Credit Writedowns 2019 Outlook, Part 1 – US Politics

Happy New Year!

I’ve been thinking about what will be different in 2019 than 2018 and I wanted to run my thoughts by you on a number of different topics. And because I’ve discussed some of my thinking about the outlook for the markets and the economy a lot in recent weeks, I thought I would lead with politics, specifically US politics.

Framing the Trump issue

I think 2019 will be a defining year for the Trump administration because some of the NY investigations and the Mueller investigation will come to a head. And the way I would frame the issue is as being about:

• the damage Trump is doing to the Republican brand,
• the ability of Republicans to paint the Democrats as after Trump for partisan reasons,
• the support Trump will receive from his base as more substantial investigatory information is revealed

I think Trump’s style of managing the country and the way he attacks his enemies is damaging both to the Republican brand and to the American brand because Trump is impulsive, even reckless. And he’s vindictive and petty. The Republicans in Congress have stayed loyal to him despite these flaws. But many paid a heavy price in the midterms. And they may do so again in 2020 unless they can distance themselves for Trump or get someone to ‘primary’ him.

The Cohen Trojan Horse

I suspect the calculus for Republicans is already changing. And it’s not because of Russia. Moreover, I doubt it will be because of Russia and collusion – even if Mueller finds a smoking gun. I’ll say more on that later. But, for now, I want to hone in on the real issue: Trump’s likely white collar criminal conduct.

White collar crime in America isn’t prosecuted assiduously at all. We saw that in the aftermath of the financial crisis. And, in that instance, we were talking about public companies open to scrutiny, who had been bailed out by taxpayers after the caused the worst financial crisis in three quarters of a century. Almost no one at any of the big banks went to jail due to the crisis. And I would argue that’s not because criminal acts weren’t committed. I would argue it is because white collar law enforcement in America is lax. It’s all about firms paying fines, getting a proverbial slap on the wrist, and then moving on.

Donald Trump, by all accounts, operates in the shadier side of business. This is a man with autocratic control over his company and a checkered financial history that made him a pariah to American banks. That made him turn to the former Soviet Republics and places like Saudi Arabia to drum up business. An, of course, Trump operates in the real estate business, an industry notorious for money laundering and financial chicanery to hide assets, cheat the tax man and clean dirty money. Plus, Trump has a long documented history of working with the Mafia.

This is why his personal business was his ‘red line’. I believe he has a lot to hide. And so, the campaign finance violations that snared Micheal Cohen are a big deal in this context. The cooperation of not just Cohen but also Trump Organization CFO Allen Weisselberg is like a Trojan horse, a beachhead for investigations into every nook and cranny of Trump’s shady business past. If there is any criminality there, Trump would have been involved since he is reputed to be a very ‘hands-on’ CEO. And I believe we will get tangible evidence of criminal wrongdoing at some point in 2019.

The Russia ‘Witch Hunt

Now, crime is crime. Evidence of, say, money laundering or tax evasion can’t easily be dismissed by waving a ‘partisan’ magic wand. The Russia investigation, by contrast, can easily be painted as a partisan affair because it originated among allies and supporters of Hillary Clinton. Sour grapes, people would say.

Just look at this Fox News headline today: “Former NY Times editor rips Trump coverage as biased“:

A former executive editor of the New York Times says the paper’s news pages, the home of its straight-news coverage, have become “unmistakably anti-Trump.”

Jill Abramson, the veteran journalist who led the newspaper from 2011 to 2014, says the Times has a financial incentive to bash the president and that the imbalance is helping to erode its credibility.

In a soon-to-be published book, “Merchants of Truth,” that casts a skeptical eye on the news business, Abramson defends the Times in some ways but offers some harsh words for her successor, Dean Baquet. And Abramson, who was the paper’s only female executive editor until her firing, invoked Steve Bannon’s slam that in the Trump era the mainstream media have become the “opposition party.”

So, what kind of smoking gun would Mueller have to find to get Fox News readers and watchers to believe this isn’t just a ‘witch hunt’?

For me, the Brett Kavanaugh example is instructive. It was clear that Kavanaugh lied about what he knew about Ninth Circuit Court Judge Alex Kozinski, who resigned last December over allegations of sexual misconduct. He lied about “Memogate”, a 2003 scandal over theft of Republicans stealing Democrats’ emails. He lied about warrant-less wiretaps. The list goes on. See here. And I know for a fact Kavanaugh lied about whether he could drink legally while in high school and college (he couldn’t).

So, here’s a guy who basically lied in the present repeatedly about things he did in the past. For me, that’s disqualifying for the Supreme Court. But, Kavanaugh and his allies successfully painted him as a victim of left-wing smears, with the Blasey Ford allegation simply being an uncorroborated story from some 30 years ago.

Won’t Trump be able to say the same thing about Mueller when he releases his evidence? Unless he was taping himself like Richard Nixon was when he was covering up Watergate, there is unlikely to be a smoking gun, still smoking enough to convince a large proportion of Americans that the Russia investigation isn’t just partisan nonsense.

So I am prepared for Mueller to release his evidence in 2019 and for Fox News and Trump allies to dismiss it as a nothing-burger.

Democrats investigations and Republican unease

But, with the House of Representatives now under Democratic control, it will be interesting to see how the Democrats prioritize their oversight role. We all know that investigations of Trump are coming. The questions are about what they want to investigate and whether those actions can be painted as purely partisan in nature. I suspect that at some point in 2019, the Democrats will glom on to what’s going on in New York and help to uncover financial malfeasance at the Trump Organization. But that is pure speculation.

Nevertheless, it’s clear to me that Republicans in Congress are starting to push back against Trump. It began with Saudi Arabia. It continued with the pullout from Syria and the resignation of Secretary of Defense Mattis and it was made most plain by the recent Mitt Romney op-ed in the Washington Post. For all Mitt Romney’s faults, I think his recent Washington Post piece is a clear signal that something has shifted for Republicans in terms of how much they are willing to stay aligned with Trump.

If, as I suspect, we get non-Russia related revelations about Trump in 2019, the Republicans will have a big question to deal with; do they stick with him for fear of his support from the base or do they cast their lot with someone else who will help save the Republican brand from permanent damage.

Nikki Haley might be a safety valve for Republicans thinking about 2020, either as a possible 2020 primary opponent of Trump or a Pence replacement on the 2020 Republican ticket.

Tax time bomb and the slowing economy

As all this maneuvering is happening, the US economy is likely to be slowing in 2019. And I think the big economic issue that will test Trump and support from him is tax filings. That’s because there are a lot of people who are going to see their state and local tax deductions from federal income tax capped. And some people are going to be caught out. They will be angry. And the theme of the December 2017 tax overhaul as a corporate tax giveaway will become an issue again. I think this is a time bomb for Trump and the Republican Party.

I am going to leave it there for now. But the big questions left are: what does Trump do when he feels cornered? Will he face lawsuits when he leaves the White House? I think those two questions are interrelated because Trump has an incentive to stay President as long as he can to run the clock down on any litigation whether related to Russia, campaign finance or Trump Organization criminality, hoping he can’t be indicted as a sitting President.

I believe Trump, now surrounded almost entirely by yes-men, will be more erratic and unpredictable given the forces bearing down on him. And that is going to have major consequences domestically and abroad.