Analysis |

Trump or no-Trump, Things Look Bad for Wall Street and the Dollar

It is hard to imagine a scenario where a Trump impeachment or resignation would end happily for investors, in Israel too

David Rosenberg
David Rosenberg
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This file photo taken shows the New York Stock Exchange in New York, February 16, 2017.
This file photo taken shows the New York Stock Exchange in New York, February 16, 2017.Credit: AFP/Bryan R. Smith
David Rosenberg
David Rosenberg

Fear and loathing of Donald Trump has become so intense that few people actually ask themselves what would happen if the president is forced out of office.

Everyone imagines the scene out of the Wizard of Oz when Dorothy kills the Wicked Witch – her henchman are grateful for ridding them of the burden of serving her, the munchkins stage a colorful parade to the tune of “Ding, Dong, the Witch is Dead” and Dorothy is soon back in Kansas.

A great movie, but we’re not in Kansas. We’re in America 2017 and the idea that all problems can be solved by removing one man from office is, to say the least, unrealistic.

Yet the fantasies of a beautiful post-Trump America seem to be shared even by those who should know better, like the denizens of Wall Street.

Periodically, the market is shaken by the twists and turns at the White House, but the overall trend shows investors’ real feelings: The S&P 500 index closed last week at a record high.

The prevailing wisdom on Wall Street seems to be that Trump will not be impeached or leave office early and that, even if he does, the U.S. economy is in good shape. Corporations just turned in their third straight quarter of earnings gains and even if GDP growth was a little disappointing, the outlook overall remains good.

And if Trump does go, the Wizards of Wall Street reason, things will be even better. Like Trump, Mike Pence is business-friendly and, unlike Trump, he is a skilled and experienced politician. The Republicans command solid majorities in Congress. It’s a win-win with Trump in or Trump out.

Water won't work

The problem, however, is in the transition. Dorothy dispatched the Wicked Witch with a bucket of water within a few seconds, but Trump isn’t likely to melt away nearly so fast. As embarrassing and scandalous his administration is, the case for impeaching Trump still isn’t there and the Republicans will set a high bar for making one. The GOP leadership doesn’t like the president much, but in the hyper-partisan atmosphere pervading America right now, backing impeachment would be tantamount to backing the enemy Democrats.

That means a prolonged period of political crisis. Say goodbye to healthcare reform (thank heavens) but also to Trump’s tax overhaul and the big infrastructure spending plans that investors were counting on to fatten corporate profits and justify higher stock market valuations. Wall Street is trading 18.7 times forecast earnings for 2017, way over its historic average, which makes it vulnerable, not just to bad news out of Washington but to no news at all.

Then, let’s suppose Trump is out and Pence is in, say sometime in 2018. Out would go Jared Kushner and his Russian cronies, Steve Bannon and Sean Spicer; in would come the usual GOP Washington types that the business world feels more comfortable with. But there would be a transition period as the new president drains the Trump swamp and lost time.

The mid-term Congressional elections would be an electoral circus of angry Trump supporters, confused Republicans and vengeful Democrats that will surpass even the 2016 elections. My guess is that it would result in Washington gridlock – a Democratic-controlled Senate and a House controlled by Republicans, divided between hardline conservatives and pragmatists. Pence’s economic agenda would be dead in the water.

And all this assumes there are no major crises along the way that demand urgent action from a dysfunctional Washington.

Why Israel should worry

The dollar is a better barometer than the Dow for how things look for the U.S. No less than Wall Street, the foreign currency market was smitten by Trump in the early days, but more recently it has come to its senses and the dollar index is down about 5.7% from its post-election high.

"The Trump premium in the dollar has become a Trump discount. Global capital just doesn't feel safe coming to the U.S.," Robert Sinche, chief global strategist at broker dealer Amherst Pierpont told CNBC last week.

For us in Israel, this should be cause for worry.

From the point of view of Naftali Bennett and the right, an embattled Trump is good news because all the talk of the ultimate peace deal would evaporate as would the pressure on reining in settlement construction. But for the rest of Israel it’s a different story.

The weaker dollar has created a stronger shekel – on Friday it was at its strongest against the dollar since August 2014 after a 7.4% appreciation so far this year.

So far, Israeli business has coped with this quite well, with exports up at an 11% annualized pace in the first quarter. But it takes time for the effect of a weak dollar to set in and when it does, the Israeli economy will be vulnerable.

Economic growth has been led in the last couple of years by a consumer-spending boom, but that is over and exports were supposed to take over from now on. They’ll have a tough time doing that with a weak dollar.

From Tel Aviv or Jerusalem, Trump’s troubles may look like someone else’s problem, but think again.

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