Seeking Alpha

Why A Trump Impeachment Should Actually Be Bullish For Stocks

by: Mayer Winkler
Mayer Winkler
Long/short equity, special situations, macro, biotech
Summary

The impeachment process against President Donald Trump has now gone public, with the House of Representatives voting on a public inquiry.

If stocks fall only because of a potential Trump impeachment, then the dip should be bought.

Wall Street's real fear is an Elizabeth Warren presidency, the chances of which could actually decrease if Trump is impeached and convicted by the Senate.

Americans have waited over 3 years to see whether Congressional Democrats would be able and willing to realistically pursue the impeachment of President Donald Trump. We now have our answer. Yesterday, October 31, the House of Representatives voted on a public inquiry that will most likely lead to official impeachment proceedings. According to Bloomberg, it's only a matter of time now:

"The vote... is a step well short of authorizing Trump's impeachment, but no one on either side doubts that's where things will end up."

This is a complete turnaround since last month when Politico reported that House Speaker Nancy Pelosi had harshly criticized House Judiciary Committee Chairman Jerry Nadler for his one-sided pursuit of impeachment without the support of the House Democratic Caucus.

She has since been converted to the cause, and we are on our way. Wall Street has been ambivalent about the news, though it did cause some volatility when it started to look more likely that Congress would make a move last month. Once proceedings become formalized and the process moves to an actual case in the Senate, we are likely to see capital markets sell off if only due to the political uncertainty such a thing engenders. If so, the dip should be bought.

Beyond the general adage that Wall Street abhors uncertainty especially in the top corridors of political power, it is far from clear whether or not a conviction would ultimately be a negative for corporate America fundamentally speaking.

Why not? First of all, even if impeachment proceedings were to occur, the chances of a conviction are small. Even if the House of Representatives votes to impeach Trump, which is likely now, the Senate alone would have to vote to convict him by a 2/3rd majority. That means 19 Republicans would have to cross party lines and vote to convict a Republican for allegedly asking a foreign leader to dig up dirt on a Democratic candidate for President. While Trump certainly has some enemies on the Republican side of the Senate aisle, he doesn't look to have enough to reach a conviction.

But let's assume somehow that Trump is convicted and removed from office, as unlikely as that may be. Maybe the charges will end up being worse than what is currently being reported in the media. In that case, Vice President Mike Pence would assume the Presidency, and most likely the Republican nomination for 2020. In that event, the White House race would most likely be Pence vs. either Joe Biden or Elizabeth Warren.

Biden does not strike fear on Wall Street the same way that Warren does. Omega Advisors' Leon Cooperman, for example, believes that a Warren victory would precipitate a bear market with stocks falling 25%. He even joked that the stock market may not even open if she wins the White House in 2020.

Why all the Warren fear? First of all, her proposed 2% annual wealth tax on households worth over $50 million would siphon money straight out of stocks and into the Treasury, given that much of the savings of this group of Americans is in the form of equities.

An additional 1% annual billionaire surtax on top of the 2% wealth tax could further trigger a massive flight of capital out of the US and US equities in a hurry. Keep in mind that a wealth tax is not a one-time tax, but an annual payment repeated over and over again from the same pool of wealth. At that rate, by the end of a decade, every billionaire's household's net wealth would be about a third less than otherwise. It is very unlikely that any wealthy estate would tolerate this. Any rational estate planner would instead do everything possible to find a way to shelter wealth outside of the country.

We could even see a swell of millionaires and billionaires expatriating from the US before a victorious President Warren would even be sworn into office. This is because she is also threatening a 40% exit tax on these same people if they choose to renounce their US citizenship, so better get it done before the exit rates go up.

Specific Stocks, Sectors That Could Suffer

The effects of a wealth tax would likely hit financial stocks (XLF) front and center, because the rich will have to find a way to get their money out of the banking system entirely, even international banks due to their cooperation with US banks as a result of the Foreign Account Tax Compliance Act (FATCA). I believe that the main beneficiaries of these capital movements will be precious metals, as this is the one of the safest ways to store wealth outside of banks.

We can get more specific by seeing what US billionaires own presently. According to a February 2017 piece by the New York Times, former Microsoft CEO Steve Ballmer owns about $50 billion in Microsoft (MSFT) stock, adjusting for price changes between then and now. It's not an exact number of course, but you get the idea. If he tries to move that money out, it will affect the stock. He also owns about $900M worth of Twitter (TWTR).

The same applies for other tech companies with big stakes owned by their founders. There's Mark Zuckerberg, who owns 28% of Facebook (FB), and Google founders Larry Page and Sergey Brin who own 14% of Alphabet (GOOGL). If these people feel that Warren could win the presidency, expect some stock liquidations.

Potential Positives? Not Really

On the positive side for Wall Street, one could argue that perhaps Warren's views on trade are less aggressive than President Trump's, and that she may be able to find a way to strike a trade deal with China where Trump could not. Maybe, but Warren's public stance on trade is actually very similar to Trump's in its hard-line nationalism and bellicosity. From Warren:

We've let China get away with the suppression of pay and labor rights, poor environmental protections, and years of currency manipulation. All to add some zeroes to the bottom lines of big corporations with no loyalty or allegiance to America… And unlike Trump, while I think tariffs are an important tool, they are not by themselves a long-term solution… I want to… use our leverage to force other countries to raise the bar on everything from labor and environmental standards to anti-corruption rules to access to medicine to tax enforcement. If we raise the world's standards to our level and American workers have the chance to compete fairly, they will thrive - and millions of people around the world will be better off too.

What Warren neglects to mention here is that American standards are expensive, and raising the world's standards to American levels by force probably will not work. Instead, other countries may simply find other more easygoing trading partners or raise their own tariffs, just as China has already done against Trump.

Conclusion

The question for stocks then, insofar as a potential Trump impeachment conviction goes, is this. Which Republican has a greater chance of winning against a candidate Warren? Trump or Pence? According to the latest polls Warren is already beating Trump. Pence would certainly have the support of the entire Republican establishment which Trump has never fully enjoyed, and Pence would probably still be popular among Trump's current base compared to Warren at least. In other words, if Wall Street's worst case scenario is Trump getting impeached and convicted, Republicans could still end up having an even better shot at putting down a possible Warren presidency, which seems to be the stock market's main fear right now.

However, if Trump is not convicted by the Senate and Elizabeth Warren ends up being the Democratic candidate, expect the stocks above to take a hit, and the financials generally.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.