Americans are glued to their phones and televisions for impeachment news, but for global financial markets it’s all just a sideshow. Sure, the S&P 500 index reacted rather badly to the news that Our Dear Leader might be ousted from office (or as Republican presidential challenger Bill Weld suggested, much worse) but that was a blip. Market volatility is being driven, as ever, by uncertainty about central bank policy, late cycle excesses such as an unprecedented corporate debt bubble, and an increasing sense of fragility (eg, the repo shocks).
That’s the way it’s always been. As a recent Capital Economics report noted, the S&P rose 30 per cent between January 1998 and February 1999, amid President Bill Clinton’s sex scandal, because the dotcom bubble was still . . . um . . . inflating. And while markets fell during the Watergate affair and Richard Nixon’s resignation as president back in the 1970s, that was as much if not more to do with an oil shock that tipped the US into a recession.
That’s not to say that markets don’t care about US politics. Donald Trump’s trade war has been the most important event in the global economy aside from central bank policy over the past two years. But they aren’t yet betting that he’ll be out of office anytime soon. Prediction markets think there’s only a 15 per cent chance that the president will be ousted, which is really a bet on the fact that a Republican-controlled Senate will make a craven bet to stick with him, come what may. Interestingly, prediction market bets on a Democratic presidential win in the 2020 elections haven’t changed much either in the wake of House speaker Nancy Pelosi’s call to action.
Ed, I noticed that you think Elizabeth Warren has benefited somewhat from the impeachment news. I suspect that what would really move markets is a Warren presidency. My bet is that they’d fall sharply (would you agree?), but then rebound (or not) as her policy choices became more clear. How much would the US tax system be reconfigured? How would the composition of government spending shift? Could there finally be some sort of government-led infrastructure spending programme? I think the mid to longer-term market response to 2020 will hinge on those questions.
In the meantime, those looking for market signals in Washington should look elsewhere. The S&P didn’t move much during turning points in the Mueller investigation. I doubt it will on impeachment proceedings. Then again, if Weld got his way . . .
- I enjoyed catching up on my fall stack of The New York Review of Books this last weekend, and was struck by two pieces: one by Ian Johnson on “What holds China together?” (answer, not as much as you’d think), and a round-up of new books on air pollution, with some disturbing facts about how tiny particles in the air that we can’t necessarily see or even feel are wreaking havoc with our immune systems.
- I sped read Margaret Atwood’s new book The Testaments last week. Not as good as The Handmaid’s Tale, but still pretty darn good. And boy, is she prolific.
- I’ll be digging into economist Bob Shiller’s Narrative Economics which is a look at how stories go viral and drive markets more than anything else. I think that’s particularly true at the moment, given how little recent history tells us about where we are in a changing world.
- In the Financial Times, I enjoyed my colleagues Lindsay Fortado and Robin Wigglesworth’s continuing coverage of the turmoil at the hedge fund DE Shaw. And for anyone attending UN week next year, I’d second Gillian Tett’s advice: take a bike.
Edward Luce responds
As a de facto Washingtonian, I can attest that the town always overestimates how much the markets care about its political scandals. They continued their bull run during Watergate, Lewinsky and, as you say, Rana, during the Mueller report as well. A Warren nomination might be a different matter. If she is serious about bringing in a wealth tax and punishing the financial sector, that would be unpopular with Wall Street. If she won nevertheless (Trump having heavily outspent her), we would have a perfect test case of how much the markets can tolerate.
Warren would quickly discover that she only has the political capital to push through one or two big things in her first eighteen months. Even to accomplish those, she would probably have to abolish the filibuster in the Senate. Would she risk endless legal battles and a flurry of neutralising amendments to push through the wealth tax? Would all that political capital really be worth spending on something that, at best, would only raise $275bn a year? If the answer is yes, you would expect a bitter war with Wall Street. If, on the other hand, she makes it a priority to push through the infrastructure upgrade, and other necessary public investments, through equalising capital gains with income tax, and returning the corporate rate to 35 per cent, that would have a better chance of succeeding. It could also lay the foundations for a bull run. The New Deal launched one of the longest market booms in US history. A new new deal could do the same.