Analysis

Investors are Jittery and the Reason is Trump

From the U.S. president’s embrace of tariffs to his war with the Fed, some are calling this the “Trump Slump.”

By , a senior correspondent and deputy news editor at Foreign Policy.
A trader rubs his face on the floor of the New York Stock Exchange in New York on Oct. 3, 2008. (Jeremy Bales/Bloomberg via Getty Images)
A trader rubs his face on the floor of the New York Stock Exchange in New York on Oct. 3, 2008. (Jeremy Bales/Bloomberg via Getty Images)

It’s not that U.S. President Donald Trump was entirely wrong in blaming Federal Reserve Chairman Jerome Powell for December’s market plunge. Many experts agreed with Trump that the Fed may have been misjudging economic conditions by continuing to signal that it will raise interest rates—including the Wall Street Journal, which wrote the week before Christmas: “Time for a Fed pause.”

No, the problem was more the way Trump went about voicing his unhappiness with Powell—at least at first. Last week he floated the idea of firing the chairman he’d nominated just a year earlier—before learning he probably couldn’t. Then Trump tweeted that the Fed was behaving like a golfer who “can’t putt.” The Dow Jones Industrial Average and S&P 500 plunged further. Finally Treasury Secretary Steven Mnuchin—who was said to have earned the president’s ire by picking Powell in the first place—was trotted out to “reassure” investors that the banks had enough liquidity and capital.

It’s not that U.S. President Donald Trump was entirely wrong in blaming Federal Reserve Chairman Jerome Powell for December’s market plunge. Many experts agreed with Trump that the Fed may have been misjudging economic conditions by continuing to signal that it will raise interest rates—including the Wall Street Journal, which wrote the week before Christmas: “Time for a Fed pause.”

No, the problem was more the way Trump went about voicing his unhappiness with Powell—at least at first. Last week he floated the idea of firing the chairman he’d nominated just a year earlier—before learning he probably couldn’t. Then Trump tweeted that the Fed was behaving like a golfer who “can’t putt.” The Dow Jones Industrial Average and S&P 500 plunged further. Finally Treasury Secretary Steven Mnuchin—who was said to have earned the president’s ire by picking Powell in the first place—was trotted out to “reassure” investors that the banks had enough liquidity and capital.

This led to yet another market drop, a 653-point cliff dive by the Dow on Christmas Eve, since until that moment no one was really questioning whether the banks did have enough liquidity or capital to tide them over. Mnuchin’s comment only served to remind investors of the nightmarish bank-generated crash of 2008 and the Great Recession it exacerbated.

The administration finally seemed to get the message right on Wednesday. After Council of Economic Advisors Chairman Kevin Hassett reassured the markets that Powell’s job was “100 percent” safe,  the Dow posted its largest point gain ever, soaring slightly more than 1,086 points to finish at 22,878. Other key indices posted similar gains. This also may have reflected sentiment that the Fed could now pause in its rate hikes and its policy of quantitative tightening so as to stem the downturn.

In addition—and this was no small thing—Trump’s Twitter feed remained quiet most of the day.

Despite the five-percent bounce on Wednesday, however, overall stock prices remain well down on the year. And perhaps the most pressing question of the day is: Does the leader of the free world really comprehend how markets and basic economics function? Underlying the year-end market turmoil is a sense that many things are coming home to roost at once for Trump.

The president’s no-end-in-sight trade war, the chronic turnover in his administration, his cavalier government shutdown over a wall with Mexico that many experts say can never be built, and above all his seemingly limited understanding of the way the global economy works are all starting to seriously spook investors, some economists and market experts say.

“Both reality and inexperience are catching up with the Trump Administration,” said Adam Posen, the president of the Peterson Institute for International Economics. “Realities that trade is good not bad for business (and the economy), that the Fed is independent legally for good reason, that the Great Wall of Xenophobia is infeasible, are all inescapable.

“Similarly, only those who are unaware of how governments interact with markets would think having a crisis call [Mnuchin’s consultation with the major banks on Sunday] when there is no crisis or taking credit to prolong an avoidable shutdown is a good idea. This also makes them look incompetent.”

In an interview with CNBC on Wednesday, former Wells Fargo CEO Richard Kovacevich called Wall Street’s December doldrums “the Trump slump.”

Kovacevich, like other market experts, said the problem is largely that Trump appears to think he can dictate monetary policy to fit his fiscal policy, which depends on higher deficits and a weaker dollar with which to wage his trade war with China. But that’s not the way the economy works. Instead, the markets have traditionally depended on an independent Fed and tend to go haywire if they believe the White House is interfering.

“It’s chaos, chaos, chaos,” Kovacevich said. “Every week, every day, he comes out with something.”

Since he launched his bid for the presidency, Trump has sown doubt over his understanding of modern economics. His zeal for a trade war with China and even U.S. allies in Europe—he called himself “Tariff Man” in a tweet—suggests that his basic view of world trade predates Adam Smith, the founder of modern economics. Trump appears to see trade as a zero-sum game, in which surpluses are in effect profits and deficits are losses, like the mercantilists (or “economic nationalists”) of two centuries ago who believed that countries are more prosperous when they export more than they import. Smith and his successors have spent the last two and a half centuries disproving that notion. The more trade is opened up, the more everyone gains (though some classes of workers—who happen to make up part of Trump’s base—can find themselves displaced).

Judging from his speeches and tweets, Trump also appears to believe in protectionism as a principle, not merely as a tool to open up China or force Canada and the European Union to further open their markets. “We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength,” Trump said in his inaugural address.

Never mind that trade protectionism helped lead to the Great Depression and two world wars. Trump also seems to believe that, as he tweeted in November, billions of dollars are “pouring into the coffers of the United States” because of the tariffs he has put on Chinese imports. In truth, most of those tariffs end up being a tax American consumers have to pay. That in turn typically means less spending and fewer revenues.

In his book Fear, published in September, journalist Bob Woodward wrote that Trump’s then-National Economic Council chairman, former Goldman Sachs president Gary Cohn, was “astounded at Trump’s lack of basic understanding” when the president advised him during a discussion of the national debt: “Just run the presses—print money.”

“You don’t get to do it that way,” Cohn said, according to Woodward. “We have huge deficits and they matter. The government doesn’t keep a balance sheet like that.”

To be sure, there are many reasons for the current market correction—as is always the case with any broad change in market sentiment—that probably have little to do with Trump. After all, other major economies are very likely in more trouble than America’s, and investors are pricing that in as well. “The initial market decline was because of the sharp slowdown that seems to be happening in China, possibly the worst growth recession they have had since Tiananmen Square,” Harvard University’s Kenneth Rogoff, the former chief economist at the International Monetary Fund, told Foreign Policy in an email.

“Trump’s trade war played a role in this, but more in giving Chinese leaders someone to blame than in actually being the main cause,” Rogoff said. “The next leg was the Fed’s latest tightening, accompanied by a statement that embodied forecasts far more optimistic than that of private forecasters. Many economists argued that the Fed should have paused, as the risks of overtightening far exceed the risks of being too patient right now. But this latest stage seems mostly Trump.”

Trump shows no signs of acknowledging his role in any of this. On the contrary, he continues to advise millions of investors that they are wrong. The current downturn, he said Tuesday, “is a tremendous opportunity to buy.” On Wednesday, at least, it appeared the markets were listening to him.

There is always the temptation for a president to use the bully pulpit to send messages to the markets. Trump’s predecessor, Barack Obama, did exactly that in early March 2009, when he told a press conference: “What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.”

The stock market hit its low point less than a week later, on March 9, 2009, ushering in the 10-year boom that may now be in its final stages. Obama had called the bottom right.

What some economists fear now is that Trump will continue only to unnerve the markets—and as is his wont, blame everyone else if things go wrong. A year ago in January, after the Dow broke 25,000 for the first time, Trump boldly took credit for it. “I guess our new number is 30,000,” Trump told reporters.“There were those that said we wouldn’t break 25,000 by the end of the eighth year [of my administration], and we’re in the 11th month.”

“The reason our stock market is so successful is because of me,” Trump told reporters in November 2017.

If the downturn continues, will Trump take a new look in the mirror? His history is not a positive indicator, and some economists fear that with his administration now all but bereft of tough, experienced policy hands such as outgoing Defense Secretary James Mattis and chief of staff John Kelly, Trump will not adjust himself or his policies fast enough.

“This is about needing to be reality-based and open to hard-won knowledge when having public responsibility for economic management,” said Posen. “Citizens and businesses, not just markets, are right to be deeply concerned.”

Michael Hirsh is a senior correspondent and deputy news editor at Foreign Policy. Twitter: @michaelphirsh

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