Thursday 8th June 2917
Economics, Geopolitics or History ? Answer : All of the above ....
ref :- "Wall Street turns a blind eye to Trumpian risks" , AMERICA by Edward Luce, Comment, The Financial Times
We're making a big effort NOT to discuss the three big events taking place today (even though each one could prove a market-shaker in its own right) on the grounds that we've already "been there, done that" this week. No doubt we'll examine the outcome of the UK election, the ECB meeting and ex-FBI boss James Comey's Senate testimony soon enough.
At first sight, you'd think anybody writing about "Trumpian risks" must lean pretty hard on the question of whether the President interfered illegally into an FBI investigation into the Russian Connection. But the fact is Edward Luce manages to ponder the record-breaking strength in US equities against a background of a whole raft of colossal own goals by this administration and potential global flashpoints, of which the Comey affair is just one. That, one might argue, says it all.
We can just about understand how Wall Street got to these sky-high valuations (even if they're making some feel a mite uncomfortable). Since November's US election, stock markets have been banking on "Trumpflation", with growth stimulated by aggressive tax cuts and infrastructure spending. More recently, they've been able to derive further support from stronger Eurozone growth, a very healthy round of US corporate earnings data and the prospect of central bank withdrawals from ultra-easy monetary policies that are likely to be gentler than many expected.
But this week was supposed to be one of fanfares for the roll-out of tax cuts, and barely anyone noticed. That's probably not so surprising since Mr Trump has put forward a plan for just $20 billion a year in cuts when $1 trillion was promised. It might also be true that the disappointment with the administration's inability to fulfill their promises was masked by the brouhaha surrounding the Comey hearing and just about every tweet the President insists on sending (against legal counsel's advice, one might add).
On top of all that, we've got the flare-up in the Gulf, North Korea's ongoing brinkmanship and Trump's controversial (yes, let's call it controversial) decision to pull out of the Paris climate accord. You could hardly contend that the state of the world is screaming out for higher and higher equity prices ..... and yet on they go.
In fairness, history suggests short-term economic fundamentals and their effects on markets are pretty impervious to all but the most seismic political meltdowns. Bill Clinton's impeachment hearings in 1999 didn't stop the Dow Jones from rallying .... but then as Mr Luce memorably puts it, catching a president in a sexual escapade with a White House intern was no match for the internet revolution. Even the big daddy of US political disasters, the Watergate crisis of 1973 / 74 is considered to have had very little to do with the subsequent sell-off in the Dow which had it's origins in poor economic fundamentals in advance of a global crash brought on by the great oil crisis.
Mr Luce's concern is that markets have failed to grasp the real danger that Mr Trump and his unprecedented actions pose to the global order ..... and by extension therefore, to global markets. For all the possible ramifications if proved true, it's not that he might have had an unhealthy relationship with the Russians, or that he might get impeached for trying to cover it up. The real risks are those presented by this particular President of the United States's flagrant hostility to the world order fashioned in large part by the United States itself.
It's often said (not necessarily by us) that analysis of President Trump's personality could keep a conference of psychiatrists occupied for months. That may not matter too much in the greater scheme of things for a property mogul, but in a president his kind of unpredictability should be of the very greatest concern ...... and it's getting worse. In no particular chronological order, the world has relied on the US for freedom, security, goods and ideas over the last 70-odd years. It's very possible that that could all go up in smoke.
What would happen for example if Mr Trump pulls the US out of the World Trade Organization ? What would he do if Russia invaded the Baltic states ? What if there's a clash with China in the South China Sea ? All unlikely scenarios, but possible .... and if you're getting the feeling that some momentous event is more likely to occur on Mr Trump's watch (and not in a good way), how do markets price in the kind of event that would change the world order ?
It's being suggested that we are worryingly close to a moment similar to 1914, where the old order was thrown out for good and no one would have known how to insure against it even if they'd had the perspicacity to see it coming. Listen to Douglas Rediker, a former US director of the IMF : "How do you hedge against the assassination of Archduke Ferdinand ? It's one thing to price in geopolitical risk. It is another to put a value on radical uncertainty."
Quite so, and Mr Trump has become the embodiment of radical uncertainty .... and as such he could present specific risks to equallyspecific bastions of the world order.
First and foremost, transatlantic stability .... or rather, the lack of it as the rift between Mr Trump and Angela Merkel grows. The US President is far from popular in Germany and Mrs Merkel has an election to win, whilst Mr Trump resents what he sees as lecturing from the European political class, and he's no fan of the EU to boot. The result of this faltering relationship is a weaker Nato which could tempt an ever-acquisitive Vladimir Putin to test the alliance's newly dubious resolve.
There's also the theory that China's Xi Jinping is staying nice and quiet until he secures another five year term, at which point he can start pushing boundaries once again, in more ways than one. And what do we make of Mr Trump's latest venture into the Middle East ? He apparently supports the Saudi-led severing of links with Qatar even while that nation hosts the major US air base in the region and thousands of US troops. What's the plan behind that, and how's it all likely to pan out ?
The point is that having been the guardian of global stability for so long, the US under Donald Trump is becoming a net generator of instability. Now that is something really new, and it's not at all clear how one would go about hedging against a "wild card US".
"Geopolitical crisis ? Buy Oil ....." used to be the market mantra. Well, we know oil is nice and cheap by historical standards, but as Mr Luce comments only mildly flippantly, going long of oil seems like a pretty weak hedge against all the possible threats represented by this extraordinary President.