Donald Trump Doesn't Scare Investors, But His GOP Imitators Do
Back in 2001-02 Enron and WorldCom, two major U.S. companies, filed for bankruptcy within about seven months of each other. WorldCom's bankruptcy was the largest in U.S. history at the time.
Interesting about all this is how the markets reacted to what were two rather consequential corporate implosions. Calmly, as it turns out. As Jim Glassman noted, between November 8, 2001 when Enron announced that its financial statements "should not be relied upon", and June 25th (when WorldCom's deceptions were made public), the Dow Jones Industrial Average dropped 3 percent.
All of the above should be of interest to readers, but certainly not a surprise. Markets never price in the present. Rumblings about both companies had gradually been priced by investors ahead of the announcements. As evidenced by what was a small market retreat amid some already uncertain times (9/11, most notably), bankruptcies and instances of fraud don't much faze investors. Yet from June 25th through the end of July, the Dow fell 12%. The bankruptcies again didn't faze always forward-looking markets, but Washington's subsequent reaction in the form of Sarbanes-Oxley (passed 97-0 in the Senate) scared the hell out of them. A law that threatened CEOs with jail time for failure to properly account for earnings would surely neuter companies in ways that investors wouldn't like.
All of which brings us to the present market uncertainty. It's being said that China's retreat was well overdue in light of a market that had grown frothy, but for a wild-eyed bull to express his market optimism, he must find a sober bear to sell to him. Stock markets don't solely have buyers; rather passions balance each other out as the word "market" confirms. As for worries about a Chinese economy that can't sustain blistering rates of growth, pay no mind to the view. Figure markets have been processing the future of China's economy for years. Investors didn't just discover something new.
What about the U.S.? Some tie our market rumblings to China, and in particular the decision of the country's monetary authorities to devalue the Yuan 1.9% relative to the dollar. What a laugh. All China was doing in devaluing was seeking to maintain the Yuan's overall stability. As it's pegged to the dollar, and with the dollar's volatility high, Chinese monetary officials are merely moderating some of that volatility.
Others reflexively point to the Fed. Convinced that the Fed's zero rate policies tricked investors into bidding up higher yield assets, some are saying the Fed's eventual rate increase has markets spooked. This one's really a howler. It too presumes that markets only have buyers, but as always any zero rate, QE tricked bull can only buy insofar as someone sells. The rate argument also ignores that Japan's BOJ has kept the rate it sets near zero since seemingly the early ‘90s without a market rally. As for future rate hikes spooking markets, let's be serious. Those were priced long ago.
What's too often missed is that it's never the known that spooks investors. Markets are information machines, and they're constantly processing the known.
The source of corrections is always and everywhere surprise. Corrections result from entirely new news that investors must price. Enter Donald Trump. Here we have a more realistic source of market turmoil, but not in the way you might think.
It's fair to say that no credible source predicted that Trump would be leading most Republican presidential polls at this point. This counts as a surprise, but to believe that Trump will eventually be President Trump is to believe that an immigrant bashing misogynist who thinks Mexico and Japan are smacking us around economically will attract a majority (or something close) of the U.S. electorate. Not very likely. Also, as John Podhoretz has pointed out, Rick Perry had Trump's polling numbers at this point in 2012, while Rudy Giuliani did in 2008. Does anyone remember when Republicans thought Sarah Palin a future national star? These are early days, plus Americans generally don't vote for individuals promoting a negative message.
Sticking to Trump, some point to the protectionist in Trump soaring in the polls as the real source of market anguish. That's certainly more realistic, but then when in modern American history has the electorate placed a protectionist in the White House? Think hard. Never.
In that case, what seems the real surprise spooking the markets is the response of Trump's opponents to his success, or better yet, their imitation of the present frontrunner. As the Wall Street Journal reported recently, "China bashing has erupted on the 2016 campaign trail." Here is the more realistic source of market anxiety. Americans don't elect protectionists, but with Hillary Clinton and Bernie Sanders expressing anti-trade sentiment on the left, and Republicans increasingly imitating Trump on the alleged right, voters don't have much choice.
Campaigning in South Carolina last week, candidate Marco Rubio offered up the comical falsehood that "The Chinese government's efforts to devalue its currency and rig global trade are a rising threat to our economic interests." Many books could be written about all the confusion inside those 20 words, but for now one of Rubio's opponents might alert the Senator to the reality that China's currency has been pegged to the dollar since at least 1994. So if we ignore that Chinese monetary authorities pushed the value of the Yuan up over 20% relative to the dollar after 2005 amid intense dollar weakness, what we can't ignore is that if China's devaluing it's because the U.S. Treasury is not protecting the dollar.
As for its government's ability to supposedly "rig global trade," it would be nice if a Rubio opponent would ask him if we're buying Chinese goods at gunpoint? Someone might then ask how China's government manages to bully Walmart into stocking its wares. After that, one of Rubio's opponents might ask how Americans are hurt by low cost goods from overseas. And if the bargains kill "American jobs," should American producers in all 50 states be blocked from offering sale prices just in case the competition forces some U.S. companies to close? No one's offering up disagreement simply because China-bashing is the pathetic norm at the moment.
Missed by Rubio and the clownish Republicans eager to mimic Trump on trade and immigration is what a primitive, impoverished and cruel country the U.S. would be absent open trading lanes that mean we have the world's citizens competing to serve us; their role in the division of global labor maximizing our own ability to do the work that most animates our own individual talents. Having said that, maybe Trump and his imitators DO understand how disastrous barriers to trade would be, and eager to keep ambitious immigrants out, they've figured out that a weak economy usually does the trick.
Back to the markets, the surprise isn't Trump. He's long advertised his protectionist ways. What arguably has them scared is that none of his opponents are expressing their disagreement with Trump. There's your surprise, and resulting global market uncertainty as Iran-obsessed Republicans talk up the kind of isolationism that is exponentially more perilous to global peace and prosperity than any deal with an irrelevant Middle Eastern country could ever hope to be.