invest in lasting infrastructure. It is nimble-footed, expert at gaming social media — the stock market of attention. It won the battle for clicks, and made a killing in this election. Such online frenzies are akin to destabilizing flows of hot money, forcing legacy parties to adapt or die. But when Parliament is so weak, its legitimacy so tenuous, they can look like democratic upsurge.

That may be Mr. Farage’s ultimate triumph. The quintessential City trader and apostle of cutthroat competition, he is exploiting our democratic crisis to remake politics in his own image.

The Inevitability of Impeachment

Even Republicans may be deciding that the president has become too great a burden to their party or too great a danger to the country.

Whether or not there’s already enough evidence to impeach Mr. Trump — I think there is — we will learn what the special counsel, Robert Mueller, has found, even if his investigation is cut short. A significant number of Republican candidates didn’t want to run with Mr. Trump in the midterms, and the results of those elections didn’t exactly strengthen his standing within his party. His political status, weak for some time, is now hurtling downhill.

.. The midterms were followed by new revelations in criminal investigations of once-close advisers as well as new scandals involving Mr. Trump himself. The odor of personal corruption on the president’s part — perhaps affecting his foreign policy — grew stronger. Then the events of the past several days — the president’s precipitous

  • decision to pull American troops out of Syria,
  • Secretary of Defense Jim Mattis’s abrupt resignation,
  • the swoon in the stock market, the
  • pointless shutdown of parts of the government —

instilled a new sense of alarm among many Republicans.

 

The word “impeachment” has been thrown around with abandon. The frivolous impeachment of President Bill Clinton helped to define it as a form of political revenge. But it is far more important and serious than that: It has a critical role in the functioning of our democracy.

.. Lost in all the discussion about possible lawbreaking by Mr. Trump is the fact that impeachment wasn’t intended only for crimes. For example, in 1974 the House Judiciary Committee charged Richard Nixon with, among other things, abusing power by using the I.R.S. against his political enemies. The committee also held the president accountable for misdeeds by his aides and for failing to honor the oath of office’s pledge that a president must “take care that the laws be faithfully executed.”

.. The current presidential crisis seems to have only two possible outcomes. If Mr. Trump sees criminal charges coming at him and members of his family, he may feel trapped. This would leave him the choice of resigning or trying to fight congressional removal. But the latter is highly risky.

.. I don’t share the conventional view that if Mr. Trump is impeached by the House, the Republican-dominated Senate would never muster the necessary 67 votes to convict him. Stasis would decree that would be the case, but the current situation, already shifting, will have been left far behind by the time the senators face that question. Republicans who were once Mr. Trump’s firm allies have already openly criticizedsome of his recent actions, including his support of Saudi Arabia despite the murder of Jamal Khashoggi and his decision on Syria. They also openly deplored Mr. Mattis’s departure.

.. It always seemed to me that Mr. Trump’s turbulent presidency was unsustainable and that key Republicans would eventually decide that he had become too great a burden to the party or too great a danger to the country. That time may have arrived. In the end the Republicans will opt for their own political survival. Almost from the outset some Senate Republicans have speculated on how long his presidency would last. Some surely noticed that his base didn’t prevail in the midterms.

But it may well not come to a vote in the Senate. Facing an assortment of unpalatable possibilities, including being indicted after he leaves office, Mr. Trump will be looking for a way out. It’s to be recalled that Mr. Nixon resigned without having been impeached or convicted. The House was clearly going to approve articles of impeachment against him, and he’d been warned by senior Republicans that his support in the Senate had collapsed. Mr. Trump could well exhibit a similar instinct for self-preservation. But like Mr. Nixon, Mr. Trump will want future legal protection.

Mr. Nixon was pardoned by President Gerald Ford, and despite suspicions, no evidence has ever surfaced that the fix was in. While Mr. Trump’s case is more complex than Mr. Nixon’s, the evident dangers of keeping an out-of-control president in office might well impel politicians in both parties, not without controversy, to want to make a deal to get him out of there.