It has been said that the only two certainties in life are death and taxes. Perhaps it is time to add a third, which is that the majority of politicians will do whatever is politically expedient to get re-elected.
While there is a lot of noise going on at the moment surrounding the possible impeachment of President Trump, it should be remembered that impeachment is a political process and we are only in the investigation phase.
Given that we prefer to deal in facts rather than fiction, there is no denying that the US president is in a difficult predicament. Moreover, it is more likely than not that the news will get worse for him as the investigation continues.
Looking at his (former) favourite news source, the polling data does not look good.
No other president in history has had such bad ratings so early on in the impeachment process.
While at this point in time the Republican party seems to behind the president, a further deterioration in these numbers could cause things to change rapidly as Republican candidates reassess their chances of staying in power. In fact, a large majority of Republicans have stayed ominously silent, perhaps hedging their bets.
As we alluded to last time, the drop in US consumer confidence has led to an inflection in real economic data, with US manufacturing now technically in recession and services declining.
As demonstrated below, US retail sales are also exhibiting a worrying trend and it is possible that worse is to come.
All of this combined with a slowing global economy has placed many investors on edge, especially given the powerful psychological effect of last year when markets deteriorated significantly in the last quarter.
However, we should not forget that we have known the global economy is slowing for quite some time. As a result, markets should have priced in the vast majority of this news. Another vital factor this year compared to the same period last year is that central banks are in a highly accommodative mode. While they cannot deliver real economic growth, they can ease the pain somewhat.
It is of course a bizarre coincidence that the recent (unsigned) mini trade deal with China along with the withdrawal of US troops from Syria coincided with some especially noisy impeachment headlines!
Things carry on as they are with the US economy floundering and no conclusion to trade deals. Trump is not re-elected – after all, who wants to deal with all this nonsense when there is no economic benefit? No incumbent US president has ever been re-elected amidst declining consumer confidence and economic data.
Trade deals are struck in order to boost the economy ahead of the US elections. While commentators may care about the financial details, markets could not care less as they just want this whole tawdry episode to go away so that growth can return. In fact, since the implementation of tariffs no real progress has been made, with the recent deal being just what China offered the US two years ago, though of course it will be spun a different way.
Tariffs are increased and a new front in the trade war with Europe opens up. The US economy starts declining sharply, forcing the United States to change course rapidly.
Trump resigns, not wanting to go through the impeachment process or to see his party turn on him and convict him in the Senate (part of the deal would be a non-prosecution agreement).
This impediment to growth is removed and markets rally.
With the yield on US equities (S&P500) higher than that of 10-year US Treasuries (a consistent and reliable bullish market indicator), investors cautiously positioned and glued to political developments in Washington and many commentators talking about decade-long tensions with China, we find it very hard to be negative.
Peter Ahluwalia, Partner
Chief Investment Office
peter.ahluwalia@swisspartners.com
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