Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

23 September 2017

Why the “Trump Bump” is Over


[Click here to skip to the current essay. For brief comment on the chance that President Trump might actually become a leader, click here. For a comparison of Cohn’s with Tillerson’s response to Trump coddling bigotry, click here. For a recent essay on how and why our Civil War continues today, click here. For the usual catalogue of popular recent posts, click on the appropriate link below:]

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Why the “Trump Bump” is Over

Here, in rough order of importance, are ten good reasons why the stock-market rise since President Trump’s election is dead or dying:

1. The Fed’s unloading
2. Markets hate uncertainty 1: war
3. Markets hate uncertainty 2: health insurance
4. The Trump euphoria is over, or it should be
5. Markets hate uncertainty 3: politics
6. The US is getting ostracized
7. Globalism giveth, and globalism taketh away
8. Everywhere you look, you see rot
9. Winter is coming
10. Lies help nothing
Conclusion

1. The Fed’s unloading. Earlier this week Janet Yellen made clearer than ever that the Fed is going to stop buying government securities, or at least stop re-buying them after they come due, to the tune of a maximum of $10 billion a month this year and $50 billion a month next year.

At that rate, if continued, it would take over six years to liquidate the Fed’s $4 trillion portfolio. So not much will change overnight. But the Fed’s dumping assets should cause at least short-term interest rates to begin to rise right away. As time goes on, the rise in return on relatively riskless assets will take some money out of stocks and into bonds, reducing the demand for and prices of stocks.

The “see-saw” between stocks and bonds is as old as organized markets in securities. We’ve been stuck at an artificial high in stocks, made possible by the Fed bailouts, for going on ten years. But that fact does not repeal the age-old verities. Now the bond side of the see-saw is going up, and the stock side will likely go down.

2. Markets hate uncertainty 1: war. Trump is threatening no less than two wars, with North Korea and Iran. I’m on record on this blog saying that the first war might be the best of dismal alternatives. But the second would be totally gratuitous.

Trump wants to “renegotiate” the nuclear deal with Iran. But he has no leverage. All our domestic experts (in both parties) think he ought to stick with the deal we’ve got. Worst yet, the other parties to the deal (China, Britain, France, Germany and Russia) are itching to do business with Iran. They are unlikely to support or observe additional sanctions on Iran.

So the only real “leverage” Trump would have with Iran is war or the threat of war. He can’t just stiff Iran as he allegedly has his employees, business partners and students, far less unilaterally, without our allies. So if Trump is serious about ditching the deal we have, we’ll be closer to war with Duyba’s “Axis of Evil” than we’ve ever been. Unfortunately, markets don’t like war, although war might make defense stocks rise.

3. Markets hate uncertainty 2: health insurance. If the Graham-Cassidy health-insurance atrocity passes, and if Trump is so imprudent as to sign it, health-insurance markets will descend into chaos. That’s what virtually all our health-insurance trade associations and some leading insurance firms say.

Faltering insurance markets could bring down finance, which might bring down our economy again. Remember how the near-failure of insurer AIG helped cause the Crash of 2008? or how the failure of European insurer Dexia caused aftershocks and required a bailout in Europe?

Health-care accounts for about one-sixth of our economy, and private health insurers support a substantial part of it. So it’s possible that passage of Graham-Cassidy alone could cause our markets to retrench, especially those related to health care and health insurance.

Late-breaking news: Friday Senator John McCain (R., AZ) denounced the hasty and careless manner in which the Graham-Cassidy bill arose. He pled for deliberate and careful bipartisan action on health insurance. His respected voice, as well as announcements by other Republicans, made actual passage of Graham-Cassidy unlikely. But the failure of that hastily-thrown-together bill still leaves private health-insurance markets in limbo, at least until next year. It remains to be seen whether whatever emerges from bipartisan compromise will stabilize or further roil health-insurance markets.

4. The Trump euphoria is over, or it should be.. Trump has been in the White House for nine months now. That’s enough time for a woman to conceive and bear a child.

Unfortunately, the Trump Administration so far has been barren. In all that time nothing real and significant has happened, except avoiding national default (for three months), avoiding a government shut down (ditto) and starting the flow of relief money for Hurricane Harvey victims. And it took rare cooperation with Dems to make even that happen.

Other things that have happened, such as weakening banking and environmental regulation and punting DACA to Congress, are generally negative. Weakened regulation may increase the profits of some businesses, but it will hurt others, not to mention the people the regulations protect. Keeping 800,000 young people under the risk of deportation, when they are just in school or starting their careers, is not good for them, their educational institutions, or the general economy.

It could have been different. Trump could actually have improved the lives, jobs and pay of the people who voted for him by making massive infrastructure investment his first priority. But he didn’t.

Instead, he jumped on the GOP bandwagon for the last seven years. He doubled down on having no perceptible plan to improve our nation or people’s lives but making our first black president look bad. He tried to repeal Obamacare without the ghost of a credible replacement.

Now we Americans are staring down the barrel of Graham-Cassidy, which could be even worse than its two failed predecessors. Its self-evident purposes are to kill government-assisted health insurance, give the money released to the rich, and to shift health-care subsidies massively from the populous North and West, to the less populated and productive South and Midwest, where Graham-Cassidy’s supporters cluster. If this atrocity passes, it would deprive millions of access to medical care and expose many middle-class people to bankruptcy, suffering or death. In so doing, it will deepen regional rivalries and hatreds, strengthen arguments for secession, and stir the caldron of political uncertainty.

As if all this weren’t bad enough, Trump has cast his next two legislative priorities in stone by giving Congress six months to resurrect DACA and decreeing a full-court press for tax “reform”—another giveaway to the rich and corporations.

Next year is an election year. Its elections will be among the most bitterly contested in our national history. The chances of serious cooperation between right and left will all but disappear. So infrastructure will have to wait now for almost two years, if Trump has any political capital left. By then the Trump Bump will long since have become the Trump Slump.

5. Markets hate uncertainty 3: politics. US history has few analogues to today’s political uncertainty. The best that come to mind are the leadup to our Civil War, and the Vietnam War era. That’s why Ken Burns’ TV series on the Vietnam War and the domestic division it caused is so timely.

Within the next two years we could suffer any or all of the following: (1) the first-ever removal of a US president after impeachment; (2) the breakup of the Republican Party; (3) the formation of a new party; (4) the whiplash of a progressive Congress, or one of its Houses, replacing the most radical and extreme right-wing Congress since Reconstruction; or (5) the start of a serious move toward breaking up the United States. In the meantime, the parts of politics that most directly affect our economy—infrastructure, insurance, banking, and the status of 11 million undocumented workers (including their children)—will remain in limbo.

And that’s not all. There are two additional aspects of political-economic uncertainty: whether the GOP’s attempt to steal the nation’s substance for its rich and powerful backers or the Red States will succeed and what economic dislocations that will cause. Sooner or later, the homeless that the rich will have to step over on the way to their offices will become a nuisance. Sooner or later, the vast majority of the people, and the “minorities” who are supposed to take over this country in about one generation will see reality and begin to revolt, politically or otherwise. Can all this be good for markets?

6. The US is getting ostracized. As a budding center of right-wing ideology, authoritarian government, racism and xenophobia, the United States is in a far better position that prewar Germany. We just freely elected our would-be tyrant; we haven’t yet made him Führer; with luck, we won’t ever.

We haven’t started a world war lately, although we started two smaller unnecessary ones and are threatening two more. Unlike World War I for Germany, the big war we lost (in Vietnam) didn’t maim any major powers, except maybe us ourselves. And its memory outside our borders is fading.

Europe and Japan are still grateful for the money and military aid we have given them since humanity’s most terrible war. Much of the world thanks us for starting the UN and leading humanity to a new, global economic order. So we Yanks have a large reservoir of international goodwill that Germany never had after World War I.

Yet the signs of failing patience and growing ostracism are everywhere. Our pols are unique globally (except for Syria) in refusing to acknowledge global warming. Our inconsistent and erratic statements about North Korea, Asia generally, and NATO have caused our longtime allies to seek solace elsewhere. Even those most threatened by China, such as the Philippines and Vietnam, are now seeking to accommodate China.

As we turn our back on the rest of the globe and globalism, rising nations seek to replace us and play our role. They included China, Germany, India and Brazil. Even Russia, in its awkward, spook-led way, is seeking greater accommodation with Europe and China and greater cooperation with its Middle-Eastern and South-Asian neighbors.

The brain drain from others to us hasn’t stopped yet. But what will happen if we reduce legal immigration to well below 50,000 per year, as Trump wants? Won’t the rest of the brain drain flow to other nations? Might it even reverse?

Once we were the indispensable nation, in finance, in military hardware, in defense, and in technology. Now our president has declared us to be dispensable and, through his actions, curmudgeonly. Can outflows of trust, credulity, brains and money be far behind?

The world will not have infinite patience with our self-absorption, our apotheosis of celebrity, or our neglect of the norms of truthfulness, politeness, consistency, diplomacy and reason that have transformed our species from beasts to Homo (allegedly) sapiens. It will not countenance, let alone applaud, our abandonment of the science that underlay our leadership in commerce, trade and war during the last century.

7. Globalism giveth, and globalism taketh away. From NATO and ANZUS, through our alliances with Japan and South Korea, to the UN, Bretton Woods, GATT and WTO, we Americans have helped build today’s world order. Perhaps more than any other nation, we have committed ourselves to it. Others have run with us at full speed, so we cannot now retreat without being left behind.

We can impose whatever self-defeating restrictions on immigration we foolishly choose. But we will not and probably cannot restriction emigration. So we are and will remain vulnerable to brain drain, both of people who came here seeking better lives and our own natives who can’t find suitable jobs.

As the primary proponent of open markets and unrestricted capital flows for decades, what will we do when capital starts to flow massively offshore? As the demand for dollars falls, will we restrict outflows like China? Unlikely. And our First Amendment leaves us open to others’ propaganda and fake news, as the last election just showed.

We have made ourselves vulnerable to the globalism that we created and pushed for over three generations. Now we have to live with it. The longer we violate the rules we ourselves have pushed on others, the more we will fall in their estimation, the less they will see us as sensible and reliable, and the less advantageous our trade and security relations with them will be.

In the the next few years both outward brain drains and significant outward capital flows are possible. The coming boom in crypto-currencies, which we did not invent but to which we especially are open, will facilitate capital outflows and make them hard to monitor. Crypto-currencies will also facilitate crime, money laundering, significant arms trafficking (including to terrorists), graft and corruption. Wouldn’t it be nice for corrupt businesses to be able to bribe our pols while being sure that no one could follow the money? They wouldn’t even have to disguise their bribes as campaign contributions.

Unless we can reverse the trend of the last nine months—unless we can return to reason, politesse, diplomacy, vibrant but controlled immigration, and respect for minorities and science—our moral and economic decline will continue. Software and mobile devices are not the last words in human progress and advancement. Things like private space travel, nanotechnology, computerized biology and gene editing, quantum computing and communication, and advanced genetics-based medicine are next. Whether we can continue to lead in these fields as we did in electricity, electronics, computers, software and related medicine remains to be seen.

The clock is ticking, and time for us is running out.

8. Everywhere you look, you see rot. We have a president and members of Congress whose casual lying has reached new depths never before seen in the United States. We have businesses whose goal is “monetizing” everything in sight, rather than doing any job well, let alone doing good. Many of these businesses are so dysfunctional they can’t keep their own operations running right or smoothly; when customers complain, they fob them off on low-wage Indian or Filipino phone reps reading from a script.

Wells Fargo Bank, once the paragon of honesty and back-office efficiency, stands accused of defrauding customers by signing them up for accounts and “products” (including insurance) that they never asked for. A self-important youngster, somehow allowed to run a pharmaceutical firm, oppresses people with rare diseases by raising the price of their essential medications by multiples, for no apparent reason other than price gouging. Our business community utters not a peep; and the young man is sentenced to jail, like Al Capone, for a technical offense far from what stinks to high heaven.

One car maker is fined gravely for designing software to cheat on emissions tests. Then another is accused—a German firm (Volkswagen) at the heart of Germany’s rise to economic power and redemption from the ashes of World War II. It’s beginning to look as if that firm, in combination with others, committed a deliberate fraud on the whole continent of Europe, leaving its roads, towns and cities full of unhealthy diesel fumes and its citizens believing that diesel is more efficient and an answer to Energiewende.

Then, of course, we have the summit of sleaze. The fossil-fuel industries, throughout the West, have gone on a massive propaganda campaign, seeking to convince drivers and voters that their products are not responsible for rising temperatures and more violent storms, and that they will last forever (or functionally so). Using the most powerful tools of lying and persuasion that humanity has yet developed, they seek to blind us to the inevitable exhaustion of fossil fuels, which is rushing towards us with the speed of a freight train, and its effect on the energy we use, its prices, and declining fossil-fuel feedstocks for our fertiliziers, chemicals and medicines.

This is far from all, but it’s enough to get the flavor of our American and even global moral and economic rot. Just as before the Crash of 2008, no one is minding the store of reality, let alone morality. Everyone’s out for himself, with the richest and most powerful far ahead, and devil take the hindmost. The phenomenon is more diffuse than in the Crash of 2008, where it was confined to liars’ loans and their derivatives. But doesn’t that just make it more dangerous and its consequences harder to predict?

9. Winter is coming. Our own negligence is heating our planet, but we still haven’t abolished winter. It’s now almost October, the onset of real fall in the Northern Hemisphere. It’s getting cold, even in parts of California.

October is the time when exuberance (irrational or otherwise) turns to real conservatism, not the crazy kind that the GOP tends to profess today. Even squirrels feel it; they stop prancing around lawns and begin seriously to hoard and hide their nuts for winter. People put their tents, plastic swimming pools, lawn chairs and summer clothes away and get back to work.

Fall is also a time of great change. Often it happens when the false exuberance fades with summer, to be replaced by an overwhelming sense that things are not right. The Crash of 1929 came in October. So did the Russian Revolution. By October 2008, even the pols whose constant mantra was “Things are OK; don’t worry!" began to understand that, without swift government action, the global economy would collapse.

So it’s a good time for all but the angriest Trumpets to see, with regret but all of a sudden, that maybe they made the wrong choice. Maybe a solid future can’t be based on lies. Which brings me to the last of my ten points.

10. Lies help nothing. Almost a year before the Crash of 2008, I sold out and saved my retirement. My reasons for doing so I called my “Diogenes Test.”

Remember Diogenes? He was the guy who supposedly roamed around ancient Athens, looking for an honest man. He never found one.

In 2007, neither could I. But today things are worse.

There are two big differences between then and now. Then the lies were less explicit. True, they came from the highest levels of our government and our businesses. But they were mostly what I call “PR speak.” They were words, sentences and whole paragraphs of meaningless verbiage, intended to be soothing but signifying nothing. They were the equivalent of a fired executive, accused of incompetence or wrongdoing in the prime of his life, claiming he quit to spend more time with his family.

But they weren’t outright lies. They weren’t the president of the United States claiming that his inauguration crowd was much bigger than his predecessor’s, when all the photos showed exactly the opposite. They weren’t the president-to-be claiming that his predecessor, born in Hawaii, was not an American citizen. They weren’t the same man claiming, in effect, that running over a bunch of people with a vehicle, and killing one, was roughly equivalent to some unruly shouting and shoving in Charlottesville.

One of the most politically damaging current lies is the notion that the “Black Lives Matter” movement somehow derogates from the value or privilege of whites. Trump and his supporters endlessly promote this notion, expressly and by implication, hinting that BLM advocates (perhaps including white me!) are terrorists.

When and if we ever have a national epidemic of police-shooting deaths of unarmed white youth, in all parts of our nation, there might be some sense in that notion. But so far as I know, there has not been a single such incident in the last several years, despite the fact that we whites are still a majority. So that notion is just another lie, intended to discount and neglect a plea for fairness, justice and equality for a people abused, oppressed and offended in our land for four centuries and counting.

Of course every life matters. But in America today the lives of African-Americans are the only ones under systematic assault with military tactics and weapons that have no place in routine use on our city streets. This must stop.

It’s bad enough that our chief executive is a veritable fount of lies, and that few seem to care. But he’s not the only one. Members of Congress routinely lie, especially Republicans about the intent and effects of their hasty, ill-considered and often still-undrafted attempts to “repeal” Obamacare, without the hearings, debate or the careful consideration—or even the draft language—that usually accompanies major legislation. Putin lies; and his lies, so cleverly inserted into our national debate and social media, probably helped elect Trump.

Yet even this still fails to capture the essence of our moment in history. The worst is that so many people believe the lies.

At this point it’s worth reviewing the impact of Trump’s three main lies, at least before he became president. According to a careful survey, over half of Republicans believed his “birther” lie three months after Trump himself had recanted it. Over half also believed that climate change is not real or not due to human action and that “millions” of people voted illegally in the 2016 presidential election.

When so many people can believe things that just are not so—even after their chief proponent recants them—we have left the realm of reality and entered a regime of dark fairy tales, told on social media and believed as gospel. We have entered an era when Putin’s trolls and spooks can plant outlandish lies that no precocious child should believe and sway a presidential election. We have entered an era where truth and basic common sense, let alone science, are transient and perishable.

In such a era began the Russian and French Revolutions. In such an era began our own Salem witch trials. In such an era, with nuclear weapons, our species could easily extinguish itself—a fate it narrowly avoided in 1962.

So those of us who retain our skepticism and our common sense can only prepare for winter and hope it won’t be nuclear. We can hope that someone, somehow, somewhere comes up with an editor for Facebook, to keep it from becoming the most powerful and evil nest of lies in human history. We can hope that somehow, somewhen, our nation returns to respect for expertise and news edited for accuracy, and thence back to competence and sanity. For we are rushing, not just drifting, in the other direction.

Conclusion. No nation has a covenant with God to rise always and never decline. Advancement and leadership come to those who help themselves.

Breaking all the rules and believing whatever you like may sound good to a teenager. They may even sound good to a worker crushed by decades of declining opportunity and wages.

But breaking all the rules never works. Just ask the French and the Russians about their bloody and disastrous Revolutions. The only things that work are being an adult and doing the hard, often unrewarding work of cooperating, empathizing, analyzing, and respecting conclusions drawn from evidence, including science. Doing otherwise brings only decline, debility, disease and death, sometimes more swiftly than anyone could imagine.

Nothing done by the Trump Administration during the past nine months has the potential to restore our global economic or political leadership. A lot of it has a clear chance to weaken our political cohesion, reduce our cooperation with other peoples, nations and cultures, and destroy the engine of immigration, education, and innovation in science and engineering that made our nation a global leader.

Sooner or later, unless we change direction radically, all this will have an effect on our markets and our prosperity. That effect could be as profound as the Crash of 2008. It could also be even more profound, if only because it involves more people and more sectors and aspects of our economy and has many more moving parts.

No one can tell precisely when the next crash will come, or how hard it will hit. But ’twill come, unless we wise up soon.

Endnote. As always, I try to live what I write. I have thoroughly retrenched my own portfolio, putting more in cash than ever since I sold out in late 2007, in anticipation of the Crash of 2008. I have also put some money in American mutual funds that invest in Europe and Asia.

I’m prepared to do more along these lines as time goes on and signals of an imminent collapse arise. Like everyone else, I can’t now tell when or how quickly markets will fall, what will be the primary cause, or when and how interest rates will rise as the Fed liquidates its massive bailout portfolio.

But I do believe in cause and effect. Sooner or later, what our totally inexperienced, incompetent and clueless president has done (and not done!) will have a dramatic effect on us Americans, with ripples all around the world. The current picture is neither as dramatic nor as specific as the liars’ loans, increasing default rates, toxic derivatives, and rampant executive lying in 2007. But the very diffuseness and pervasiveness of today’s rot should give everyone pause, for it may augur even more extensive and prolonged consequences.

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