“China may have more to lose in economic terms but Mr Trump stands to lose more politically — and so far, Beijing is proving adept at exploiting that, targeting its tariffs on the President’s supporters.”
Financial Times, 7 April 2018
Mind the gap!
“…registered-voter polls could be underrating Democrats in this year’s midterms.”
Nate Silver, FiveThirtyEight, 14 March 2018
In just under seven months time, Americans will go to the polls to vote in the midterm elections. Or at least some Americans will. If a swathe of elections of one sort or another since the the 2016 general election have taught us anything, it is that, as things stand, Democrats are significantly more likely to turn out on polling day than are Republicans.
This is especially the case for last month’s special election in Pennsylvania’s 18th Congressional District, where the Democratic Party candidate overturned what had been a 20 percentage point victory for Donald Trump in 2016 (and a similarly-sized win for Mitt Romney in 2012) on a turn-out which was around the mark one would expect in the midterms (ie 60-70% of the turnout in a presidential election). As this pretty much matched what we saw in Alabama’s special election for the US Senate at the end of last year, there is good reason for the Republicans to be worried.
What we are seeing is clear evidence of a significant ‘enthusiasm gap’ in actual elections, which top psephologist Nate Silver sees as being a far more reliable indicator of the midterms’ outcome than ‘mere’ opinion polls. Consider, for example, 2012 (as Mr Silver does) when Republicans turned a 6pp enthusiasm gap into a rout, picking up 63 seats in the House.
Hope for the GOP?
“The other essential ingredient of the Republican survival plan is largely out of the party’s hands: Democratic self-immolation. Naturally, it’s already underway.”
This being said, by other measures there is no need for the Republicans to despair. Since passing the tax bill at the end of last year the gap between the proverbial ‘generic’ Democrat and Republican has narrowed from over 13pp to 7.5pp on the RCP Average. Similarly, Mr Trump’s personal approval ratings have been pretty steadily above 40% this year (and are currently at 41.5% on the RCP Average), as against 36-38% for most of the second half of 2017.
What this all amounts to in the ‘real world’ as follows.
- The Senate: The GOP looks to have a good chance of retaining its majority (currently 51 seats to 49), with (as I noted in my 24 December article) the Democrats having successfully to defend 26 seats AND win a further two where only three Republican seats (in Arizona, Nevada and Tennessee) are currently seen as ‘toss ups’ (compared to at least six potentially vulnerable Democrat seats).
- The House: 13 seats currently held by a Republican look more or less sure to flip to Democrat (as against just one which will probably go the other way), with a further 26 in toss up territory (as against just four Democrat-held seats) and another dozen which could be vulnerable. With just 191 seats at present and needing 218 for a majority, the Democrats still have a job to do but almost certainly not as big a one as the Republicans.
[Note: The Democrats are also in quite a strong position to boost their current 19 state governors to 26-plus, ie a majority, with three states currently held by the Republicans looking likely to flip and at least another four possibles.]
It is, of course, possible that the Democrats will mess up, notably by selecting candidates too far left to persuade centrists to vote for them. [Note: for a slightly tongue-in-cheek take on this try here.] But I think it is reasonable to assume that the current seeming enthusiasm for Democrat candidates is driven in substantial part by a wave of anti-Trump sentiment. So, the big question for the midterms seems to me to be: can the Republican Party energise its base and get a large proportion of the 40% or so of voters who are in Mr Trump’s ‘approve’ column out to vote?
Playing to the base
“Partisan gravity could pull Trump’s numbers back into the low 40s…[on] an issue that Americans aren’t thinking about very much now — say, a military confrontation with North Korea — could be pivotal in the 2018 and 2020 elections.”
Nate Silver, FiveThirtyEight, 24 August 2017
At the risk of sounding like a cracked record (and thank goodness vinyl is back in fashion, meaning that this particular cliché comprehensible to the under-25s!), as I have frequently observed there is compelling evidence that Mr Trump’s approval ratings tend to go up when he delivers on his pre-election pledges — and down when he doesn’t. Even though he is not (of course!) standing this year, this does matter to his party. So, it is reasonable to assume that he will look to continue to pander to his base throughout the coming weeks. Although I certainly do not rule out the sort of ‘wag-the-dog’ resort around either Iran or North Korea about which I have frequently written (and especially not with John Bolton and Mike Pompeo now right alongside him), the principal relevant headline-grabbers looks set to be immigration and trade. As David A Graham wrote in The Atlantic earlier this week:
“You would think, based on the surprise that has greeted President Trump’s recent decisions to walk to the brink of a trade war with China and dispatch the National Guard to the Southern border, that he had not talked about securing the border and punishing Chinese trade practices for years.
These two moves point to a curious paradox about [Mr] Trump. He is a historically dishonest president, prone to lying about matters large and small at a prodigious rate. Yet [Mr] Trump has consistently tried to follow through on the biggest promises that were central to his campaign. He has not always been effective, and he has seldom been artful, but it is difficult to question his tenacity.”
Could trade be key?
"We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the US. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!”
Donald Trump (on Twitter), 4 April 2018
I am not about to get drawn into writing about immigration (not least since, as Mr Graham points out, Mr Trump has found himself stymied at almost every turn as far as this agenda is concerned). But I do want to underline that I agree entirely with Mr Graham about the President’s determination to follow through on his trade agenda. In particular, with China where we seem to be sliding closer to ‘trade war’ status. And let us not forget that the Nafta renegotiation is far from concluded and that this too is a favourite Trump target, as the President’s Easter Twitter outburst makes absolutely clear.
To judge from the volatility we have seen in equity markets in particular these past few days around China/US relations, investors (admittedly reacting in part to conflicting signals from the Administration) are struggling to get this on board. Perhaps the penny will now drop after Mr Trump, despite his propensity to claim sole credit for the 2017 surge in stock markets, accepted in a 6 April radio interview that at least a modest sell-off was necessary if he was to achieve his objectives, as follows.
“I'm not saying there won't be a little pain but the market has gone up 40%, 42% so we might lose a little bit of it. But we are going to have a much stronger country when we are finished and that is what I am all about. We have to do things that other people wouldn’t. So we may take a hit and you know what, ultimately we are going to be much stronger for it. But it is something we have got to do.”
He is probably also betting that, although Beijing is clearly targeting states where the Republicans enjoy strong support, especially in the Mid-West, the Chinese are either going to capitulate in the face of his doubling down or that the economic impact of the threatened tit-for-tat tariffs being imposed is unlikely to have any significant impact until after the midterms.
On the first point, I think he is likely to be proved largely wrong. Even if Mr Trump had not explicitly linked his proposed tariffs to President Xi Jinping’s Made in China 2025 agenda, thereby effectively wrapping them up in what I have described as a potential Thucydides’s trap ‘21st century-style’, I agree with Reihan Salam, writing in The Atlantic on 5 April, that Beijing would never have come close to meeting his demands, at least not in the short- to medium-term. Indeed, rhetorical sparring notwithstanding, China seems right now to be more than prepared to dig in for a long haul — although, given that its exports to the US far exceed its imports from there, as Neil Irwin reflected in The New York Times last week, it may have to resort to some decidedly “unconventional weapons” to sustain tit-for-tat measures.
However (and contrary to the stated view of some commentators), I am inclined to agree with Mr Trump if he does, indeed, think that any negative impact on the midterms is likely to be minimal. After all, we are probably still a couple of months away at least before any serious tariffs are actually imposed and even then it will take time for their economic impact really to be felt. This certainly seems to be the view of experts quoted in an extensive article by Patti Waldmeir and Tom Hancock in the 7 April edition of the Financial Times (subscriber access only), coupled with the thought that few if any voters are likely to turn against Mr Trump over trade.
Bear in mind too that, with less than 50% of Americans actually owning shares (either indirectly, eg through a pension fund, or directly), only a relatively small proportion of Mr Trump’s ‘core’ vote is going to be overly concerned about stock markets taking a hit.
However, there is a tricky issue embedded in this for Republicans standing in the midterms, ie that, although Mr Trump seems to have the party largely in his pocket for now at least, on trade his stance is very different to that of many of its legislators. Importantly, this could help sitting Democrats to defend four ‘at risk’ Senate seats, ie in Indiana, Missouri, Montana and North Dakota. But it is less clear that it helps them to flip seats currently in Republican hands.
Of course, especially after a (largely symbolic, in my view, and in the context of a particular shared problem, ie North Korea) deal was struck last month between South Korea and the US, it would be unwise to rule out completely some sort of ‘quick win’ low cost (to both sides) deal between Beijing and Washington between now and the midterms. But I see this as a low probability.
Assuming I am correct about this — and although I do think that a protracted trade war with China could damage Mr Trump’s prospects in 2020 — I tend to agree with the FT that it is unlikely fundamentally to change anyone’s views about him between now and 6 November. But what an escalating trade dispute — be it with China or with Mexico, bearing in mind how much US farmers have benefitted from Nafta — could do is make it harder for the Republicans to bridge the enthusiasm gap and get their vote out.
Nevertheless, if investors (or, indeed, Beijing, as the FT claims) reckon that Mr Trump is likely to back down, or at least significantly moderate, on trade because of the midterms, I think they are going to be disappointed.
Summer storms and smoke-screens
“Back when he was a private businessman, [Mr] Trump learned how to use the law as a weapon.… As President, however…[Mr] Trump has discovered that his old techniques no longer work. Worse: the old techniques now work against him.”
Furthermore, it is worth recalling the way in which the steel and aluminium tariffs were first announced by Mr Trump on 1 March. It was, in short, a rushed job (where there was no directly related need to make a decision until early April) from which there has subsequently been considerable row-back in the form of exemptions for some allies despite initial assurances that there would be no exceptions. The most obvious explanation for this, in my view, is that the highly media-conscious Mr Trump was driven primarily by three consecutive days of what were, for him, dreadful headlines, ie: Jared Kushner’s security downgrade; another spat with Attorney General Jeff Sessions (who is well regarded by conservatives) on Twitter; reports that Robert Mueller was investigating Mr Trump’s business interests in Russia; and Hope Hick’s resignation. In a stroke, Mr Trump succeeded in turning the news flow right around and generating positive headlines about himself for pretty much the whole of the following week (by which time, the preceding ‘bad news’ stories had slipped from the collective conscience of much of America).
Looking ahead, we should expect more of the same in similar circumstances, including trade-related announcements. And “similar circumstances” there will certainly be.
First, the Mueller investigation continues. The story which first appeared in the Washington Post last week that Mr Trump is a “subject” of the investigation, rather than a “target”. This is far from being an academic point, as Carol D Leonnig and Robert Costa make clear in the relevant article, as follows.
“[Mr] Mueller’s description of the president’s status has sparked friction within [Mr] Trump’s inner circle as his advisers have debated his legal standing. The President and some of his allies seized on the special counsel’s words as an assurance that [Mr] Trump’s risk of criminal jeopardy is low. Other advisers, however, noted that subjects of investigations can easily become indicted targets — and expressed concern that the special prosecutor was baiting [Mr] Trump into an interview that could put the President in legal peril.”
Furthermore, they believe that his “subject” status is encouraging Mr Trump to agree to be interviewed by Mr Mueller, as the investigation prepares what looks likely to be a series of written reports, possibly starting with one on possible obstruction of justice by the President. These reports will be submitted confidentially to Deputy Attorney General Rod Rosenstein who will decide whether to make them public or not.
The timing of all this is unknown. But I find it hard to believe that there will not be further headline-grappling developments between now and the midterms. And it would be surprising, to say the least, if some were not bad news for Mr Trump.
Second, Mr Trump’s legal team is currently engaged in separate (but, in some ways, related) court actions involving three women, ie Stephanie Clifford (aka Stormy Daniels, pictured above), Karen McDougall and Summer Zervos.
In the case of Ms Clifford, as Julie Hirschfeld Davis reported in The New York Times on 5 April, after weeks of silence on this topic (and it is interesting, to say the least, that Ms Clifford has, almost uniquely among those who have crossed him, not be the subject of a Trump Twitter storm), Mr Trump may have made his life more difficult last week by denying all knowledge of a payment to her at the time it was made. Ms Clifford’s lawyer, Michael J Avenatti, was quick to seize on this since...
“The president’s comments on Thursday could create a predicament for him and his legal team. Ms Clifford’s case is based on the notion that the confidentiality agreement is invalid because Mr Trump was not a party to it. By saying he was not aware of the agreement, Mr Trump appeared to confirm that argument, which would mean neither party is legally bound by it, thus potentially paving the way for Ms Clifford to break her silence without consequences.”
Mr Trump’s lawyers may yet succeed in getting the case moved to arbitration, and therefore out of the public eye as far as any hearing is concerned. But, given Mr Avenatti’s deft handling to date on behalf of his client, one way or the other I doubt that this is going to go away anytime soon.
[10 April addendum: My timing was purely fortuitous (as one would expect given that the Mueller investigation simply does not 'leak') but within 24 hours, more or less, of this article being published Mr Mueller and Ms Clifford have morphed. The FBI's raid on the home of Mr Trump's lawyer Michael Cohen may have had more to do with other (mainstream?) aspects of Mr Mueller's enquiries; but documents relating to Mr Cohen's payment to Ms Clifford were certainly a target too. AS to what this may mean, the BBC's Anthony Zurcher's summation is, in my view, spot on, as follows.
"When a president's personal lawyer is the target of a federal law-enforcement raid, it is a Big Deal. How big a deal remains to be seen, but the fact that the move came at the request of the Justice Department's Southern District of New York - after a referral from Special Counsel Robert Mueller's office - could be an indication that Donald Trump's affairs are now relevant to a second criminal probe.
Trump-watchers may recall that the president had fired the former US attorney for the Southern District, Preet Bharara, and was reportedly personally interviewing his replacement. A year later, the office is still under the direction of an interim appointment.
According to the New York Times, FBI agents sought information on payments made relating to Mr Trump's alleged affair with porn star Stormy Daniels and other tax and business dealings. What was once largely a political embarrassment could have metastasised into legal jeopardy.
Mr Cohen's ties to Mr Trump run deep. He's more than just a personal lawyer, he's a friend and fixer. He was already on Mr Mueller's radar for his work for the Trump organisation in Russia. Now the scope of his legal concerns may have dramatically expanded."]
“The potential implications of the Zervos case are huge. When Paula Jones sued Bill Clinton for sexual harassment 20 years ago, the Supreme Court set the precedent that a sitting president can’t push off a federal case until after he leaves office. [Mr] Clinton’s perjury in a deposition in that case ultimately led to his impeachment.
The judge in [Ms] Zervos’s case cited the Supreme Court’s decision in Clinton v. Jones in her ruling allowing the case to move ahead. If it enters the discovery phase, [Mr] Trump could find himself in a dangerous position. [Ms] Zervos’s lawyers could seek a broad range of information from [Mr] Trump and his campaign — they’ve already subpoenaed all campaign documents relating to ‘any woman alleging that Donald J. Trump touched her inappropriately.’
In discovery, [Ms] Zervos’s lawyers could also depose [Mr] Trump, forcing him to speak under oath — and potentially putting him the same situation [Mr] Clinton once faced.”
This being said, although the timeline is again unclear, there seems to be only a lowish probability that Ms Zervos’s lawyers can bring the case to discovery before the midterms. And, even if they were to, it is highly questionable whether this alone would get Mr Trump’s supporters fundamentally to change their mind about him.
Best buckle up
“After the ‘volatility vortex’ in February, sparked by concerns about inflation, markets have thrown a ‘tariff tantrum’ after President Donald Trump sparked fears of a trade war with China.”
Buttonwood, The Economist, 28 March 2018
So, in all three of these cases and with the Mueller investigation, the critical questions for now again appear to be: whether related ‘bad news’ headlines could spur Mr Trump into further actions to recapture control of the news flow, including on trade; and whether the overall impact on voters could even be further to boost the existing enthusiasm gap to the Republicans’ midterm detriment. My personal conclusion is that the answer to both questions is probably 'yes'.
As for financial markets, as Buttonwood suggests (subscriber access only), as uncertainty mounts, including around the midterm outcomes, and sentiment softens, it does indeed look like investors are in for an increasingly bumpy ride.