Unlock the White House Watch newsletter for free
Your guide to what the 2024 US election means for Washington and the world
You may have seen the latest developments on the political side. Alphaville tries to stay out of all that stuff as long as it doesn’t matter much to our main subject matters, but it’s becoming hard to ignore.
So it also seems for the sell-side, where the output has become subtly more critical lately, while still remaining cautious lest some poor analyst becomes the White House’s latest bête noir.
Kudos therefore to Evercore ISI, which waded into the latest kerfuffle with a question that everyone is probably asking, but you won’t see many investment analysts squarely address.
We’re going to quote from Evercore introduction at length just to lay out where things are.
With over 100 legal challenges filed in response to executive actions taken by the Trump Administration, perhaps it was only a matter of time before sharp tensions between the Executive and Judicial branches began to bubble up. Until this week, the Administration had by and large complied with court orders, albeit slowly and begrudgingly, including re-opening the CFPB, reinstating many fired probationary federal workers, and taking at least modest steps to pay some outstanding USAID claims.
This week, however, the Trump Administration stepped closer to the line of outright defiance, with planes carrying deportees taking off around the time a district court judge was determining the lawfulness of the deportation. The tensions in this case escalated to the point where President Trump called for the judge’s impeachment, leading Chief Justice Roberts to issue a rare public rebuke, noting that “impeachment is not an appropriate response to disagreement concerning a judicial decision.”
The latest set of events — combined with a series of statements made by Trump and several top DOJ nominees — suggest we are edging closer to a situation in which the Administration may openly defy a Supreme Court order. Historically, Presidents have generally abided by Supreme Court rulings against them — even when the rulings were highly consequential. Open defiance of the Supreme Court would arguably represent uncharted constitutional territory.
. . . Markets have generally been willing to tolerate signs that U.S. political and legal stability is eroding. But would a constitutional crisis have market implications? We think underlying facts of the case matter.
While markets may be willing to overlook legal spats over certain subjects, if the Trump Administration defies a court order in a way that impacts meaningful government spending or undercuts the judiciary’s ability to enforce contracts or effectively mediate commercial disputes — which are foundational to the U.S. free market system — then we see higher risks of an adverse market reaction.
The main body of the report examines historical stand-offs between the US judiciary and executive branches, the cases currently pending, and whether US Marshals — who are tasked with carrying out a judge’s orders, collecting fines and arresting those that oppose them — would be actually able to do their jobs. Yep, that’s where we are today.
But for Alphaville readers, the main issue is probably Evercore’s view on whether this matters to markets, or when it might begin to do so.
As the investment bank’s analysts point out, markets “have generally shown a willingness to shrug off a continued erosion of US legal and political norms”. They might once again ignore a stand-off between two of the three main branches of the US political system as just more inevitable noise, or at least a lesser danger than tariffs.
Evercore’s broad conclusion is that the underlying case will affect whether and how much markets immediately react to the chaos, but that the real long-term danger is an insidious “erosion of market perceptions of US stability and safety”:
For example, if Trump defies courts in using the Alien Enemies Act of 1798 to deport suspected gang members without full due process protections, markets may not react. The issue at play is not fundamentally economic in nature, and while stripping of due process protections will certainly cause concerns, the Administration’s actions here will have been done on a relatively small scale and — the Administration would argue — only in response to the unprecedented circumstances of millions of excess immigration inflows relative to trend.
In contrast, if Trump defies a court order on a fundamentally economic or commercial issue — refusing a court order to pay a government contractor for work already completed, for instance markets might care more.
Even as certain norms around democracy and the rule of law have faced challenges in recent years, the U.S. judicial system has continued to function as an effective and independent mediator of economic and commercial disputes, providing an essential backbone to our free market system. Open defiance of a court order around payments or contracts would suggest that the U.S. government is no longer subject to the economic rule of law.
If the dispute is small enough in dollar terms and the Administration again argues the circumstances are unique, markets might also look through, say, the government stiffing an individual contractor. But we would remind investors that at least one senior Administration economic official has openly flirted with the idea of defaulting on Treasuries. And so at least as far as markets are concerned, we think a refusal to comply with a court order around government payments or contracts raises the possibility of an extremely dangerous slippery slope.
It is unclear whether a market response would come suddenly in response to a single event or slowly over time. Either way, the erosion of market perceptions of U.S. stability and safety would carry enormous economic impacts. As our former Evercore ISI colleague Ernie Tedeschi (who now serves as the Director of Economics of the Yale Budget Lab) has written:
“The US enjoys a safe harbor investment premium — a value that investors place on US safety, soundness and stability. Even a relatively modest move in risk premia would have profound implications for the US. If the US country risk premium moved to that of the current UK level, after 10 years, real equity wealth per household would be $50,000 lower and real GDP 1% smaller.”
Given the number of cases against the Trump Administration and the speed at which they are moving, there will likely be multiple near-term opportunities to test the markets resolve on this issue.
Yup, probably!
Read the full article here
