Why Comey’s dismissal is negative for the economy and markets

It is now clear that Donald Trump dismissed FBI Director James Comey in a fit of pique over the investigations into Trump’s ties to Russia. But this move has already backfired, with the Senate investigation issuing subpoenas to former Trump National Security advisor Michael Flynn. Rather than recede, the Russian investigations will dominate headlines for weeks and months to come.

Conclusion: The end result is that Trump’s legislative agenda will be derailed and delayed, making his tax reform agenda less likely to succeed.

Two things. First, while the media have focused on the parallels to Nixon, to my mind, all of this is very reminiscent of the Kenneth Starr investigation of Bill Clinton and the Whitewater controversy. Starr ultimately never found anything damaging on Whitewater, but his investigation did unearth the Monica Lewinsky situation, which led to Clinton’s impeachment by the House.

Second, this impulsive act by Trump, which undermines his agenda, is very much in keeping with his character. Remember this assessment of mine from January?

People like Donald Trump leap before they look, fixing their mistakes as they go, rather than sitting idle, preparing contingencies and escape clauses.

People like Donald Trump are the likeliest personality type to make a lifestyle of risky behavior. They live in the moment and dive into the action – they are the eye of the storm. People like Donald Trump enjoy drama, passion, and pleasure…

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Also challenging is that to people like Donald Trump, it makes more sense to use their own moral compass than someone else’s. Rules were made to be broken.

We are seeing Trump’s penchant for leap before you look behaviour in action. And it’s clear that his team of aides are not fully capable of deterring him when he puts his mind to it. In my view, this is the most important takeaway here: Trump will make reckless decisions as President, some of which will be very important. And the Comey sacking shows how difficult it will be to stop those decisions being made.

But what about the economy and markets?

The Trump rally was based in part on the likelihood of Trump’s economic agenda delivering more economic growth, not the claimed 3-4% but more than in the past. We will get decent growth in this quarter and perhaps next. But that has nothing to do with Trump because he has no legislative achievements of note.

Bottom line: with Russia serving as a major distraction, the ability of the Trump administration to usher any growth-enhancing legislation through Congress is doubtful. And that makes the increasingly stretched US equity valuations look vulnerable.

Post-script: Don’t expect NAFTA negotiations to start anytime soon. They are being held up by the lack of a US trade negotiator. And Republican senators McCain and Sasse won’t back Trump’s trade nominee Robert Lighthizer. These are the same Senators who have just voiced discontent over the Comey dismissal – more reason to believe Comey’s sacking will derail Trump’s legislative agenda.