National leaders, it seems, are betting that headlines generated by heady stock gains will bestow a ‘halo effect’ on their economic stewardship
Jan 19 2018
Stock markets are rallying so fast that analysts can’t keep up. As they throw charts, models and all caution to the wind, many are turning their dials up toward continued gains from New York to Mumbai.
That’s music to the ears of world leaders—Donald Trump, especially—who are getting on the booming-stock bandwagon as never before. The US president even believes Wall Street’s record-breaking run absolves all manner of sins. Russia investigations? The Dow Jones is booming, Trump counters. Cronyism scandals? Wacky comments? His trolling North Korea? You’re missing the point—investors are loving my White House!
Sadly, this strategy is catching on. Look no further than Shinzo Abe’s Japan, where the Nikkei is at 26-year highs. Even though Prime Minister Abe put few structural reform wins on the scoreboard in five years, markets can’t seem to go long on Japan fast enough. “Buy my Abenomics!” Abe says. India punters buzz about a Narendra Modi “put”—the idea that the prime minister has investors’ backs.
Or is it the other way around? National leaders, it seems, are betting that headlines generated by heady stock gains will bestow a “halo effect” on their economic stewardship. It follows, then, that more traditional yardsticks—GDP (gross domestic product) numbers, consumption trends and approval polls—take a back seat to swelling asset values.
Trump is the most obvious purveyor of the stock bait-and-switch. It fits with his “fake news” mantra. Earlier this month, pundits countered Trump’s claim that the 2.6 million jobs the US created in 2017 were the most ever. That pace didn’t even best 2016, President Barack Obama’s last year in office. Rather than admit he misspoke, Trump tweeted: “Dow now over 25,000!”
This stock-centric view is worrisome on two levels. One, stocks, it’s been very well established, are a poor indicator of broader economic health. A president who talks about himself in the third person, like America’s current one, is apt to take “Trump bump” talk in markets too literally. Two, a focus on keeping shares aloft skews today’s incentives to the long-term peril of living standards.
India sheds light on the worry No. 1. Modi, no doubt, has altered the narrative on Asia’s third biggest economy, even pulling off some important reform wins. But the Nifty and Sensex rallies are losing sight of the daunting clouds hovering above, from slowing growth to bureaucratic dysfunction to complacency.
Modi himself has talked of “surreal valuations” in share markets. Bulls may have too much faith in the “Modi put”, India’s answer to the “Greenspan put” of old. Former Federal Reserve chairman Alan Greenspan bailed out markets early and, often, with fresh liquidity or soothing words. The Modi effect appears to have coaxed markets into a similar trance.
Trump best exemplifies worry No. 2. Of course, by the logic of the “Trump Doctrine”—the idea that surging stocks are everything—Japan’s Abe had a stellar 2017 and his 2018 is looking rather sweet already. But no leader has more riding on stock market ups and downs than Trump. And, given Trump’s limited understanding, or respect for, divisions of power in Washington, expect desperate and unsightly attempts to keep stocks rising.
Any acceleration in Fed rate hikes, for example, will suffer @realDonaldTrump’s wrath. That’s why anyone betting the next Fed leader, Jerome Powell, will rock global credit markets, come February, can relax. At the same time, Trump is sure not just to jawbone the market, but to tweak regulations aimed at cheering investors and, perhaps, even direct public cash into stocks. That, after all, is what then-President George W. Bush envisioned in the 2000s in trying to privatize social security.
It’s ironic, really. Trump slams China’s system of government early and often. But he, too, attacks press freedom, skews toward authoritarianism and governs more by slogan than substance. Will he next pull out Beijing’s post-2015 playbook?
In the summer of that year, remember, Shanghai stocks were in free fall. Rather than strengthen foundations, increase transparency or make companies more shareholder-friendly, China added steroids to the market. The People’s Bank of China slashed rates, while Beijing took a kitchen-sink approach: increasing leverage limits; suspending initial public offerings; easing margin-trading regulations; letting individuals put up homes as collateral. The government sponsored a huge public-relations blitz to encourage mainlanders to buy stocks out of patriotism.
Think Trump wouldn’t go down a similar road if the Dow started racking up double-digit drops? I hope I’m wrong, and overthinking things. It’s interesting, though, to see so many formerly skeptical investors chasing the market higher, so as not to miss out. This herd mentality smacks more of a global pyramid scheme, than inspired value investing.
It also means governments will find more value in propping up stocks than doing the hard work of raising economic games.
And that’s a bad trade-off for everyone.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek.