With some of the news coming out about about Director Comey and the impact it is having on our political environment (and market), we wanted to share a research piece we read. In answer to the question we placed at the head of this email, there is no direct connection between Director Comey and the markets. Earnings have been strong, economic data has been good, and we believe fundamentals will continue to do well. However, there are some legitimate concerns over the news coming out and whether there is any truth to the claims. Markets don't like uncertainty, and with the odds of a turnover in Washington increasing as they have, uncertainty has risen.
That said, Dan Clifton from Stategas said, "The past eight days are like nothing we have seen in politics, ever. The mood in DC is very different today than in the past couple of months. We are heading into a larger period of uncertainty, one in which there is a growing doubt Trump will be President of the United States in 2018.
Betting odds this morning place a 33 percent probability that Trump will be impeached in 2017, up from 24 percent yesterday and 13 percent a week ago.
Our big takeaway this morning is that if Comey goes on the record in sworn Congressional testimony and says that Trump tried to obstruct a federal investigation, the appetite in Congress to protect the president will fall considerably. But if this is just another anonymous leaked story to smear the president (many of the recent anonymous leaks have proven to be false), then we can continue this blind leak, more uncertainty game, but never get any real direction one way or another. Comey could face legal risks if he goes on the record with this claim, but did not report the incident at the time. This latter point has some people believing the memo is just a smear tool which is why going on the record will be a key data point.
Impeachment is a big and complicated step that would require Republicans to turn on a president of their own party. Impeachment requires 67 votes in the Senate, but the thought is no longer a Democratic wish list. Every Republican member of Congress has the word impeachment in his or her head this morning. Democrats smell blood in the water. The press is in a feeding frenzy. Trump Administration staffers have become demoralized. We cannot begin to explain how dour the mood is on Capitol Hill among Republicans.
Every morning since Donald Trump has been elected president, we have awakened to negative news stories about the president and his administration. Upon reading the negative coverage, the first question we ask is “what does this mean for earnings?” The second and related question is “what does this mean for the agenda getting through from a regulatory and legislative perspective that can further enhance earnings?”
Very few stories over the last six months had much impact on these two questions. Most of the stories were based on information from people who did not want Trump to be president and were grinding an axe. There was a lot of noise and even some smoke due to the president being associated with bad characters. But at the same time, earnings have surprised to the upside thus negating the political noise from Washington.
We want to remind everyone we are very suspicious of anonymous leaks. A number of damaging leaks in the past week have been proven completely wrong such as whether the FBI asked for more resources for the Russia investigation and whether the Deputy Attorney General threatened to quit. Moreover, the Senate Intelligence Committee Chairman is on the tape this morning saying that Comey was very forthcoming to the committee and never mentioned the events reported in last night’s news. The Acting FBI Director further testified last week that he had no evidence of the Russia investigation being obstructed. The sudden shift is noteworthy.
All of that being said, last night’s news becomes a much bigger deal if: 1) Comey goes on record and 2) Comey claims Trump tried to obstruct a federal investigation. Why this gives us some pause is that if Comey does go on record, he could face legal jeopardy if he did not disclose these conversations immediately. We urge caution here as we don’t know all of the facts.
But Comey going on the record with sworn Congressional testimony saying the president tried to obstruct a federal investigation would be a real game changer. It does not really matter if this becomes a “Comey said, Trump said” thing. Trump’s approval rating is 38 percent. Republicans see the generic ballot of Congressional control flashing a wave election. There may not be much of an appetite to protect the president. Congressional Republicans have a transactional relationship with Trump, which is different than the support Reagan and Clinton had in previous administrations.
Potential options in that scenario:
- Republicans Assign A Special Prosecutor To Investigate Trump’s Dealings With Comey: Democrats have been pushing for this on the Russia investigation and Republicans have been reluctant. Two options exist here for Republicans. First, Republicans can appoint a Special Prosecutor to investigate the circumstances around Comey’s firing. This could buy some time, displace the issue for a while, and then allow Republicans to move on the policy agenda to get some policy wins on the board. Another option would be to have a Special Prosecutor for Russia which could take over a year of investigation and drag out some of this building uncertainty.
- Trump Resigns And Pence Takes Over: This would be the most elegant solution for markets since it leads to an easier transition, absent the idea that the bureaucracy successfully took out a sitting president (which will have to be dealt with later). Our experience is that Trump is a fighter and when his back is against the wall, he fights and usually wins. We see this option taking place if the votes are there to actually impeach the president and the Republicans come to Trump and let him know he should step aside to avoid the vote.
- Congressional Republicans Move On Impeaching The President: If Trump does not want to go voluntarily, Republicans may be forced into impeachment. We cannot underscore how tough this option would be with a Republican House, with some very loyal to the president needing to move first followed by 67 votes in the Senate. But that probability is no longer zero.
- The 25th Amendment Is Invoked To Replace The President: I cannot even believe I am using the phrase 25th Amendment in a client note. How far we have come. This would empower the vice president and a majority of the officers of Trump’s executive departments to remove him from office if the president is “unable to discharge the powers and duties of his office.” Should the president contest, a 2/3 vote in Congress is needed to confirm the vice president and executive officers’ decision. Some in Congress like this option better because it is the president’s own administration that would start the proceedings and gives cover should they need to vote. Conversely, this is a stretched reading of the amendment which was more designed for a president wounded by an assassination attempt or suffering from health factors. But this option came up in three different conversations yesterday.
The fact that we had to lay these options out is indicative of an environment in which uncertainty is going higher, driven by an increasing probability of some premature change at the highest level of the United States government.
Investors need to keep in mind some parts of the agenda will continue regardless of the background noise.
- Financial Deregulation: We believe the President is close to appointing the Vice-Chair of the Federal Reserve for Supervision. This appointment will set the plan in motion to deregulate the banking sector via the Federal Reserve stress tests in 2018. The Senate will need to approve the appointment, but it looks like Randal Quarles will get the needed votes.
- Energy Infrastructure: Last week the President announced new appointments to the Federal Energy Regulatory Commission (FERC). These appointments are needed for a quorum on the commission to approve $50bn of energy infrastructure projects via pipeline and LNG export terminals. We continue to believe investors are missing this theme, which is not really impacted by current headlines.
- Tax Reform: Conversely, if the current headlines turn to have a bigger bark than bite, and we have many examples of sensational headlines being proven wrong in recent weeks, the agenda can be turned on fairly quickly. Our base case has been that as Trump gets into trouble, Congressional Republicans will need legislative victories. This has been somewhat out of consensus, but we believe the Senate Finance Committee is rallying around a tax reform plan that reduces the corporate tax rate to 23-25 percent without a border adjustment or major changes to the interest deduction. We have seen Congressional movement in the past week on healthcare and tax reform that has been constructive.
We also have some concerns:
- FY 2018 Budget: Congress needs to pass a FY 2018 budget to create the reconciliation instruction for tax reform. With the inability to balance the budget over 10 years, reaching an agreement may be difficult. This will be a Republican-only exercise and therefore the party needs to be on the same page.
- Debt Ceiling: Republicans have relied on Democratic votes for key budget and debt ceiling votes. Democrats will now hold them hostage over Trump investigations. Republicans are going to need to sit in a room and figure out how to get the entire party on board with raising the debt ceiling to avoid Democratic leverage. This may be the toughest fight of the year and could be happening in the Fall as the investigations and negative headlines creep up."
As always, if you have any questions or concerns you'd like to discuss, please call or email us.
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