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By Sebastian Mallaby,
You can bet, if you like, on the chances of a Trump impeachment. A bookmaker named PredictIt puts the odds at around 1 in 5. But some sharp minds on Wall Street are pondering a different bet — one that, unlike prediction markets, has real-world impact.
That bet is against the stock market, which is up about 15 percent since the election — despite the considerable turbulence that President Trump has wrought. Sooner or later, goes the thinking, a volatile president will mean volatility for markets — there was a brief burst of that last week before calm returned. If the trade that defined the crazy subprime mortgage era was the “Big Short” — the wager that bubbly house prices would ultimately succumb to gravity — today’s milder analogue may be the “Trump Short.”
Stocks jumped after Trump’s November victory because Wall Street expected a gusher of profits. Tax cuts for businesses would boost profits directly. Tax cuts for individuals would do so indirectly by spurring consumption. Deregulation would slash corporate compliance costs. An ambitious infrastructure program would fuel a construction bonanza.
This post-election logic was not crazy, but it overlooked the rather consequential question of presidential competence. It failed to anticipate that Trump would squander political capital by picking a national security adviser who needed to be fired; by firing an FBI chief who did not need to be fired; and by blabbing about the whole business to Russia’s foreign minister. It failed to anticipate that Trump would disdain the detailed work of legislating; or that he would assemble the thinnest economic team in memory. More than four months after the inauguration, there are virtually no trained economists in Trump’s orbit. Last week a distinguished economics professor told me that he had given informal advice to a senior Cabinet official. But he was supposed to keep quiet about the encounter lest contact with a pointy-head damage the official’s credibility.
The early post-election bull market also underestimated the tensions and contradictions within Trump’s program. Tax cuts and infrastructure spending expand the budget deficit; as the forthcoming budget fight is almost sure to demonstrate, deficit hawks in Congress will contain their scope. The promise of deregulation may likewise be diluted. Blue states may resist; Europe or other markets may oblige global corporations to hold themselves to higher, non-Trumpian standards.
If Trump’s ability to help business may have been overestimated, the Trump Short story continues, the president’s propensity to harm business is obvious. Already, a clamp down on immigration is making it harder to hire workers, especially with a graying population and an unemployment rate of only 4.4 percent. Further, Trump appears to be, deep down, a true-believing protectionist, so he is likely, eventually, to provoke a trade war. And if Trump reverts to tweeting out threats to individual businesses, as he did during the transition, sky-high corporate share prices will look even more incongruous.
Some financial markets already see Trump clearly: The dollar, which initially strengthened after the election, is back to where it was on the eve of the vote. But stock prices continue to trade at an extremely high multiple of corporate earnings, and the most obvious explanation is not exactly comforting. In the past three years or so, the job of price discovery in the stock market has shifted from human analysts to algorithmic robo-traders. The algorithms excel at interpreting data from e-commerce web sites, Fed surveys and so on. They are less good at qualitative judgments about presidential competence.
It is possible, of course, that there is nothing to worry about; finance offers no sure bets. Defenders of the market’s level point out that the stocks that stand to gain most handsomely from a tax cut or infrastructure splurge have fallen appropriately since Trump lost momentum, suggesting that prices are not wholly irrational. But the Trump Short still seems disturbingly compelling. As with the Big Short of the previous decade, you can bet against today’s equity market by buying relatively cheap options — cheap because the electronic herd is blissfully sanguine.
The way the Trump Short is priced now, traders almost double their money if the stock market falls by 8 percent between now and year’s end. If that sounds attractive to enough speculators, they could create a self-fulfilling prophesy, causing the stock market to tank. In some ways that would be healthy: The market would be adjusting to reality. Trump’s hopes of a business-led growth boom would then be exposed as wishful. And his budget, which presumes a magical economy to pay for tax cuts, would look even less credible than it already does.
Read more about this topic: Catherine Rampell: Trumponomics: The philosophy that it doesn’t suck enough to be poor Robert J. Samuelson: Why the budget doesn’t balance Catherine Rampell: Trump’s worst lie about ‘priming the pump’ isn’t that he made up the expression Robert J. Samuelson: Taxes will go up. Here’s why.