political risk/Nixon impeachment

Last week a reader asked me to comment on these two issues.  Here goes:

political risk

When investors talk about political instability/risk, they typically think about stuff that happens in emerging economies, like a country:

–defaulting on its international borrowings (think: Cuba or Argentina)

–changing tax or other laws retroactively (think: India)

–arbitrarily seizing foreign-owned assets (lots of places)

–having judicial ruling that favor locals no matter what the facts/law say (again, lots of places)

–having rigged elections (lots…)

–having crony capitalism (think: Russia)

–overthrowing the sitting government by military coup (lots…)

In sum, no matter what we think about partisan politics in the US, the EU or Japan, these are by far the most politically stable places for investors on earth.  The US, in my view, is the most stable–although arguably this is in part because I think I understand the rules of the game.

Having said that, I think there is an important stock market issue now beginning to play out in Washington.

As I see it, Donald Trump, an outsider, was elected in part on his promises to “Drain the Swamp,” to reform corporate taxation and to dramatically increase government spending on infrastructure.  At the very least, this is why the S&P 500 has risen by 15% since the election.  So far, however, he has demonstrated poor judgment, a lack of focus and an inability to grasp the basics of how to do the job he now has.   Of course, Washington insiders of all stripes haven’t been particularly helpful.

From a stock market point of view, though, if what we’ve seen so far from Mr. Trump is all he has to offer, it will be very hard for world stock markets to move higher–and we could lose, say, half of the post-election gains as investors come to terms with this failing.  

As I’ve been pointing out for some months, the “Trump trade” ran out of steam around inauguration time.  This may mean, ironically, that Trump stocks will be relative outperformers in any feet-of-clay correction.
Nixon impeachment

I’m taking this question as really being “What can we learn about the stock market during Nixon’s impeachment that we might apply if Trump suffers the same fate.”

Two modern presidents have been impeached, Nixon and Clinton.  So the sample is very small.

In the Nixon case, his impeachment wasn’t the only stock price depressing game in town.  During the same time frame we had:

–the first oil shock, with prices tripling

–the UK economy collapsing, requiring the IMF to prop it up

–the gold-based fixed-rate international currency exchange system in place since the end of WWII falling apart

–the early Seventies speculative stock market bubble, roughly the equivalent of the Internet bubble of 1998-2000, popping.

So while there may have been stock market weakness around the impeachment, it would be hard to factor out the other stuff.

As to Clinton, who was actually tried by the Senate, in January 1999, and acquitted, the market scarcely noticed.  Of course, Internet mania was just getting a head of steam then.  And unlike Nixon, Clinton remained very popular at the time–particularly among women.  Go figure.

As to assessing Mr. Trump’s stock market impact, I think a lot depends on whether his possible demise would be read as the fate of a hero done in by an entrenched, self-interested political elite defending its privileges or of a real estate bungler brought to fame as a reality host and elected in a win-the-lottery series of fortunate accidents.  In other words, would a Trump demise mean the end of the government reform movement–increasing the likelihood of a Japan-like economic fate for the US.





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