Merlin Weekly Macro: Trump trumped. What now?

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‘There's only one thing more to be done,' continued the gratified Badger. 'Toad, I want you solemnly to repeat, before your friends here, what you fully admitted to me in the smoking-room just now. First, you are sorry for what you've done, and you see the folly of it all?' There was a long, long pause. Toad looked desperately this way and that, while the other animals waited in grave silence. At last he spoke. 'No!' he said, a little sullenly, but stoutly; 'I'm not sorry. And it wasn't folly at all! It was simply glorious!’

At which point an unrepentant Toad declared that he would drive off in the very first motorcar he saw, poop! poop! Kenneth Grahame’s Toad of Toad Hall could have been a metaphor for Donald Trump and the mid-terms.

The only surprise was the scale of the defeat

From Texas to Michigan and Maine, Trump and the Republicans have been given a serious drubbing. War; the cost of living; failed promises. A series of unforced errors produced the widely forecast outcome. Paraphrasing Lady Bracknell, to lose the House was unfortunate; given only a third of seats were being contested, to lose the Senate by such a wide margin was careless. Amid a plethora of demographic data, essentially it was the female voters who did for the Republicans: the male vote was split down the middle, 49% apiece; but 58% of women voted Democrat while only 40% voted Republican, and many more women voted than men.

There is only one person to blame. Like Toad, Trump doesn’t do repentance or humility but for a moment he sounded uncharacteristically humble. He acknowledged the defeat and took responsibility. He was even gracious to the Democrats for fighting a ‘great campaign’ and suggested a form of cross-party cooperation for the remainder of his presidency. Not a hope! Cooperation is not in Trump’s playbook: he takes on counterparties, regards them as adversaries. All his instincts are naturally combative. For their part, the Democrats smell blood. They have Trump on the ropes. And they despise him viscerally as feckless, feudal and corrupt. With the wind in their sails and presidential and congressional elections in only two very short years’ time which they aim to win with a clean sweep, why on earth would they cooperate?

Reasonableness with the duration of a nanosecond

Here is what is likely to happen. White House emollience will last about as long as this sentence. ‘In the national interest’ Trump will resort to rule by decree and the power invested in the Sharpie pen; the Democrats will reject every executive order on principle. They will introduce primary legislation reversing Trump’s policies on social care reform; Trump will exercise his veto. The courts will be busy with political petitions and counterpetitions. The Democrats will win some and some they’ll lose but such tactics will slow the process right down and limit what ends up on the statute book. The description ‘lame duck’ presidency implies little happening; however, what we are likely to see for the remaining two years is brutal, bruising, partisan politics in which both sides expend considerable energy to achieve opposite aims: Trump to get things done and rescue his legacy, the Democrats to make sure he doesn’t.

Actively aggravating the situation will be impeachment. With a big Democrat majority in the House and only a simple majority required in the vote, it is all but guaranteed that proceedings against Trump will be petitioned. A formal Senate trial will follow which inevitably will turn into a battle of political wills. Given he/she is Head of State and Commander-in-Chief, removing a sitting President from office is a very big deal; it requires a two-thirds majority in the upper chamber. For many Republican senators, the decision to remove Trump will be a significant struggle that pits their own principles against their personal political prospects. It remains unlikely but it is certainly not impossible; the Vice-President would take over.

Trump’s political ledger: credit……

Trump 2.0 has achieved much. He completed his tax reforms; he secured much of his fiscal goals with his One Big Beautiful Bill; he no longer needs the support of Congress to prosecute these policies but both could be under threat.

Divisive and controversial, he has succeeded in constraining immigration; he is taking on the drug cartels. Inherited from Joe Biden, he has built on the massive book of foreign inward investment reindustrialising and reinvigorating the old bust-up Rust Belt. US GDP growth still far outstrips the rest of the G7 and employment is close to full.

He was right to chase down America’s NATO partners about freeloading on the back of America’s balance sheet when they ought to be taking much more care of themselves, indeed in a more extreme way, it continued the same complaints levelled by both Biden and Barack Obama.

Many will disagree with the means but Trump and China’s Xi Jinping both understand the strategic imperative for energy security, something that eludes European countries including the UK.

…and debit

On the other side of the ledger, Trump promised no foreign wars and a reduction in the cost of living. He then started a war with Iran that he seems incapable of completing but which pushed up the rate of inflation.

The planning and prosecution of the offensive have been abysmal. Obama made Instagram headlines with his cheap but catchy ‘Trump spent $36 billion on a war with Iran over a nuke that never existed and opening a strait that wasn’t closed in the first place’. Of course it was Obama, in collusion with the EU, the UK and Russia, who signed the original Iranian nuclear containment treaty that proved totally inadequate for the task; Trump abstracted the US in his first term; Joe Biden subsequently tried and failed to restore the US position, in the process handing leverage to Tehran. Conflict with a potentially nuclear-armed Iran was almost inevitable at some stage. Trump’s failure to secure a quick victory has had three major negative effects: it has handed strategic advantage to Iran exerting control over the Hormuz and Bab al- Mandab Straits disrupting energy supplies and global supply chains and driving inflation; it has made the US military appear limited in ability and capacity, one dimensional and unimaginative; by negotiating with it, the Iranian regime has been given legitimacy, agency and oxygen.

But it is Trump’s broken promises that have been his undoing at the polls: Americans resent the big hikes in energy costs emanating from the consequences of a war they never asked for and were promised would never happen. Trump’s poll disaster reflects the immediacy of US voters being hit by rising energy and food prices far outweighing the less visible benefits of superior growth, full employment and the long-term benefits of reindustrialisation.

The new Democrat majority Congress wants to bring a swift end to the war. There is considerable jeopardy extricating the US without the result being in any way perceived as a victory for Iran and therefore a defeat for America. Iran has already demonstrated it has the upper hand. The risk is that a ‘bad’ war produces a worse deal that leaves the Iranian regime not only in power but empowered and emboldened with the scalp of the Great Satan to prove it. The consequences for regional and global security are significant.

Trump boasted that he would end the war between Russia and Ukraine in a day: ‘I have the power’. It was and remains a self-delusion. Nearly two years on, war still rages for reasons Trump fails to understand or accept. Trump rails against Zelensky and appeases Putin, precisely the opposite of America’s obligations to assure the sovereignty and security of Ukraine. Trump’s decision to buy conflict diesel direct from Russia, thereby helping fund Putin’s war machine, is both unconscionable and immoral.

While right to chase down other NATO members about their obligations to ensure their own security, his deliberately corrosive methods have split the alliance and exposed its vulnerabilities. He thinks it is smart; the opposite is true: it not only weakens European security, it also undermines that of America. His withering criticisms of the international rules-based order (especially the United Nations and the plethora of sub-organisations it has spawned) are valid; but again undermining them in such a corrosive way only adds to global instability and hands advantage to those who would do us harm.

Trump’s personality traits feature large. Even long-time supporters have been vocal critics of his bad manners, boorish behaviour, wild statements and the incoherence of his press briefings. And there are many across the political spectrum who disrespect Trump for his self-aggrandisement and the deliberate confusion and conflation of his and his family’s financial and political interests with his duties and obligations as President of the United States. Notable has been the extent to which it jars with the American public, even those who voted Republican, that the whiff of corruption clinging to Donald Trump brings the office of the President into disrepute. It is likely that this will be the central plank of the potential impeachment petition.

Countdown to November 2028

Focus inevitably shifts towards the November 2028 presidential polls. There will be no Trump 3.0 (however wild, there is speculation that as Melania takes a leading and surprising role in brokering Russo-Ukrainian peace initiatives, could the Trump dynasty be lining her up for an attempt?). The party caucuses to choose their respective presidential and running mate candidates will begin in earnest in only 15 months. Who will emerge on both sides of the divide as candidates and the potential occupant of the White House?

Republicans have the considerable challenge of retaining the votes of that significant minority who are die-hard Donald Trump supporters but who are not conviction Republicans. To what extent too are the potential lead candidates (e.g. JD Vance, Marco Rubio etc) tainted by association with Trump or capable of disassociating themselves without being disloyal? Vance is already running away from Trump as fast as his legs will carry him. The Republican field is open but the way ahead is difficult.

In the other camp, a Democrat leader has yet to emerge. The Left believes this is their time. Revealing in the aftermath of their mid-term success was the comment of a senior Democrat congressman: do not underestimate the capacity for a polarised party with an increasingly strong and strident left wing having the ability to shipwreck itself on the rocks of competing left-of-centre ideologies. The emotive and divisive politics of Palestine and Zion will figure large.

MAGA: Rest in Peace? Or Rot in Hell.

MAGA’s obituary is already being written. For the aggressive, dominating, brutalist policy put forward by Donald Trump in his National Security Strategy a year ago, that may be the case. But ‘America First’ remains a powerful and widely held value across the political spectrum. Many Americans might be embarrassed by Donald Trump but they are certainly not embarrassed to be Americans. They are fiercely proud of their nationhood. ‘YOO-ESS-AY! YOO-ESS-AY!’ is a national rallying call. It is ingrained in the American psyche to be a winner which by extension means everyone else is a loser. MAGA as a peculiarly Trumpian ideology might be in its dying days. But belief in ‘America First’ certainly is not even if what follows might be a kinder, more collaborative version of it.

Markets second guessing 

Markets are still digesting the changing inputs and second-guessing what the effect might be. We have already seen volatility in share prices, the dollar, the oil price, gold and bond yields. There are many assumptions but no certainties about what happens in Iran, with inflation, with US government spending, the deficit and the debt.

As to the immediate future, returning to Wind in the Willows and the analogy with Toad, much depends on whether what emerges is a penitent Trump who sees the errors of his ways, or the one who says of Badger’s remonstration in the smoking room, ‘Oh, yes, yes, in there, I'd have said anything in there.’ And then drives off in the first car he finds, poop! poop! We’re about to find out.

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.