Expect fireworks when markets price in a Trump impeachment
OPINION: Ten to one? Five to one? Actually, it is a lot closer than that.
The bookies now rate the chance of Donald Trump being impeached at just 4/6, which means it is more likely to happen as not. Indeed, over at UK bookies Paddy Power, the real action is betting on the actual case for removing him from office.
The smart money seems to have already decided it will happen one day or another, and is now more interested in what the case consists of.
Despite that, the markets keep sailing on upwards as if nothing is happening. The main American indices keep on hitting fresh highs, dragging up equity prices across the world. And yet the historical record tells us that the impeachment of an American president is a traumatic experience for investors, sending equities and currencies on to a wild rollercoaster. There is no reason to believe it would be any different this time around.
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There are so many issues swirling around Trump, and he came into the White House with so much baggage, that it is hard to see how he can hang in there until 2021. There have been fresh disclosures about his links to Russia during the campaign. He has been engaged in open warfare with the security services and the FBI. His staff are in turmoil, with his press secretary and his chief of staff the latest casualties.
American voters might have wanted a change, but it is hard to imagine that this is quite what they had in mind.
True, impeachment of a sitting president is very difficult, which explains why none has been successfully removed from office during the last 200 years, despite several attempts.
A vote has to be passed by Congress, and with the Republicans still in control of the House there may still be some reluctance to turn on someone who is still nominally a member of their own party. Still, the bookies probably have it about right. It is more likely than not.
To investors, none of that seems to matter in the slightest. Powered by the extraordinary rise of the tech giants such as Amazon and Facebook, the indices have been racing ahead all summer. Last week, the Dow Jones index hit a record high, while the Nasdaq and the S&P 500 hit all-time peaks a week earlier. If there is any bad news out there, investors seem determined to ignore it as they push equity prices higher and higher.
Of course there are plenty of things to worry about, from the Federal Reserve raising interest rates, to a hard crash in China, to a return to protectionism slowing down global trade. But impeachment is surely the big one. And it is certainly not unexpected. So what will be the impact if a trial begins? The historical record suggests we can expect some fireworks.
FROM WATERGATE TO BILL CLINTON
The most similar case is surely the Watergate scandal of 1974.
In February of that year, the House of Representatives appointed a committee to investigate Richard Nixon for "high crimes and misdemeanours", setting the basis for his removal from office.
As the crisis deepened, and tapes from the White House were released, Nixon eventually bowed to the inevitable and resigned. So how did the market respond to that unfolding saga?
According to research by Mark Hulbert's financial newsletter, between the date of the Watergate break-in and Nixon's resignation, the S&P 500 dropped a massive 23 per cent. Interestingly, during the first six months of the saga, investors became more and more bullish. They ignored it for a long time, deciding either that it would never actually happen, or it didn't matter if it did. It was only close to the very end that they suddenly turned dramatically bearish.
How about Bill Clinton?
An impeachment action for perjury and obstruction of justice was launched against him in 1998, although it ultimately proved unsuccessful - Clinton was acquitted early in 1999.
What happened to the markets that time around? There was a 22 per cent drop between July and October that year - although in fairness, the Russian financial crisis hit at the same time, which contributed just as much to the collapse as anything that was happening in Washington. As he was acquitted, however, stocks rallied and overall the Clinton years saw some of the best stock market returns of any president.
Going back further, the other major example was the impeachment of Lincoln's successor Andrew Johnson in 1868. Like Clinton, he was acquitted, although only by a single vote on the floor of the House. The stock market was far less developed in those days than it is now. But Wall Street had rallied 10 per cent in the month before the action - they knew how to do volatility properly in those days - and then sank sharply as the trial got under way before recovering again.
Given that, how is the impeachment trade likely to work out in 2017? If it happens, the markets will head into crisis on all-time highs, and largely ignoring the risks, much as they did as Watergate unfolded in late 1973. Just as they were then, the markets will be complacent for a long time, ignoring the risks of Trump being evicted from office.
And then they will suddenly panic when they realise that the world's largest economy has been plunged into political chaos. And that will be made worse by Trump's unpredictable responses - some of the tweets as Congress threatens to end his hold on office can only be imagined. He might well lash out by ripping up trade agreements, by firing officials at the Fed, or by launching a military action somewhere to distract attention.
Any or all of those moves will only heighten the crisis. The American economy remains the largest in the world, alongside China, and the dollar remains the pre-eminent reserve currency. Turmoil in Washington on that scale could only be ignored for so long.
True, if and when Mike Pence is installed as president, possibly with Jeb Bush as his vice-president, sentiment will recover, and possibly very quickly, just as it did after Nixon resigned.
Investors have long since given up on the promises of tax reform and infrastructure spending that fuelled the "Trump rally" after he was elected last year. It is obvious to just about anyone that he has neither the support or the skill to get any legislation passed.
Pence is a far more traditional Republican, with a pro-business, low-tax agenda, and the markets will like the look of that. But it is going to be a very rocky ride until then. The impeachment trade has only just started - and when it gets going, we can expect plenty of wild swings in the markets.
- The Telegraph, London