Impeachment is a political process. We watch it unfold with strenuous claims and counterclaims, as we did with the Nixon and Clinton episodes. We are writing about it because it impacts markets: Political outcomes impact policy, and that is where impeachment intersects markets. With the Clinton debacle, policy was little changed; but with the Nixon outcome, change was huge.
We’ll start by providing readers with a little background on the history of impeachment in the United States, and then examine the current presidential impeachment process and surrounding issues from the perspective of financial markets and investors’ decision-making.
“The House has impeached 19 federal officers. Of these, 15 were federal judges: thirteen district court judges, one court of appeals judge (who also sat on the Commerce Court), and one Supreme Court associate justice. Two were Presidents: Andrew Johnson and Bill Clinton; both were later acquitted by the Senate.” (https://en.wikipedia.org/wiki/Impeachment_in_the_United_States#Federal_impeachment_investigations_formally_commenced_and_officials_impeached)
“The House of Representatives has initiated impeachment proceedings only 64 times since 1789, only 19 of these proceedings actually resulting in the House's passing Articles of Impeachment, and of those, only eight resulted in removal from office (all federal judges).” (https://en.wikipedia.org/wiki/Impeachment#United_States)
Astute readers may notice that the Wikipedia numbers cited above omit two individuals who faced impeachment. These were a US Senator (William Blount, 1797) and a Secretary of War (William Belknap, 1876). (https://history.house.gov/Institution/Impeachment/Impeachment-List/)
Senate convictions of presidents have never occurred in US history. When faced with that possible outcome, Richard Nixon resigned before the House could vote on the articles of impeachment and thus before impeachment proceedings reached the Senate.
Impeachment proceedings create uncertainty for market agents. They also distract government. But they run their course in time, and markets normalize after the events.
Impeachment proceedings can alter political outcomes, which can, in turn, change policy; and markets then respond to those policy changes. Polls show that the Americans are deeply divided regarding impeachment, along party lines. It is far too early to say how impeachment proceedings will impact the 2020 election, but we will obviously be watching carefully.
(Chart source: “GOP’s Collins Blasts Trump’s ‘Spy’ Comment: Impeachment Update”: https://www.bloomberg.com/news/articles/2019-09-26/whistle-blower-report-to-be-made-public-impeachment-update)
Here is the official text of the whistleblower complaint against Donald Trump, in PDF format: https://intelligence.house.gov/uploadedfiles/20190812_-_whistleblower_complaint_unclass.pdf
Intended by the nation’s founders as means to prevent abuses of power, impeachment is also one tool of the political process. For investors, the Trump impeachment issue has to be evaluated as to whether or not it is a market-changing event.
(WSJ, Sept. 29, 2019) “Impeachment’s Role in History: Part Legal Creature, but Mostly Political”: https://www.wsj.com/articles/impeachments-role-in-history-part-legal-creature-but-mostly-political-11569776731/
William A. Galston, a Senior Fellow in Governance Studies at Brookings, suggests that impeachment proceedings against a president, historically speaking, have been influenced by three factors: (1) a president’s approval rating, (2) public support for the impeachment process, and (3) bipartisan support for impeachment in the House of Representatives. Galston looks at what we know about each of these factors today in a must-read analysis, and he suggests that one issue will be whether Americans of both parties have time to assimilate relevant information and formulate opinions grounded in what they learn.
(Brookings, Sept. 27, 2019) “Impeachment and public opinion: Three key indicators to watch”: https://www.brookings.edu/blog/fixgov/2019/09/27/impeachment-and-public-opinion-three-key-indicators-to-watch/
Reports this weekend of Sept. 28-29 suggest, however, that things will move quickly in the House.
(USA Today, Sept. 29, 2019) “Nancy Pelosi has put the Trump impeachment inquiry on a fast track. Here's the plan, timeline and key players”: https://www.usatoday.com/story/news/politics/2019/09/29/nancy-pelosi-impeachment-inquiry-trump-ramps-up-plan/3791214002/
In the meantime, past and current news reports address the context and the import of Trump’s call to the Ukraine on July 25 and the White House’s subsequent handling of the records of that call.
(NY Times, May 9, 2019) “Rudy Giuliani Plans Ukraine Trip to Push for Inquiries That Could Help Trump”: https://www.nytimes.com/2019/05/09/us/politics/giuliani-ukraine-trump.html/
(Bloomberg, Sept. 27, 2019) “Ex-U.S. Attorney Moore Weighs In on the Legal Implications of Trump's Ukraine Call”: https://www.bloomberg.com/news/videos/2019-09-27/ex-u-s-attorney-moore-weighs-in-on-the-legal-implications-of-trump-s-ukraine-call-video
(Reuters, Sept. 29, 2019) “In pushing probe of rival, did Trump enlist the U.S. government?”: https://www.reuters.com/article/us-usa-trump-whistleblower-machinery/in-pushing-probe-of-rival-did-trump-enlist-the-u-s-government-idUSKBN1WE0B5
(WSJ, Sept. 28, 2019) “Embarrassing Leaks Led to Clampdown on Trump’s Phone Records”: https://www.wsj.com/articles/embarrassing-leaks-led-to-clampdown-on-trumps-phone-records-11569710889/
On Sept. 27 former national security adviser Susan Rice acknowledged that the Obama administration moved transcripts of conversations with foreign leaders onto the same top-secret server where the Trump administration stored Trump’s recent phone call with Ukrainian President Zelensky. She stated, however, that calls “were never moved over unless they were legitimately in their contents classified.”
(The Federalist, Sept. 28, 2019) “Susan Rice: Obama Put Call Transcripts On Top Secret Server, Too”: https://thefederalist.com/2019/09/28/susan-rice-obama-put-call-transcripts-on-top-secret-server-too/
The system to which the Trump team moved the call with Zelensky is managed by the National Security Council’s Directorate for Intelligence. It stores “codeword-level” intelligence – for instance, intelligence about covert operations or the movement of military assets. Just a few people in the White House and a few in the national security community have access to this codeword-protected server. Thus, says Elaine Kamarck, “… it is surprising that a conversation with President Trump considered appropriate enough to release to the public would have been stored in such a secret place.
“Democrats and Republicans with Top Secret security clearances should be able to view [the server’s] contents. If what they find are mostly highly sensitive records of covert operations, then the president may have an easier time convincing the Congress that he has not abused his power. But if they find other instances of secret communications with Ukraine or with other foreign governments that involve the personal political interests of the president, the case for impeachment may get much stronger.”
(Brookings Institution, Sept. 27, 2019) “Is Ukraine simply the tip of the iceberg for impeachment?”: https://www.brookings.edu/blog/fixgov/2019/09/27/is-ukraine-simply-the-tip-of-the-iceberg-for-impeachment/
The Clinton impeachment process accelerated with the evidence of a notorious stain on a dress. Nixon’s demise was triggered by an 18-1/2–minute tape erasure. Will the evidence being amassed against Trump prove to be more substantial and damning than in either of these cases; or will it, as Trump asserts, turn out to be merely a hoax, the made-up products of a witch hunt?
In any event, the impeachment process will profoundly affect US politics and governance in the runup to the 2020 elections. This article from the Wall Street Journal (Sept. 28, 2019) summarizes the risks: “What Matters This Week in the 2020 Race” – https://www.wsj.com/articles/what-matters-this-week-in-the-2020-race-11569643261?
Clearly, added political risk is being posed by Trump’s behavior (his mentioning of civil war, his demanding to know the identity of and threatening consequences for the whistleblower, who must now have protection).
(New York Times, Sept. 30, 2019) “Trump Seeks Whistle-Blower’s Identity”: https://www.nytimes.com/2019/09/30/us/politics/trump-schiff-treason.html?smid=nytcore-ios-share
(Politico, Oct. 1, 2019) “Grassley breaks with Trump over protecting whistleblower”: https://www.politico.com/news/2019/10/01/grassley-trump-whistleblower-014715
In response, Senator Mark Warner, the ranking Democrat on the Intelligence Committee, said on Twitter that Trump’s attacks on the whistleblower is a threat to both government accountability and national security.
(Bloomberg, Oct. 1, 2019) “Impeachment update: Warner decries Trump’s whistle-blower attack”: https://www.theedgemarkets.com/article/impeachment-update-warner-decries-trumps-whistle-blower-attack
The issue of Joe Biden’s and Hunter Biden’s involvement with Ukraine has to be evaluated as a separate matter, one potentially impacting the election. Trump is making every effort to distract attention from his own actions while raising negative allegations against Biden. In order to assess the ultimate impact of this political strategy for the 2020 election, investors must consider both the facts regarding the Bidens’ involvement in the Ukraine and the potential impact that attacks can have, independent of facts, on voters’ opinions and behavior.
(The Guardian, Sept. 29, 2019) “Rudy Giuliani: Ukraine sources detail attempt to construct case against Biden”: https://www.theguardian.com/us-news/2019/sep/29/rudy-giuliani-ukraine-biden-trump-impeachment
(Burisma Group, May 2014) “[Hunter] Biden outlines his mission for the Company”: https://burisma-group.com/eng/news/burisma-holdings-board-member-hunter-biden-outlines-his-mission-for-the-company/
(Al Jazeera, May 2015) “[Obama] White House: No conflict with Biden's son working for Ukraine gas company”:
http://america.aljazeera.com/articles/2014/5/14/ukraine-biden-gas.html
(Bloomberg, May 16, 2019) “Ukraine Prosecutor Says No Evidence of Wrongdoing by Bidens”
https://www.bloomberg.com/news/articles/2019-05-16/ukraine-prosecutor-says-no-evidence-of-wrongdoing-by-bidens
(The Hill, Sept. 26, 2019) “Solomon: These once-secret memos cast doubt on Joe Biden's Ukraine story”: https://thehill.com/opinion/campaign/463307-solomon-these-once-secret-memos-cast-doubt-on-joe-bidens-ukraine-story
(NBC, Sept. 25, 2019) “There's no evidence for Trump's Biden-Ukraine accusations”: https://www.nbcnews.com/politics/2020-election/there-s-no-evidence-trump-s-biden-ukraine-accusations-what-n1057851
As Trump and his personal lawyer have sought means to damage Joe Biden’s bid for the presidency, and as the Democratic-led House of Representatives now launches its impeachment inquiry, we find ourselves watching two versions of America’s political process in use against each other. Outcomes remain to be seen.
Finally, I will share an excerpt of Bob Brusca’s thoughts on fair play, the ethics and politics of impeachment, and the effects of this latest three-ring political circus on the real business of running the country:
“No one is above the law and everyone deserves fair play
“It is ironic to find myself defending Trump, a man I do not like. But he is president and the office matters. And I do like some of his policy stands especially on trade where we (as a country) have a great deal invested. The Democrats are constantly undercutting him and have set back the President’s ability to negotiate especially with China where a nearly done-deal was set back by Democrats undercutting Trump and giving the Chinese second-thoughts earlier this year. Now Democrats are holding up the NAFTA replacement treaty (USMCA) and there is a question of whether a prescription drug bill will go ahead. Yet, the Republicans hold such a substantial margin in the Senate that there will have to be some really significant wrong doings to impeach Trump and remove him- not just trumped up errors in judgement. It actually seems quite impossible. Yet the House presses on and will ignore real business. The House leadership realizes how touch and go this is. House members have not voted articles of impeachment against Trump. That would require their members putting their names on record as ‘for’ impeachment and it would require naming the charges. If these acts by Trump are so reckless then vote articles of impeachment. If not then stop playing this in-between game that is going NOWHERE (queue playing of Nowhere Man by the Beatles, the new official song of the US House of Representatives).”
Right now Cumberland remains fully invested in our US stock market ETF strategy. Our quantitative strategies are also fully invested. Our bond strategies continue the barbell. Of course, this course can change at any time.
David R. Kotok
Chairman and Chief Investment Officer
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