The Perfect Storm
What are the three elements of the perfect political and market storm I see coming together later this year?
The first is an effort by the Democratic House of Representatives to impeach President Trump.
The second is the socialist-progressive tilt in the 2020 presidential election field.
The third is the fallout from the Mueller report and the Russia collusion hoax — what I and others called ‘Spygate’.
These components are independent of each other but are at high risk of convergence in the coming months.
Let’s look more closely at the individual elements of impeachment, electoral chaos and Spygate that comprise this new storm with no name.
Impeachment for Trump?
The first storm is impeachment.
Impeachment of a president by the House of Representatives is just the first step in removing a president from office.
The second step is a trial in the Senate, requiring a two-thirds majority (67 votes) to remove the president.
Two presidents have been impeached, but neither was removed. Nixon resigned before he could be impeached.
If the House impeaches Trump, the outcome will be the same.
The Senate is firmly under Republican control (53 votes) and there’s no way Democrats can get 20 Republicans to defect in order to get the 67 votes needed.
So House impeachment proceedings are just for show.
But it can be a very damaging show and create huge uncertainty for markets.
There are powerful progressive forces in Congress and among top Democratic donors who are fanatical about impeaching Trump and will not be satisfied with anything less.
One poll shows that 75% of Democratic voters favour impeachment (including almost 100% of the activist progressive base).
Speaker of the House Nancy Pelosi and House Majority Leader Steny Hoyer have both poured cold water on impeachment talk.
They feel it’s a distraction from Democratic efforts to enact their legislative agenda.
But some of the party’s biggest private money donors, including Tom Steyer, are also demanding impeachment.
If Steyer does not get an impeachment process, he looks to support primary challenges to sitting Democrats who don’t join the impeachment effort.
This could jeopardise Pelosi’s speakership in a new Congress. So Pelosi could come under heavy pressure to go along with impeachment.
The final outcome is irrelevant; what matters is the process itself.
Impeachment fever is not likely to last long into 2020, because at that point the election will not be far away.
Voters will turn their backs on impeachment and insist that disputes about Donald Trump be settled at the ballot box.
That’s why you can expect impeachment fever to come to a head by late 2019. And that will create a lot of uncertainty for markets.
Trump to win in 2020
The second storm is the 2020 election.
Trump is on track to win re-election in 2020.
My models estimate his chance of victory is 63% today and it will get higher as Election Day approaches.
The only occurrence that will derail Trump is a recession.
The odds of a recession before the 2020 election are below 40% in my view and will get smaller with time.
Meanwhile, Trump will keep up the pressure on the Fed not to raise interest rates and will ensure that the US-China trade war comes in for a soft landing.
This may sound like a rosy scenario for the economy.
But it’s not so rosy for the Democrats.
Every piece of good economic news will cause Democrats to dial up their political hit jobs on Trump. Each one will try to outdo the next.
There are now 24 declared candidates for the 2020 Democratic presidential nomination.
That’s more than the Democrats have ever had before. Currently Joe Biden and Bernie Sanders are out in front.
Biden is considered the most moderate of the candidates.
But I don’t expect Joe Biden to stay in front for long, and I don’t believe he’ll win the nomination.
The only way for a Democrat to stay in the race is to stake out the most extreme progressive positions.
This applies to reparations for slavery, free healthcare, free childcare, free tuition, higher taxes, more regulation and the Green New Deal.
If Biden does fall away, then the choices are back to Sanders, Elizabeth Warren or maybe Kamala Harris. But one is more radical than the next.
So, you could have a shock effect where all of a sudden it looks like the Democratic nominee is going to be a real socialist. And that would rattle markets.
This toxic combination of infighting among candidates and bitter partisanship aimed at Trump will be another source of market uncertainty and volatility until Election Day in 2020 and perhaps beyond.
But the biggest threat is…
The third storm is the most dangerous and unpredictable storm of all: Spygate.
It involves accountability for those involved in an attempted coup d’état aimed at President Trump.
The Mueller report lays to rest any allegations of collusion, conspiracy or obstruction of justice involving Trump and the Russians.
There is simply no evidence to support the collusion and conspiracy theories, and insufficient evidence to support an obstruction theory.
The case against Trump is closed.
Now Trump moves from defence to offence, and the real investigation begins.
Who authorised a counterintelligence investigation of the Trump campaign to begin with?
Did surveillance of the Trump campaign by the US intelligence community (CIA, NSA and FBI) begin before search warrants were obtained? On what basis? Was this surveillance legal or illegal?
These are just a few of the many questions that will be investigated and answered in the coming months.
These criminal referrals will be taken seriously by Attorney General William Barr along with other criminal referrals coming from Congress.
Barr will take a hard look at possible criminal acts by John Brennan (former CIA director), James Comey (former FBI director) and James Clapper (former director of national intelligence), among many others.
At the same time, Lindsey Graham, a Republican senator from South Carolina, will hold hearings in the Senate Judiciary Committee about the origins of spying on the Trump campaign and lies to the FISA court.
These may be the most important hearings of their kind since Watergate.
Trump will be running for re-election against this backdrop of revelations of wrongdoing by his political opponents in the last election.
Actual indictments and arrests of former FBI or CIA officials will cause immense political turmoil. Such charges may be fully justified (and needed to restore credibility).
They will certainly energise the Trump base.
But they are just as likely to infuriate the Democratic base. Cries of ‘revenge’ and ‘witch hunt’ will be coming from the Democrats this time, instead of Republicans. Markets will be caught in the crossfire.
How do these three storms — impeachment, the 2020 election and Spygate — converge to create the perfect storm?
By November 2019, the impeachment process should be well underway in the form of targeted House hearings.
The 2020 Democratic debates (starting in June 2019) will be red-hot. Trump’s counterattacks on the FBI and CIA should be reaching a fever pitch based on real revelations and actual indictments.
The impeachment process and Trump’s revenge represent diametrically opposing views of what happened in 2016.
The Democrats will continue to call Trump ‘unfit for office’. Trump will continue to complain that the Obama administration and the deep state conspired to derail and delegitimise him.
The 2020 candidates will have to take a stand (even though they may prefer to discuss policy issues). There will be nowhere to hide.
The bitterness, rancour and leaking will be out of control.
Have a life vest handy?
Any one of these storms would create enough uncertainty for investors to sell stocks, raise cash and move to the sidelines.
The combination of all three will make them run for the hills. That’s my warning to investors.
The next six months will present unprecedented challenges for investors.
Markets will have to wrestle with fights over impeachment, election attacks and Spygate.
Trump will be trying to improve his odds with Fed appointments and an end to the trade wars. Democrats will be trying to derail Trump with investigations, accusations and leaks.
Some of this will be normal political crossfire, but some of it will be deadly serious, including arrests of former senior government officials and revelations of an attempted coup aimed at the president.
A perfect storm with no name is coming.
Investors may want to consider gold and cash. And make sure they have a life jacket handy.
All the best,