Risk & Opportunity

A quarterly political and economic newsletter published by Michael Cuddehe

2017

Donald Trump – The Chaos President

This has been a difficult letter to write. The turbulence unleashed by the election of Donald Trump has continued unabated. The belligerent torrent of attack tweets and “alternative facts” emanating daily from the White House leaves one wondering how this could happen in America, and what will become of us. The news has become all Trump, all the time, and virtually all of it negative, creating an ongoing and pervasive sense of instability and crisis.

Unknown is how much of the spectacle is theater, how much is mental instability and/or incompetence, and how much is deliberate distraction. Setting aside the unsettling notion that our President is mentally incompetent, inquiring minds might want to take a careful look at plans being made for war, self-dealing, and/or tax and regulatory giveaways under cover of deliberately provoked chaos.

Or, given Trump's open admiration for authoritarian leaders, is he deliberately ramping up division and conflict until violence erupts, giving him justification to declare martial law? It’s noteworthy that Yale historian Timothy Snyder believes it is "pretty much inevitable" that Trump will attempt a coup.

The Russia Connection

The Trump-Putin bromance has been a strange one from the beginning. It has caused Trump nothing but grief, and for no apparent good reason. He has consistently gone out of his way to avoid criticizing Vladimir Putin, despite being more than willing to insult other heads of state, has promoted a Russia friendly position regarding NATO and the Middle East, and has persistently pushed back aggressively on reports of Russian hacking and interference in the election, while openly contemptuous of U.S. intelligence agencies’ consensus on nefarious Russian actions and intent.

This strange behavior, while refusing to offer up any plausible explanation for such unswerving support of an enemy state, naturally leads to questions of motivation. It is certainly plausible that there are financial connections/dependencies that Trump does not want to become public. His refusal to release his tax returns would support that theory, and press reports document long term Russian investment in Trump properties.

A more alarming theory is that Trump is compromised, as suggested by Max Boot, in effect the Kremlin’s man in the White House. That’s a pretty shocking thought, but the absence of any real information and a persistent lack of candor – putting it nicely – from the President, naturally leads people to question what he is hiding, and to think the worst.

Reports that Trump’s son-in-law, Jared Kushner, attempted to set up a secret back-channel to the Russians using secure communications in the Russian embassy only supports the worst notions, as well as Trump’s fawning treatment of Putin at the G20 meeting, and the revelation of campaign connected meetings with Kremlin connected Russians uncovered by the press, after months of denial that there had been any contacts with Russians by the Trump campaign.

Trump's sacking of FBI Director James Comey, while openly admitting it was due to Comey's investigation into “this Russia thing,” was a serious unforced error. It is a rather discouraging portrait of the state of our politics to see Republican leaders silently supporting Trump in this and other related matters that would otherwise send them into open revolt if a Democrat were involved.

The firing of Comey, and subsequent appointment of former FBI Director Robert Mueller as a Special Prosecutor to investigate the Trump-Russia connection signals that this is going to be a political cage match. At some point I think it is very likely that Trump will fire Mueller, and/or preemptively pardon everyone involved, including himself, and dare Congress to do anything about it. Then it will be up to the Republican leadership: save the republic, or save the party. I think we are going to find out how robust our institutions are, and how deep the rot in Washington goes.

Politics

Republicans are now in control of both houses of Congress and the White House. They were hopeful that they would have an open field to push through their agenda, but it is not working out that way so far. This is primarily because they have no coherent governing agenda other than deregulation, tax cuts for the rich, and annihilation of all traces of Obama.

The Republican Party has long been an insurrectionist movement, and for the past eight years in particular their politics has been entirely negative and destructive, dedicated solely to obstruction and demonizing Obama. The resulting moral and intellectual decay of the Party has been on full display in the health care deliberations.

During the Obama years, House Republicans passed over 60 bills to repeal or undermine Obamacare, but never bothered to seriously consider – let alone propose – an alternative. The agenda all along was to undermine Obama, to deny him any achievements, and not in any way to improve the health care outcome for the American people. So now that they are in a position to put their stamp on healthcare policy, they have nothing to offer.

The American Health Care Act of 2017 (AHCA), passed by the House to great praise from Trump (who later called it “mean”), which is now in a zombie state in the Senate, took the axe to Medicaid, leaving over 20 million uninsured, while jacking up rates for the elderly and those with pre-existing conditions.

According to Paul Ryan, this bill would increase choice for consumers (read: the choice to buy insurance that doesn’t cover much, or to not buy insurance at all because it’s unaffordable). It might better have been called the Medical Bankruptcy Restoration Act.

Republicans’ lack of preparation to govern has been exacerbated by the fact that Trump is not really a Republican, and his interests are not necessarily aligned with theirs. He is a populist demagogue who took control of the Republican Party because the Party has failed its constituents, just as the Democrats have failed theirs.

Many Republican policy goals will be detrimental to the very people who elected Trump, especially the wholesale evisceration of Obamacare, and the Orwellian named Better Way agenda of Paul Ryan, otherwise rightly known as Voodoo II economics, the consequences of which have been clearly demonstrated in the final collapse of the Voodoo-inspired Kansas Experiment, which put the state’s finances into a deep hole.

Henry Ford famously realized that if he gave good wages to his employees instead of exploiting them, they would be able to buy his cars. That wisdom seems to have been forgotten by the Republican Party, and by corporate America, both of which seem intent on strip mining every last dollar of every possible vein of profit from our economy, while driving American workers into penury. I don’t see how you build a thriving economy based on downward mobility and plutocracy.

A positive surprise was Trump’s pick for the Supreme Court, Neil Gorsuch. Liberals are still upset over the outrageous sandbagging of Obama’s nominee, Merrick Garland. But Gorsuch is highly qualified and respected by both liberal and conservative legal scholars. The truth is that Democrats couldn’t have asked for better from any Republican administration. I don’t think anyone would have been totally surprised if Trump had picked Kellyanne Conway.

Going forward, hyper-partisanship on both sides will be the order of the day. This has long been the state on the right, but the election of Trump has ignited a rebirth of the long dormant left, which is going to be just as hard-nosed and unyielding as the right. Those who have bought into the notion that Barack Obama is a “far leftie” are going to be shocked at the emergence of a virulent left wing in American politics. They will soon be wishing for the sober centrism of Obama.

Our politics has become war by other means. And as in war, truth has been the first casualty. Facts have become partisan fluid, fashioned to suit the need of the moment. Thus we no longer have a shared reality upon which to debate issues and formulate policy. Everything is seen through a partisan lens, as demonstrated by this University of Michigan study on the dramatic 75 point partisan reversal of economic optimism coinciding with the election of Trump.

Geopolitics

Over a long period of time, Congress has ceded it’s authority over foreign policy, including war, to the Executive. We presently live in “The Age of Unilateral Rule,” wherein foreign policy is made entirely according to the whim of the President. That’s a sobering realization, given the belligerence and unpredictability of our current President.

The whipsaw between Obama’s low key approach and Trump’s aggressive and constantly vacillating positions has thrown world leaders into a state of confusion. The uncertainty over where the U.S. stands on any given issue is straining alliances and raising tensions globally.

Trump’s “America First” economic nationalism threatens to ignite a trade war by tearing down the existing basis of global economic cooperation. One of his first acts as President was to cancel the Trans-Pacific Partnership (TPP), and he continues to threaten to withdraw from NAFTA, recently announcing a 20% tariff on Canadian lumber imports, and threatening big tariffs on steel imports. He has rejected the Paris Climate Accord, leaving the U.S. the odd man out in a 19-1 affirmation of the accord at the G20.

Long forgotten, it seems, is that the current global order was spawned by the desire to create an interdependence of nations based on shared commerce, so as to avoid a repeat of the devastating wars of the 20th century, which were waged between self-sufficient competing empires.

It’s worth listening to the NPR interview with Jorge Castañeda, the former Mexican Foreign Minister, on the importance of maintaining friendly relations with your neighbors.

Aside from the degradation of American credibility and stature on the global scene resulting from Trump’s behavior, a big worry is that he will either blunder his way into a war, or given that the traditional remedy for domestic turmoil is to redirect it to a foreign enemy, deliberately provoke one to distract attention from his problems at home.

North Korea may look like a tempting target, and Trump has already been ratcheting up tensions on the Korean peninsula. It will be a big plus for him if he can pressure China into dealing with this problem, which they no doubt can if they wish to do so. But the saber rattling could easily spiral out of control, with catastrophic consequences for the Korean peninsula, for the thousands of American troops stationed there, and possibly even for the U.S. mainland.

Former CIA director James Woolsey posted a hair-raising article on The Hill that should give pause to those who think a war with North Korea is a good idea. Alternately, Politico posted a brilliant solution to this problem by Tom Molinowski, former Undersectretary of State under Obama, entitled “How to Take Down Kim Jong Un.”

Regarding Russian hacking and interference in the election, our open society and dependence on the Internet leaves us vulnerable to this kind of meddling. As Obama said – unfortunately after the election – he let Putin know that he was unhappy about their meddling and that “we can crash their backbone” (e.g. crash their communications, transportation and power grid) but “the problem is that they can do the same to us.” And there you have it. It’s Mutual Assured Destruction (MAD) all over again with cyber warfare, with nuclear MAD lurking in the background.

A disappointing footnote to all of this is that in March, China’s Trademark Office suddenly granted The Trump Organization 38 trademarks, at least some of which had been previously denied for a decade. Meanwhile foreign delegations are falling all over themselves to curry favor with the Administration by holding their events at Trump venues, including Mar-a-Lago, which has doubled its membership fee to $200,000 since the election.

Citizens for Responsibility and Ethics in Washington (CREW) has filed multiple lawsuits attempting to force Trump to divest from a long list of enterprises that create conflicts of interest with his duties as President. America has never seen such blatant, third world style self-dealing from a President.

Economy & Markets

Job creation has been steady, positive in 22 of the last 30 months, and the unemployment rate is 4.4%, considered to be full employment. Corporate profits are healthy, and capital spending is on the upswing. Overall, confidence is high. It might be categorized as complacent.

Investors and business interests clearly consider the political turmoil to be superfluous, and are enthusiastic for promised regulatory rollback and tax reform. The stock market reflects that enthusiasm, with all indices trading at all-time highs, although doubts are creeping in regarding the Trump administration’s ability to deliver.

Despite the optimism reflected in the stock market, all other markets – bonds, metals and commodities – have been stuck in trading ranges since the election, reflecting uncertainty over policy direction, rates and inflation.

It’s a mystery to economists that with the low unemployment rate, why pay isn’t rising. There is growing concern that the long expected inflation resulting from repeated QE campaigns might be overwhelmed by deflationary pressures from overcapacity and massive debt growth.

It’s noteworthy that Ray Dalio thinks what we are seeing is pretty much as good as it gets. The global economy is “at or near its best.” He doesn’t see any problems immediately ahead, but expects the next big downswing to be “epic.” Also, notable are recent interviews with hedge fund stars Paul Singer and Bill Gross endorsing similar themes.

Trump has committed to big tax cuts as well as deficit spending on the military and infrastructure, and has also promised not to cut Medicare and Social Security. Taken at face value, this agenda is hugely inflationary.

Republicans, desperate for the tax cuts, are trying to decide if they are still concerned about deficit spending now that Obama is out. If history is any guide, they will forget about fiscal responsibility and start spending.

Trump has also promised a big push for reduced regulation, which will be welcome everywhere in the business sector, from mom and pops to big corporate entities. We can only hope that there will be an intelligent elimination of unnecessary and burdensome regulation, while retaining that which is necessary.

One should keep in mind that the last time we had regulatory rollback for its own sake, without much thought for consequences, we got the biggest financial fraud in history and the subsequent financial meltdown, from which we are still trying to recover.

Summary

It’s very difficult to read the tea leaves in this environment. There has been a general assumption that Trump’s policies will be good for growth, and stock valuations reflect that optimism. That assumption, however, is predicated on the existence of something like a functional Trump administration that can deliver on those policies.

The investigation into Trump’s Russian connections, and his increasingly desperate efforts to derail it, are taking all the oxygen out of the room. At press time, indications are that Trump is preparing to try to discredit and then dismiss Mueller, and anyone else at Justice who stands in his way.

Six months into the Trump term, despite total control of Congress and a Republican in the White House, conflicts among Republicans have produced gridlock, and zero legislative accomplishments, raising the question – can this fractious Congress pass a healthcare plan, a budget, tax reform, or any other meaningful legislation?

As difficult and frustrating as things have been for victorious Republicans, if Trump goes after Mueller, the chaos unleashed by this act will make it very difficult if not impossible to move forward on any policy issues.

As consuming as the political drama is, this is also a time of extreme distortion and risk in our economy (see Dalio, Singer, Gross above), and geopolitical instability. The potential for economic meltdown and war is real. Yet all of these points of conflict offer opportunities for upward resolution and major progress.

For example: on healthcare, having come to impasse, Republicans now have the opportunity to drop the phony demonization of Obamacare, and work with Democrats to fashion a fiscally responsible national health care program. A simple, honest effort such as this would immediately change public opinion of Congress, and create an avenue for the resolution of many issues that have languished in the shadow of partisan warfare.

What we have been lacking is the leadership necessary to take advantage of these opportunities. I see the Trump phenomenon as a test of the American people. The leadership is a reflection of the collective consciousness of the people. If and when the people wake up and demand a more constructive politics, things will change.

There are many dedicated individuals and organizations working to bring about positive change, who have the needed expertise across the array of policy issues. Check out the resources I am following on Twitter @politicsofunity for a sampling.

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