Apocalypse Now?

Writing in the Financial Times this week in the immediate aftermath of the assassination attempt on Donald Trump, the paper’s US Editor Edward Luce penned an opinion piece with the heading “America is staring into the abyss”. The nub of his thesis is that an already polarised population, obsessed with guns and fuelled by conspiracy theories, is teetering on the brink of lawlessness and civil collapse: in reference to the January 6, 2021 storming of Capitol Hill, “No honest accounting of America’s fetid climate can ignore the fact that the former president himself is the country’s most influential exponent of political violence” he wrote.

 

Whether America’s social and political climate is ‘fetid’ or rotten as Luce claims, or febrile, is debatable. A two-party state with its overarching emphasis on the office of President inevitably places all the focus on the individual who occupies the White House and those who aspire to be its next occupant. At every level of representation, the US electoral system requires significant campaign funding: cash donations risk cronyism, patronage and preferment. The extent to which social cohesion and trust in the political system are maintained, whoever is in power, is determined by the robustness of the Constitutional framework to maintain that contract between the governors and the governed. Luce’s polemic implies a lack of faith in the core strength of the US Constitution; no resilience to see America through another bout in its long history of periodic turbulence.

 

Since 2016, FT opinion writers and others among the centre left media on both sides of the Atlantic have laboured under what is for many of them an all-consuming preoccupation: in defining and labelling Donald Trump as a political ‘Strongman’, in many instances explicitly equating him with Vladimir Putin, Xi Jinping and Recep Erdogan, is he bigger than the US Constitution or is the US Constitution bigger than him?

A mature democracy founded in a resilient Constitution (with weaknesses)

The US Constitution confers significant powers on the President: as Head of State, he/she is Commander in Chief of the armed forces; as Head of Government, he/she has powers of Presidential Decree or Executive Order, effectively the right to enact laws deemed ‘in the national interest’, literally at the stroke of a pen. At its inception, the use of the Executive Order was supposed to be a rarity (hence the qualification of ‘in the national interest’); many presidents, including Trump, have tested the elasticity of what defines ‘national interest’, where the line becomes blurred or is crossed between the interest of the nation and the political self-interest of the incumbent. Any law passed by Presidential Decree can be challenged in the Supreme Court. This happened to Trump in 2020 with his Termination of Deferred Action for Childhood Arrivals (TDACA) legislation: part of his programme to limit immigration, TDACA was rejected pending judicial review for being presented in ‘an arbitrary and capricious manner, in violation of the Administrative Procedure Act.’ His Act was kicked out. The system works.

 

However, a substantial weakness, and one that erodes trust, is that appointments to the senior judiciary including the Supreme Court are the sole preserve of the President. Choices are therefore open to political bias. This is evident today: Donald Trump’s multiple criminal indictments were struck out under the current Republican-leaning Supreme Court’s recent ruling that The President (the judges’ ruling applies to all Presidents, not Trump specifically) enjoys ‘broad immunity’ from prosecution for actions arising ‘while in office’. What the President cannot do is bypass Congress on fiscal matters, whether it be the budget, taxation and the agreement on government borrowing.

 

Considering ‘Strongman’ politics, the acid test to the robustness and resilience of the Constitution is the Twenty Second Amendment. It was introduced in 1947 and ratified by all the states individually in 1951. It formalised the convention that a person may only be elected as President twice and for a total of not more than eight years (Franklin D. Roosevelt was the only President in US history to exceed two terms, dying in office in April 1945 in his fourth term). Nothing is ever impossible, but the risk of this Amendment being overturned, particularly in favour of such as divisive character as Trump, is negligible. While Trump may look longingly at Strongman demagogues who change the rules to stay in power, he himself has typically contradictory views: according to The Hill newspaper, in May this year, while whipping up a crowd at a National Rifle Association Convention (the subsequent irony of his involvement with the NRA cannot be lost even on him), he goaded ‘are we three term or two term if we win?’ However, only days before in an interview with Time Magazine, he was adamant he would not challenge the 22nd Amendment: ‘I wouldn’t be in favour of a challenge. Not for me. I wouldn’t be in favour of it at all. I intend to serve four years and do a great job.’

An America out of sorts. But why?

But even if over-egged, there is substance to Luce’s observations. What is palpable is a country ill at ease with itself and its citizenry with each other. The question is why? For the past eight decades since the end of WW2, the US has been a global superpower rising rapidly through the ranks to supremacy; since the collapse of the Soviet Union, for more than three decades the United States has been indisputably the only global super-power.

 

While there are now credible challenges and growing threats particularly from China and Russia, no other country on earth has been able to match the breadth and depth of the combination of America’s attributes: the size of its economy; the numbers, capability and sophistication of its military; its role as the world’s policeman; the development of its oil industry to the extent that notwithstanding the climate change revolution it is self-sufficient in energy; not being overly reliant on international trade to sustain its economy; its provision of vast pools of available investment capital and its ability and propensity to take risks, to innovate and develop world-leading technologies; and of course, that it is the owner of the dollar, the world’s principal reserve currency, underpinned by the fact that oil, gold and most internationally traded commodities are priced and settled in US dollars.

 

The US economy has been remarkably resilient and competitive for three decades at around 25% of global GDP (when what constitutes today’s eurozone collectively has surrendered 10 percentage points of share of global GDP down to 14%); Americans have a reputation for breezy self-confidence verging on brashness; they have an unapologetic and unabashed deep belief in God and their country. Yet as a nation, it also oozes insecurity and defensiveness, is riddled with division and permeated by dissent. It seems an obvious contradiction. But it is self-evidently true. Why else would the rallying call straplines for Donald Trump’s election campaigns going back to 2016 be “America First”, “Make America Great Again” and, pertinently and perhaps more obviously today, “Make America Safe Again”?

Fractious politics, social division, angry people. What else is new?

US postwar history says that the US has regularly seen division and rancour ebb and flow. Fear in the 1950s bordering on paranoia about communism, the development of McCarthy’s Lie Detector tests to sniff out every “red under the bed”; the segregation and race policies still unbelievably persisting well into the 1960s giving rise to the powerful the Civil Rights movement; the social upheavals of the 1960s and 70s with student riots and the deep political divisions created by the Vietnam War; the economic schisms created by Reaganomics in the 1980s exacerbated by ultra-loose monetary policy fuelling further division of fortunes between the ‘haves’ and the ‘have-nots’ in the post Global Financial Crisis economic era; the societal and cultural tensions giving rise to socio-political activist movements including Black Lives Matter and #metoo; far from unique to America, the pressures created by immigration. Further, as we discussed above, with the focus in the US system on personalities, the US is no stranger to that political violence referred to by Luce: JFK and Bobby Kennedy both murdered; the attempts on the lives of Ronald Reagan, Gerald Ford, George W Bush, and the campaigning presidential candidate George C Wallace who was shot and paralysed in Maryland in 1972; in 2024, Donald Trump himself being the target.

 

The flux of American political angst is enduring. However acute it is perceived to be today (and the storming of Capitol Hill in 2021 was extraordinary), that angst is most certainly not new. Despite virtually every new White House arrival preaching ‘unity’ and ‘togetherness’ and ‘government for all’, the temptation to stick the boot into the opposition and everyone who voted for it is irresistible; the biannual confrontations in the Congressional electoral cycle (i.e. the mid-term elections as well as those held simultaneously with the Presidential ones) almost guarantee it.

The origins of the cult of Trump: the great political inversion

Among all those factors listed above which are part of the American social and political evolution to where we are today, one that is often overlooked is the direct consequence of the North American Free Trade Agreement (NAFTA). With its genesis in the Reagan era it was finally signed into law early in 1994 by George H W Bush. NAFTA was designed to remove trade barriers across the North American continent facilitating the frictionless movement of goods and services all the way from Canada in the north, through the United States to Mexico in the south. In practice it led to the outsourcing of low-skilled jobs to cheaper production regions: it was a strong contributing factor leading to the mass unemployment in the central US industrial rust-belt.

 

The economically displaced, dominated by typically white, blue collar workers and their families, would in former times have been reliably left-leaning, heavily unionised Democrat supporting voters. Feeling increasingly abandoned by both mainstream parties including Obama’s Democrats, in an anti-reaction, in the early 2010s they eventually found a voice in the Tea Party, a right-wing splinter movement from the Republican Party led by among others, Sarah Palin the former Governor of Alaska. Capitalising on the prevalent and inseparable nationalist, anti-immigration theme, it was among this constituency that Donald Trump found his core support base; it has been rock solid for the nine years since he entered national politics. If it seems unlikely that disaffected, disadvantaged working class people should fall under the spell of a billionaire New York property mogul, his appeal was precisely what they craved: despite a wealthy background, a man who had to work his apprenticeship and take hard knocks before being given responsibility by his father; someone who talked their language and genuinely had their back; was not part of the perceived incestuous, self-serving Washington establishment; and who spoke sincerely to their kind of uncomplicated nationalism.

 

America is traditionally a conservative country, conservative with a small ‘c’.  Culturally, it is a capitalist society built on enterprise and innovation; it might be home to the world’s biggest companies but the bedrock is the family business. Over 60% of Americans directly ‘play’ the stock market beyond investing in mutual funds (compared with less than 15% in the UK who invest directly beyond ISA savings and pension schemes). Like-for-like compared with their British and European counterparts, average salaries are lower and historically it has been usual for US households to top up their incomes with capital gains on share trading (the resulting unreliability of self-certified incomes and the securitisation of the US sub-prime mortgage market became one of the principal causes of the housing market collapse which precipitated the Global Financial Crisis of 2007-9; it led to enforced repurchases from many of the same people already suffering economic hardship across the bust-up rustbelt and in other deprived regions, only adding to reactionary feelings).

 

Republicans, colloquially The Grand Old Party (GOP), were typically centre-right, paternalistic and patrician by background: the ‘owning classes’. Democrats were the ‘working classes’, centre-left and preoccupied with representation, welfare and fairness. But compared with Europe, nationally even the US centre ground was to the right. Political extremes were a minority and viewed with suspicion. European-type socialism was inconsistent with American values. But as the Republican party began to attract reactionary, working class right-wing voters, disaffected members of the GOP shifted home to the Democrats; conviction socialists (followers of Bernie Sanders and Elizabeth Warren etc) found a new voice on the left wing of the Democrat Party. Neither the Republican nor Democrat party has found it easy to settle with their new constituencies. Both have found the inversion of their support base deeply unsettling. That it has also seen considerable polarisation on both the right and left has only added to the angst and political challenge for the established leaderships.

 

Arising from this, and what few (perhaps apart from himself) predicted, has been the extent to which the persona of Donald Trump would become a cult figure. He divides like no other: there are no grey opinions on Trump, people either love him or loathe him. His enduring core support might be a minority but it is a significant minority; it is vocal, impassioned, motivated and paranoid; it feels persecuted, patronised, demonised, ignored and angry. And it is fiercely, almost blindly loyal to him.

2024: Trump the outsider is embraced by the GOP

What is significant today is how the party political backdrop has changed very quickly in this most extraordinary of election campaigns. The suspicion that the court cases against Trump were politically motivated fuelled the belief the establishment was out to get him: every indictment only added to his popularity. To his supporters, that he has been exculpated is vindication that conspiracy theories must contain some truth.

 

But the assassination attempt on Trump last weekend has had a seismic effect. In 2016, despite campaigning under the Republican banner, he was obviously an outsider. In 2020, despite having been Republican President for a term, he was still a thoroughly dividing personality even in the Republican camp. As even the Democrat-supporting New York Times this week reported to its own surprise and discomfiture, only days after being shot, Trump has cut an almost ‘Messianic figure at the Republican Convention in Milwaukee’. Together with his running mate JD Vance who also appeals directly to that rustbelt constituency, Trump is now the undisputed leader around which the entire party machinery is united: sniffing which way the wind has turned, formerly vociferous rivals have queued up to endorse him. In 2024 Trump owns the Republicans in a way he never did in the previous two elections.

Disintegrating Democrats: ‘Et tu, George?’

Meanwhile, if Trump has an aura of strength and appears literally indestructible having survived the assassin’s bullet, and the Republicans are confident, bullish and finally at one with their nominee, the Democrats are all at sea. Joe Biden was already seen as enfeebled; now he has the additional bad luck of being confined to barracks with Covid while Trump cooly owns the stage with a bandage strapped to his ear. As one commentator said, ‘the optics are not good’.

 

Open internecine warfare has broken out in camp; as fast as Republicans are coalescing around Trump convinced of victory, Biden’s troops are in disarray, divided and struggling with the enormity of needing to commit the equivalent of political regicide not only on a potential candidate but a sitting President. They no longer question whether Biden is fit to stand for another four years; today it is a reductive argument centred on self-preservation, summed up in the bluntest of terms by George Clooney (allegedly put up to the task by Barak Obama): ‘we will not win with this President’. Biden’s critics on his own side seem not to have realised that in withdrawing their support to him as a prospective second term candidate, they are actively undermining not only him personally, but also the office of President and demeaning the United States itself both domestically and internationally. It is a high price to pay.

 

How many more twists and turns can this election deliver? The ground could shift yet: there are still five weeks to go before the Democrat convention must nominate and ratify their Presidential candidate. Will Biden stand down? Will he be pushed out? Will he endure despite all? And official campaigning has not even begun yet!

 

All of this notwithstanding, and today’s momentum undoubtedly with Trump, the outcome of the election on November 5th is still likely to be determined by the turnout percentage, the results in a handful of key marginal ‘swing’ states, and the extent to which the 10-20% of those among the electorate who are yet to make up their minds are persuaded to vote Trump and Republican, or Biden/AN Other and Democrat. If they vote at all. A new factor which might inform their decision is Trump’s post-life-threatening event demeanour: does that near-death experience, the enforced confrontation with his own mortality, change his outlook on life. Does it make him even more pugnacious and divisive? Does his survival make him feel indestructible and he’ll take on all comers? Or does it pacify him and make him more reflective and broaden his appeal? 

 

This election has become almost literally morbidly fascinating to watch for those interested in politics. But investors feel the effects too.

The Investment Perspective

The immediate barometer of sentiment is the currency exchange rate: exchange rates are always a two-way perspective (e.g. selling dollars to buy sterling, or buying yen and selling euros etc: foreign exchange investors buy currencies they deem attractive by selling ones in which they have less conviction). Over the past three months sterling has strengthened against the dollar, as has the euro. However the Dollar Index (known as DXY, easily accessible via Google) which measures the dollar against a basket of currencies, while weakening two points to 104 in the past three weeks, broadly remains in the sideways pattern seen since January 2023 after it fell from 113.

 

Fixed income (bond) investors are currently more preoccupied with mounting evidence that the US economy is slowing, potentially increasing the likelihood that the Federal Reserve will make its first cut in interest rates in the autumn.

 

Greater sensitivity has been seen in equities (shares). In an interview this week, Trump suggested that the US would no longer support Taiwan militarily (‘we get nothing from them. They should pay us for their defence. They took all our chip business and are immensely wealthy. I mean, how stupid are we?’). Taiwan supplies over 60% of all semiconductors globally and 90% of all the world’s most advanced models, the type which underpin the Artificial Intelligence revolution. Share prices in several of the the Magnificent Seven (Nvidia, Apple, Amazon, Alphabet/Google, Meta, Microsoft and Tesla), the US mega-cap companies which have dominated US stock market performance, reacted negatively.¹ A useful warning sign to those who worry such companies’ shares are overvalued, or present a buying opportunity for others who see duration in the technology revolution, it is a reminder to investors that even companies which seem to be an unstoppable one-way bet are sensitive to changes in the political landscape.

 

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each.  With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.

 

¹Company examples are for illustrative purposes only and are not a recommendation to buy or sell.

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