June 2018 Commentary

  • Indictments, NATO, and the 2018 Russia–US Summit: Despite calls from top democrats to cancel the 2018 Russia–US Summit in the wake of Special Counsel Robert Mueller’s recent indictment of 12 Russian intelligence officers for election interference, the meeting between Donald Trump and Vladimir Putin is firmly set to take place in Helsinki, Finland on Monday, July 16. Russia’s foreign ministry is calling the Special Counsel’s claims a “heap of conspiracy schemes” designed to “damage the atmosphere” ahead of the summit. What makes this high-profile meeting even more pivotal is that it takes place directly after an unsurprisingly contentious North Atlantic Treaty Organization (NATO) summit in Brussels, where Trump demanded that the 28 other member countries must increase defense spending by January 2019 or face the possibility of the United States dropping out of the alliance. This stern and hard-lined approach was widely anticipated by political pundits and reminiscent of the attitude witnessed during the G7 Summit in Quebec on the eve of Trump’s meeting with Kim Jong-un in Singapore. The intended purpose of the 2018 Russia–US Summit, however, is for the two leaders to discuss election meddling, the war in Syria, the incursion into Ukraine, and nuclear proliferation.

    • Our Takeaways: Given that the Special Counsel’s investigation into election meddling has, to date, brought forth 79 criminal charges against 20 people and 3 Russian companies, and where 5 people have pleaded guilty to charges and 1 has been sentenced, the topic of election meddling will be a hard topic to side-step when the two leaders meet in Helsinki. Is Trump’s routine condemnation of Mueller’s “witch hunt” investigation going to do himself or the country any favors during this discussion? Probably not. Is Trump’s aggression towards our own allies at the NATO Summit meant to demonstrate power in the eyes of Putin? Most likely yes, but perhaps not so strategically helpful in the long-run. At the very least, what we can expect is something similar to what we saw from the meeting with Kim Jong-un: both leaders will participate in ceremonial greetings, share an amicable lunch, meet privately for a few hours, make sufficiently vague agreements/concessions, hold press conferences, and then hail the whole meeting as a huge success. Straying away from anything other than that simplified system events could sway markets at a moment’s notice for a few hours or a few days. All-in-all, we do not anticipate the discussions from this meeting to yield anything of substance, especially with respect to addressing and preventing election meddling.

  • Trade War with China: With $34 billion worth of tariffs on Chinese goods recently coming into effect, and Trump announcing another $200 billion worth of tariffs on Chinese imports this month, the war of words is now steadily evolving into a full trade war. To elaborate further, China has continued to announce retaliatory tariffs of the same amount and is seeking to file a complaint with the World Trade Organization. The trick with Trump’s initial tariffs though was that they avoided consumer goods as well as goods where China has a large market share. This course of action has avoided overly provoking China in areas where they have more influence, has allowed popular every-day items like mobile phones and laptops to remain unscathed from the trade war, and has minimized the impact on American consumers during an election year. On the other hand, the problem with the threatened $200 billion in additional tariffs, if imposed this year, is that consumer goods will likely be included within that amount to a certain extent, and therefore, begin to cost the average American consumer/voter in more noticeable ways than before.

    • Our Takeaways: Looking to the bare facts of the matter, China is the world’s leading exporter (more than $2 trillion in exports a year), second leading importer (behind the United States), the U.S. trade deficit with China was about $375 billion in 2017, and, in terms of nominal GDP, the U.S. has a $19.4 trillion dollar economy while China has a $11.8 trillion dollar economy. As we have stated in earlier investor letters from this year relating to such a trade war, the current tariffs being imposed, and the threatened tariffs yet to be imposed, are hardly enough to move the needle when looking at the larger picture. Yet, the most interesting piece within this unfolding ordeal is how China has avoided blaming, or otherwise highlighting, Trump as the key antagonist behind the escalating trade war as other countries would have done. Why? Well, according to a few political and economic analysts, one reason could be that China is trying to avoid promoting the idea that a single, outspoken politician elected in a foreign country can profoundly challenge and influence Beijing on his own – a concept that an authoritarian regime would want to suppress.

  • Brett Kavanaugh Nomination: In early July, Trump personally interviewed and later announced his intent to nominate Judge Brett Kavanaugh to fill the Supreme Court seat that will soon become available upon the retirement of Justice Anthony Kennedy on July 31. Judge Kavanaugh is a United States Circuit Judge of the United States Court of Appeals for the District of Columbia Circuit, was the White House Staff Secretary under the Bush administration, and worked as an Associate Counsel in the Office of the Independent Counsel under Kenneth Starr (who carried out the controversial investigation of the Clinton administration during the Lewinsky scandal). In regard to the political spectrum, Kavanaugh is expected to be the second most conservative Associate Justice on the bench (Justice Clarence Thomas is regarded as the most conservative per a liberal-conservative ideology scoring system) if confirmed.

    • Our Takeaways: While this opportunity to nominate a Justice to the Supreme Court might seem underwhelming to members of the general public, this nomination and confirmation process has the ability to influence the Supreme Court’s ideology for decades. Pending the Senate Judiciary Committee’s evaluation of Kavanaugh and the Senate’s vote to confirm him, Kavanaugh will likely become a key component in advancing the Trump administration’s push for loosened regulatory oversight among industries. Ultimately, his appointment to the bench would likely be regarded as a win for industry lobbyists and a crucial loss for consumer and environmental protection advocates.

  • Turmoil in Westminster and Brexit Backlash: In the two years following the United Kingdom European Union membership referendum (otherwise known as the Brexit referendum), the path for a clean Brexit remains obscure. As one may recall, the Brexit vote took place on June 23, 2016, and resulted in a simple majority where 51.9% of voters favored the U.K.’s departure. In the time since the famed vote, U.K. Prime Minister Theresa May has attempted to preserve unity within the governing Conservative Party despite having backed the vote to remain in the European Union herself. Unfortunately, however, recent weeks have shown significant cracks forming within that united front and have led to the resignation of the Secretary of State for Exiting the European Union, David Davis, who was not satisfied with the “soft Brexit” plan that was produced during a recent cabinet gathering at the prime minister’s country retreat, Chequers (the U.K.’s version of Camp David). Furthermore, we also witnessed the resignation of the highly outspoken Secretary of State for Foreign and Commonwealth Affairs, Boris Johnson, who claimed that the Brexit “dream is dying, suffocated by needless self-doubt.”

    • Our Takeaways: To put it simply, the clock is ticking for Theresa May and officials at Westminster to suture wounds and finalize a fully-baked Brexit plan. Back on March 29, 2017, the official EU withdrawal process was initiated, putting the U.K. on track to depart from the EU by March 30, 2019, less than nine months from now. The irony in the entire situation is that the Brexit referendum was never actually a legally binding vote, but the government at the time under Prime Minister David Cameron had promised to implement the results of the referendum. So, in other words, the U.K. has voluntarily created their own geopolitical and economic headache based upon a lukewarm approval and steadily deflating support. All-in-all, the path forward for a clean and clear Brexit will likely remain hazy until the final months leading up to March 2019. We anticipate that the “soft-Brexit” plan meant to quell economic concerns in the interim will be picked apart from either side as hardline “Brexiteers” press for a sharp break and as the public loses faith in May’s ability (22% approval now, compared to 54% in March 2017) to negotiate the best plan for the United Kingdom.


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