For a president who worked very hard to make himself synonymous with the US economy and also with the stock market, recessions and bear markets are non-starters. Or at least they should be.
But Donald Trump has learned that his base is willing to accept pretty much any narrative he decides to conjure when it comes to explaining bad data or stock market declines. There’s always a scapegoat. Until the pandemic hit, Jerome Powell, China, and Democrats took turns shouldering the blame for any and all adverse economic developments and market swoons.
Trump wasn’t always wrong. The Fed did over-tighten, for example.
As SocGen’s Solomon Tadesse wrote nearly two years ago, if one measured from the lows in the shadow rate, the amount of Fed tightening delivered by the time Powell finally pivoted exceeded that seen during previous cycles by a fairly wide margin. In short, the Fed hit the ceiling at around 5.5% of de facto tightening (i.e., when you account for the unwind of QE).
But just as often as not, the president was tilting at windmills when blaming others for every twist and turn in the economy and every downward blip on the Dow.
The fact is, the uncertainty created by the trade war led directly to a dearth of business investment, which partially offset robust consumer spending, needlessly weighing on output with little in the way to show for it in terms of concessions from China. Consider that business investment had already fallen for three consecutive quarters headed into the pandemic.
Sometimes, when stocks fell, Trump would simply stop talking about the market, eschewing the opportunity to assign blame for fear of drawing attention to declines.
Headed into the election, Trump is facing a situation that one might be inclined to say “could only happen to Trump”.
Just a little over a month after regaling the world’s most important economists, policymakers and financiers gathered in Davos with the tale of how he “created a boom the likes of which the world has never seen before”, the US economy careened into a recession (wait for it), the likes of which the world has never seen before.
The man who promised to deliver quarterly GDP prints of between 3% and 4%, watched helplessly as the economy shrank 4.8% in the first quarter, and will be similarly impotent when Q2 shows the MAGA “miracle” disappearing into the black hole of a contraction expected to clock in at between -20% and -40%.
The man who pitched himself as America’s economic savior, and who once lampooned the idea that the economy would ever shrink during any quarter, is looking at a contraction so large that it really doesn’t even make sense to plot it on a chart.
Similarly, the man who became famous for tweeting “JOBS, JOBS, JOBS!” nearly every payrolls Friday for three years, is now the proud owner of a nine-week rolling jobless claims spike so large that if you didn’t know what happened, and were forced to take a guess, pretty much the only possible explanations would be widespread pestilence or some kind of coordinated, multi-city terrorist attack.
The difference between this highly unfortunate turn of events and previous boondoggles is that this time, most of the blame cannot be placed with Trump.
Yes, you can argue that had Sino-US relations not been frayed by two years of bickering over trade, coordination around the virus might have been easier. And, obviously, there are those who are convinced that any other administration would have handled the US outbreak more adeptly, saving thousands of lives in the process (I’m not convinced of that myself, by the way, even as I’ll be the first to say that Donald Trump is among the very last people you would ever want to preside over a pandemic response).
But the fact is, both parties are clearly predisposed to blaming China first, as that’s a relatively riskless strategy, and the more antagonistic Beijing becomes in Hong Kong, the stronger the case will be for painting China with the “bad actor” brush in the months ahead of the election.
All of that said, Trump can (and will) be judged on the success (or failure) of the reopening push. That’s self-evident to a certain extent, but some analysts suggest the election will be won or lost in the next several weeks.
“We believe that despite a lot of other noise, the election will be primarily a referendum on Trump’s handling of the pandemic, but more specifically, Trump’s handling of the reopening’, NatWest’s US strategists write, in a note aptly entitled “Will the US election be decided by June?”
They make the same point that I (somewhat begrudgingly) make above – namely that while nobody is going to forget Trump’s predictable missteps in handling the outbreak, if the reopening goes well, some voters will look past the myriad stumbles as the inevitable byproduct of mixing a vain, inexperienced leader with what might as well have been an asteroid strike.
“If the summer re-opening is successful, debate over the effectiveness of President Trump’s handling of the COVID-19 response in March and April can be looked past, with people back to work and the 4Q20 and 2021 economic outlook on a path to recovery”, NatWest writes, adding that “this would be a real problem for the Democrats, all the more so because Biden has nearly disappeared from the scene, dominated by Trump on TV and on social media at a time when traditional campaigning is severely limited by the pandemic”.
On Tuesday, Trump found himself in a spat with Twitter over the company’s decision to encourage users to “get the facts” on two of his tweets, which contained misleading information and unsubstantiated claims about mail-in voting.
But even if social media cracks down on Trump’s penchant for (and I don’t know any other way to put this), lying to voters, he won’t be deterred. He may take some kind of action against Twitter (he suggested as much on Tuesday evening), but there’s a sense in which all publicity is good publicity, especially when Biden is getting none at all.
However, NatWest goes on to point out that the reopening push cuts both ways. To wit:
Reopening prematurely or unsuccessfully is equally risky for Trump. One of Trump’s greatest strength, voters’ views that he is better than Biden to handle the economy, will be at risk with an unsuccessful or rocky reopening. A recent CNN poll noted “54%, say they trust the President to better handle the nation’s economy, while 42% say they prefer Biden.” So if the reopening is mishandled and more widespread lockdowns are re-initiated, and we see not a “swoosh” based recovery but a W-recovery (or for the virus, a second hump of cases/deaths), President Trump may lose his advantage on this critical metric. Our base case is that there will be periodic outbreaks, and we think that should be assumed even in a successful reopening.
There’s nothing there that’s particularly groundbreaking, but when you throw in the fact that some key states for Trump were particularly hard-hit economically, you end up with a situation where what happens in the next 45 to 60 days could make or break the vote.
For their part, NatWest suggests that if there’s a serious second wave and an accompanying lockdown, it might be game over for Trump. Here’s one additional excerpt:
If either (a) workers that think they are on temporary layoff find themselves on permanent layoff, (b) we open and then close again which likely results in the same thing, or (c) the nature of the reopening is so slow that growth doesn’t bounce as we all think, then economic failure even in just these several states, not just nationally, can put Trump at risk. Chart 3 below shows the severity of job loss and fiscal shock in various states; observe that the swing states of Pennsylvania, Michigan, and Ohio are all expected to face severe pain, to varying degrees. And psychologically, we are not sure the American people being asked to lockdown a second time on a widespread basis will go over very well.
The worst-case scenario is a reopening and then another lockdown. So far, that doesn’t appear likely, but we’re not far along enough in the reopening process to draw any definitive conclusions.
Note that NatWest warns on the possibility that “workers who think they are on temporary layoff find themselves on permanent layoff”. This is a crucial point and I discussed it at length in “Temporary Precarity“. I think we’d all be foolish to believe that every, single person who identifies as “temporarily” jobless will be rehired.
Finally, I’d be remiss not to raise a subject I’ve broached previously, to varying degrees of reader receptiveness.
I do not think it is a foregone conclusion that Trump leaves office if he loses a close election. No sell-side analyst is going to write that, but it should be on your radar, even if you think it’s a ridiculous thing to fret over. I also do not think it is necessarily guaranteed that there will be an election in November if it coincides with a meaningful second wave of the virus and Trump is behind in the polls.
Remember, Trump claimed massive voter fraud even after he won in 2016. He has never dropped that claim. Given how litigious Trump is, and considering the exigent circumstances that may end up surrounding the vote, it is not out of the realm of possibilities that the president simply refuses to leave office. It’s also not at all clear what could be done in that scenario.
I think, as intelligent people who are keen on making predictions about the future of markets and the political outcomes that affect asset prices, we would all be naive not to at least consider that as a possible tail risk.
After all, if somebody had told you in January that the nine-week rolling total of initial jobless claims would be 39 million by mid-May, you’d have thought that crazy. And now here we are.