MarketLine Blog

President Trump: Twitter, crimes and misdemeanors are leading the US economy into a recession

Ongoing turmoil in the US surrounding the 45th President of the United States of America, Donald J. Trump, is reaching dramatic heights. An ongoing FBI investigation into the President, led by Special Counsel Robert Muller is reaching its end, resulting in a series of upcoming political decision points for opposing democrats. As the clock ticks, an ongoing trade war with China is resulting in severe short-term consequences to the American economy. Meanwhile, as the erosion of trust in American politics and democracy looks to be at its worst point in history, the bond market is signaling that Trump is leading the country into a recession.

As the investigation into the Trump Presidency continues, the democratic opposition stand waiting for the full publication of the results of the Muller inquiry. The full results will determine whether Trump has committed an impeachable crime, and may result in his abandonment by the rest of the Republican Party, or in the initiation of Democrat-led impeachment proceedings. Stock prices will be affected by the nature of an impeachment if the investigation reveals that Trump’s government has been colluding with Russia or if investors believe the results increase the likelihood of a Democrat government.

If the result implicates the President in a sex scandal, tax avoidance, or obstruction of justice then the effect may be relatively compartmentalized – fundamentally, company earnings will still be the same and the effects are not likely to have a lasting financial impact. Both Watergate and investigation into President Clinton caused little movement in the American stock markets or wider economy. However, if the results suggest the Presidency has been influenced by the Russian government then it’s difficult to expect anything other than a significant short-term reaction in stock markets not only would there be a political swing to the Democrats but there may be public and political motivation to undo some of the impact of two years of the Trump administration (for instance, revisiting programs like Obama’s flagship Trans-Pacific Partnership or reversing the various deregulations that have been implemented).

More significantly, it would undoubtedly escalate the likelihood of a confrontation with Russia. Historically, the US wars in Iraq (1990, 2003) resulted in a 10% fall in stocks. Previous US Wars have increased public debt and taxation, decreased consumption and investment, and resulted in short-term inflation.

As this upheaval continues, the US economy is beginning to feel the effects of an ongoing trade war with China, with its trade deficit currently at the highest that it’s been in a decade, and signs in the bond market that the economy is heading into a recession. In the long term, the effect of the Trump presidency could be severe, resulting in the erosion of democratic values and a more protectionist, less business-friendly, USA.

In December 2018, the US treasury yield curve inverted for the first time since the recession. Effectively, this means the return demanded by investors to loan their funds to the treasury over a short-term horizon has increased above that which they demand to loan over the long-term. In a usual market the reverse is true: long-term lending requires a higher return, due to there being an opportunity cost, inflation and interest rate risks factored into calculating the required rate of return. This inversion of the yield curve signals investors have concerns about the short-term economy of the USA. Historically, this event is strongly correlated with the occurrence of financial crises.

 

For more please visit marketline.com and explore reports on this topic such as:

US-China trade war: Tariffs are exacerbating existing trends, leaving few victors (2019) MarketLine Case Study

United States: Macroeconomic Outlook Report (2018) MarketLine country Profile

 

Posted in Government, Politics.

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