On Dec. 29, 2019, I published a piece in the Kyiv Post titled “Will the Trump Financial Bubble Burst in 2020?” Even before that, I became convinced that the way U.S. President Donald J. Trump had run into the ground every business he managed, he would sooner or later bankrupt America. That “sooner” appears to have arrived. Obviously, it is time to revisit my arguments.
In the summer of 2016, I had a conversation about Trump with a friend, a chief financial officer of a publicly-traded US company. We both confidently predicted that a Trump victory, which still seemed like a very remote prospect, would crash the stock market.
Boy, were we off the mark.
At least we were not alone. Quite a few economists and market analysts expected a highly negative market reaction if Trump won. The group included the Nobel Prize-winning economist Paul Krugman, about whom Trump has tweeted on a number of occasions. In January, for example, the president called Krugman a lightweight thinker who doesn’t have a clue and demanded that he be fired as a New York Times columnist — for cautioning his readers against buying into Trump’s economic success story.
On the night Trump was elected, stock futures initially swooned but recovered before dawn and investors then never looked back — at least not for more than three years. The stock market gained 66% between election night and the mid-February peak, creating a stunning $13 trillion of paper wealth. To keep this in perspective, it is about $40,000 for every American — man, woman, and child.
Trump touted his economic miracle, claiming that under his tutelage the United States had the best economy in history. The truly scary thing is that he actually believed that he had engineered a dramatic economic turnaround.
Sure, the economy was strong, the job market was humming, the recovery that began in 2009 continued apace. But I also argued that Trump did not accomplish an economic revolution that would have justified such a massive repricing of the world’s largest, best capitalized multinational corporations. Ronald Reagan did preside over a 2.5 jump in the Dow — over eight years, mind you — but he did change the U.S. economy in a radical way and, besides, Wall Street in the 1980s was coming off more than two decades of drift. Trump, on the other hand, inherited a market that was already close to all-time highs.
For all his bragging, all Trump has done was to give a tax break to corporations and loosen some regulations. Both burdens had not been particularly heavy to begin with. The tax break busted the budget, creating trillion-dollar deficits at the peak of a business cycle, while deregulation damaged climate and citizens’ health and will have to be paid for one way or another in the not-to-distant future.
Worse, Trump has been undermining the global economic system and discouraging immigration — two key pillars sustaining America’s economic success in a globalized world.
In short, the $13 trillion were the result of a bubble and in my view had to be given back — with interest. Like Krugman, I didn’t buy into the Trump economy. Every time the stock market reached a new peak I would short it and buy volatility. It was a painfully losing proposition — until now. Over the past month, it has been eerily rewarding.
There are still respected market professionals who believe that it is a temporary hiccup and that once the government gets its act together and the epidemic of the coronavirus begins to fade we’ll return to the happy world before mid-February. But as financial markets go through the wringer, the ranks of such Pollyannas begin to thin out.
The impact of COVID-19 on financial markets was so severe not because it is such a nasty epidemic — it is not — but because the financial bubble had been ripe for bursting. It only needed a slight push to go off. After all. we had other epidemics and pandemics, of SARS and swine flu, for instance, with nothing like the current financial debacle.
Similarly, the world economy has been teetering on the brink of a recession over the past year. The quarantine will now push it into a downturn. Had it not been for the financial excesses that accompanied the expansion, the recession would have been mild. Now, however, a financial crack-up will reinforce the slump in the real economy and in turn will be stoked by the recession.
The quarantine in America presents another problem. As economic activity stalls, expect unemployment to rocket quickly. American workers have no job security and firing non-unionized service employees often working part-time is easy and cheap. We saw that in 2008, when hundreds of thousands of jobs were lost every week; prepare for an even worse labor market debacle now.
Add to this the ignorance and narcissism of the commander-in-chief, the incompetence and corruption of his administration, the sycophancy of his Republican Party and the total impotence of the Democrats and we have an open-ended economic disaster on our hands.
And one more thing. When talking about Trump back in 2016, my friend the chief financial officer added something prescient. He said that Trump will antagonize our allies and trading partners with his isolationist America First talk. Indeed, back in 2008-09, both the Bush and Obama administrations worked across the Atlantic and Pacific Oceans to save the world economy. I don’t like the way they did it, but a worldwide depression was nonetheless prevented.
Trump has destroyed the infrastructure of cooperation and squandered everyone’s goodwill. America is laughed at and distrusted the world over. And just now his ban on European travel, announced out of the blue without consultation with anyone abroad, demonstrates how he’s going deal with this crisis going forward.
God help us all, then.
