Trump signed the tax bill, a continuing resolution to fund the government, and a missile defense bill before leaving to spend Christmas in Mar-a-Lago, Florida.
Trump signed the tax bill, a continuing resolution to fund the government, and a missile defense bill before leaving to spend Christmas in Mar-a-Lago, Florida. EPA - MICHAEL REYNOLDS

Trump’s latest great mistake

DONALD Trump loves numbers. If not his personal fortune, he boasts about TV ratings and crowd sizes.

The US President doesn't get to brag often about opinion polls, but when a rare one is in his favour you can be sure he will mention it.

In lieu of good polls, the number Mr Trump talks about most is the stock market.

He keeps boasting about fresh highs in the US stock market indexes - the Dow Jones, the NASDAQ, the S&P 500. He is trying to make us see stock indexes as a referendum on the quality of his administration. This is shortsighted to the point of blindness. A normal presidency goes for at least four years and stock markets dip way more often than that.

This is like a three-act tragedy. We are in act one where we see the protagonist high on hubris and full of pride. In act two the protagonist is brought down by the very same traits that raised him up. In act three a good drama provides redemption. But of course, real life doesn't always offer a third act.

THE BIG BULL MARKET

The stock market's rise is real, as the graphs below show. But it's also long. It has risen enormously since the Obamas moved into the White House, back in 2009, despite a major dip in 2015/16.

 

The long growth in the US Stock Market since President Obama was inaugurated in the middle of the GFC
The long growth in the US Stock Market since President Obama was inaugurated in the middle of the GFC

 

That rise has a lot to do with America's recovery from the Global Financial Crisis (GFC). Donald Trump can - at best - take credit for only the final uptick in stock values.

Trump claims his tax plan is energising American businesses. A corporate tax cut should give them bigger profits after all. Stockholders get to share in the profits, so on one level, the story makes sense.

TAX PLAN: IS GOOD FOR BUSINESS GOOD FOR AMERICA?

The Republican tax plan has passed Congress, with Trump expected to sign the bill before Christmas. Great news for Trump donors, the plan cuts corporate taxes from 35 per cent to 21 per cent. It also adds substantially to America's multi-trillion dollar public debt.

The plan gives a lot to the richest sliver of American society while removing tax deductions that help lower income earners. It also does nothing for the poorest Americans - around 70 million people - who pay no taxes. America's inequality is set to get worse.

It is not clear if economies really work under conditions of great inequality. China seems to do it. But it exports what it makes. America relies more on domestic consumers than any other rich nation. It exports little - just 11 per cent of its GDP. If its consumers can't spend because their wages are too low, its biggest companies won't thrive.

For example, can discount retailer Walmart succeed as America's poor descend deeper into poverty? If the answer is no, the rush up in Walmart's stock price will have to be reversed.

THE RISK IN STOCKS

US markets flop roughly every eight or nine years. Stocks fell hard in 1987, wobbled in 1990, crashed in 2000, plunged in 2008 and dipped again in 2015. The current bull market has been running for nearly nine years. Something will give in due course.

By many measures, stocks are already overvalued. The price to earnings ratio tells you if investors are paying a lot for a company relative to that company's earnings (ie profits). When the price to earning ratio is high it hints that investors are paying a lot for stocks.

The next chart shows that the price to earnings ratio is at a level that has proved dangerous in the past. People are paying $25 in stock price for every dollar of profit. To some, this is a sign investors are getting greedy. In the past, when the price to earnings ratio has hit 25 it has plunged back down soon afterwards. The long-run average for the price to earnings ratio is closer to 15.

 

Note when the last price to earnings spike occurred. The economy was hit pretty hard after that
Note when the last price to earnings spike occurred. The economy was hit pretty hard after that

CAN HE WIN COMING AND GOING?

Will it hurt Trump if the market tanks? Won't he just blithely pretend he never cared about it and move on?

The world seems to have forgiven and forgotten much bigger things. Like advisers under criminal charges, a humanitarian disaster in Yemen and a dizzying array of gaffes and golf trips - all of which might have damaged a different president.

Taking credit for the market rising, then blaming someone else when it starts to fall would be tricky. But if anyone can nimbly execute such a volte-face it will be the 45th President of the United States.

However Mr Trump may find his entanglement with the stock market's fortunes harder to escape. The American people see Trump as a business genius. Trump may get a pass for his missteps in the domains of statesmanship and policy making because he is an ingenue. If the stockmarket tanks, the reception may be different.

A stock market crash can come for many reasons. One of them might be an American security problem or global conflict. If that happens you can expect Americans to rally behind their leader. But America is also awfully prone to recessions that cause the stock market to tank. In the last 26 years, while Australia has had none, America has gone through two recessions.

The 2001 recession is especially relevant, because it was associated with a big reckoning in the value of technology stocks. The current era of Bitcoin, Tesla, Uber and Facebook seems more like the early 2000s dotcom bubble than it does 2007.

A stockmarket crash associated with a decline in great American technology companies and the economy going backward would be especially damaging to Mr Trump.



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