Trump today, Trump tomorrow?
Impeachment talk is nothing new in Washington. It’s difficult to think of any US President in recent times where some part of the political spectrum has not been calling for impeachment. Yet, US impeachment talk has gained unusual momentum in recent weeks, making it a scenario worth thinking through for investors. Here are nine questions and nine answers.
Let’s start with the logistics. How could it work?
It has to start in the House of Representatives, which has the ‘sole power of impeachment’. If a simple majority of the House of Representatives votes to impeach, the President remains in office, while he is then "tried" by the Senate. A two-thirds majority there results in the President’s removal from office.
How long would it take?
There are no deadlines and few precedents. The Bill Clinton impeachment saga took just over a year between the Lewinsky story breaking and the eventual acquittal in the Senate. The Watergate scandal played out over an even longer period. But Nixon’s resignation happened only three months after impeachment hearings began in the House.
What influences whether it will happen?
Impeachment is more of a political than a legal decision. The Constitution is quite vague: “…impeachment for, and conviction of Treason, Bribery, or other High Crimes and Misdemeanors". The last two leave a lot of room for interpretation. Republicans hold a majority in the House, where impeachment proceedings must begin, so the question becomes: what would change enough Republicans minds to impeach a President from their own party? I see two possible answers:
1) A revelation and proof thereof which makes it politically untenable to not impeach
2) A shift in the public mood. Because most House districts are gerrymandered it is President Trump’s support among Republican voters that matters more than that of the overall population. As long as Trump is popular with the base in Republican districts those Representatives will struggle to support impeachment. So far, all surveys show that the Republican base still heavily supports Trump (see the charts above and below). If that changes, you could see a wave of Republicans quickly abandoning Trump
How else could Trump leave office?
- He could resign. This would enabling an easy transition of power and the least delay in the legislative agenda. But it also seems unlikely and arguably quite out of character
- The 25th amendment empowers the vice president and a majority of the officers of Trump’s executive departments to remove him from office if the president is “unable to discharge the powers and duties of his office.” This scenario would be similarly elegant and unlikely
Who could take over?
This is the easiest question to answer. In all of the above cases Mike Pence would become the 46th President of the United States.
What could change policy-wise?
Now we’re getting closer to what matters to markets. We don’t know for sure what Mike Pence’s agenda would look like, but it is very likely it would be closer to the Republican mainstream than Trump’s. Pence enjoys good relationships with the Republican establishment, spent more than a decade in the House of Representatives and served as Governor of Indiana. It’s also worth remembering that one of the bullish arguments about a Trump administration also applies to a Pence administration: the President would still govern with Republicans in control of Congress until at least the mid-term elections in late 2018. What could change?
- Higher probability of getting policy enacted
- The legislative process would accelerate
- The scope of change would be less ambitious. There could be both a smaller tax reform and a smaller fiscal stimulus
- Many policies would be likely to remain the same. There is a broad consensus within the Republican party on topics like deregulation and repatriation of overseas corporate cash
How could markets react?
Unless Trump resigns unexpectedly, impeachment would play out over many months and get priced into markets gradually. Nevertheless, probabilities can shift suddenly based on unpredictable newsflow. Though an impeachment would almost certainly be an even bigger media circus than Clinton’s impeachment, the equity market impact could be limited, assuming 1) the recent improvement in global growth prospects has been largely independent of Trump, 2) only a small part of the tax reform boost to earnings is priced in, and 3) switching to a Pence administration has roughly as many positives as negatives. Trump-specific trades would get hit more, e.g. US small caps, but much of the initial post-election optimism has already been priced out.
How likely is this?
The bookies give Trump leaving office this year a 16% probability, and the odds of him leaving before the end of his current term stand at 48%. Of course these numbers don’t just reflect impeachment, but also other reasons for leaving office. Rather than putting our own odds on such events our approach on political topics remains ‘don’t predict, prepare’.
Is it really as simple as replacing Trump with Pence?
We have long seen the rise of Donald Trump more as a symptom than a cause of the new wave of populism, in line with our new political paradigm framework. It seems unlikely that an impeached Donald Trump would disappear quietly from the political scene. His railing against the media and the Washington swamp has been popular with many Americans and impeachment would arguably be seen as even more proof that radical change is needed. Whether they turn to an independent run of Donald Trump or a new populist candidate is difficult to say, but it seems unlikely that the process of impeachment would suddenly restore these voters’ faith in the old Democratic and Republican parties.