Yahoo Finance Trump’s legal problems could be good for markets
President Trump is in mounting jeopardy as prosecutors link him to federal crimes and detail previously unknown connections with Russian officials. It doesn’t necessarily mean Trump will face impeachment, but it does mean legal challenges will dominate his next two years in office and probably damage Trump politically.
In normal times, political turmoil at the top of the U.S. government would not be good for financial markets. But in Trump’s case, legal vulnerability could force the president to moderate trade policies that are currently unnerving investors, providing relief to markets rather than stress.
Trump’s legal problems fall into three broad categories. The first involves campaign-finance violations. Federal prosecutors have now linked Trump with crimes involving the 2016 hush payments to two women Trump had affairs with. Trump’s former lawyer, Michael Cohen, pleaded guilty to campaign-finance crimes, among other things, for his role in those payments. And prosecutors say Cohen “acted in coordination with and at the direction of Individual-1.” Individual-1 is Trump. So prosecutors are alleging Trump committed the same crimes Cohen may go to jail for.
Prosecutors probably won’t charge Trump while he’s in office, and it may be unwise for House Democrats to try impeaching Trump for campaign-finance violations. Those are serious crimes, but to voters they might seem like technicalities not serious enough to end a presidency. Democrats seem to recall that Bill Clinton’s popularity rose in the late 1990s, after a Republican-controlled House impeached him for lying under oath and obstructing justice. Many voters felt the impeachment was politically motivated and never should have happened. The same could happen with Trump.
Possible legal troubles connected to Russia, business
Trump’s second big problem is the probe by special counsel Robert Mueller into Russian interference in the 2016 presidential elections. There’s still no public evidence that Trump himself conspired with Russians, which would be illegal. But Mueller has so far found that Russians had contacts with at least 14 people involved in Trump’s presidential campaign. And Trump was seeking business in Russia at the same time he was clinching the Republican presidential nomination in 2016, which suggests his unusually favorable views on Russia may have been aimed at winning business there. At a minimum, that’s a profound conflict of interest, and there could be crimes associated with it.
Trump may also face legal challenges related to tax evasion and other dodgy business practices that prosecutors uncover amid various probes. Again, there’s no direct public evidence of a crime at the moment, but Trump’s business has never been under the type of scrutiny it faces now. The New York Times, for instance, recently described how Trump and his family engaged in “overt fraud” to evade taxes, for decades. Trump insists he paid all required taxes, but prosecutors are now looking into tax evasion, too.
Trump’s legal problems affect financial markets because they factor into Trump’s popularity, which in turn determines how much political muscle he has. With strong support, it’s easier for Trump to levy tariffs, strong-arm trading partners and ask forbearance from farmers and others hurt by his trade wars. But as Trump’s political capital evaporates, it will get harder to stand up to China and persuade Americans to endure the short-term pain of tariffs. China undoubtedly knows that Trump might not finish his first term, and if he does, it will probably be with a limp, not a sprint. And the longer they can stall, the weaker Trump will get.
Markets have swooned recently on signs the United States and China remain far apart on a trade agreement, raising fears of more tariffs and worsening relations in early 2019. But markets aren’t factoring in Trump’s weakening hand, which makes it more likely he’ll find a way to settle with China and less likely he’ll take the risk of intensifying his trade disputes.
Trump is already the least popular president since World War II. Voters firmly repudiated Trump in the midterm elections, giving Democrats control of the House by a comfortable margin. That will result in countless hearings on Trump’s legal problems and various scandals. Republicans in the Senate want to set new limits on Trump’s authority to impose tariffs, and they might take unusual measures to overrule Trump’s policy toward Saudi Arabia, following his tepid response to the murder of journalist Jamal Khashoggi by Saudi operatives linked to the ruling crown prince. Trump is even having trouble finding a White House chief of staff, a plum job that ambitious politicos would normally kill for. These are all signs of a president losing traction—and prosecutors haven’t even made their case against Trump directly.
Tariffs weigh on markets, consumers
After the Dec. 1 meeting between Trump and President Xi of China, the two sides agreed to postpone any punitive trade measures until March 1, while they try to work out a deal. Markets didn’t like what followed, with each side characterizing the “truce” differently and the Trump team even contradicting itself. What markets may have missed: The “truce” delays the decision until March 1 or later, when Trump will probably have more legal problems that interfere with everything else he wants to do.
We know Trump follows the stock market closely, and considers it a barometer measuring the success of his administration. And the verdict this year is troubling, with markets down in 2018, despite sharp corporate tax cuts that sent profits soaring. Trump’s tariffs are weighing on stocks because they raise costs to businesses and consumers and impede growth. So try to imagine Trump three months from now, amid more revelations of possible lawbreaking and perhaps even criminal charges, deciding to push stocks down even further by doubling or tripling his China tariffs, or imposing new tariffs on imported cars, as he has threatened to do.
Prediction: It won’t happen, because Trump won’t have the standing to pull it off. Trump’s tariffs are already beginning to cause trouble that spills into the real economy, via higher prices, declining 401(k) plans, and wavering business and consumer confidence. Pushing tariffs higher will cross a threshold that hits consumers directly in ways Trump can’t deny. If Trump were uncontroversial and commanding, with an approval rating of 60% or more, he might be able to persuade Americans the long-term gain of higher prices and lost business would justify short-term pain. But a damaged and unsteady Trump won’t be able to do it. His approval rating would sink into the 30s, he’d lose key support in his own party and he’d give opposition Democrats another issue to use against Republicans in 2020—they can’t even take care of the stock market.
By weakening Trump, those prosecutors are defanging him on trade. Markets haven’t noticed yet, but they will.
Confidential tip line: rickjnewman@yahoo.com. Click here to get Rick’s stories by email.
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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman
