Trump Takes On The Deep State

This is an article that merits a lot of attention. It explains what Donald Trump is really up against: A renegade “Deep State” that does what it wants, regardless of who is President, and can outlast many presidencies.

For archiving purposes, the article will remain in full here.

 

The tweet heard ’round the intelligence world.

 

 

  • Donald Trump engages in war of words with outgoing CIA head
  • Trump policies on trade, foreign policy depart from longstanding norms
  • Past events point to policymaking powers beyond elected officials
  • Russian relations a major sticking point between Trump, much of gov’t
  • Aggressive stance towards China could result in enormous market volatility

Last Sunday, US president-elect Donald Trump launched one of his now-trademark series of broadsides against the CIA, claiming that the latest series of leaks concerning his alleged misuse of a Moscow hotel suite previously occupied by president Barack Obama was a “complete fraud”.

Trump then compared the US intelligence regime to Nazi Germany in a tweet that called the leak, which alleged various colourful activities involving prostitutes, “fake news […] one last shot at me”.

The incoming president had already been warned against taking on the CIA by no less than Democratic Senate Minority Leader Chuck Schumer, who said on January 2 that Trump was being “really dumb” by taking on the CIA, adding that “you take on the intelligence community, they have six ways from Sunday at getting back at you”.

Last Sunday, outgoing CIA director John Brennan told press that he took “great umbrage” at Trump’s words, noting that Trump, who has repeatedly stated his intention to improve ties between the US and Russia, “has to understand that absolving Russia of various actions that it’s taken in the past number of years is a road that he, I think, needs to be very, very careful about moving down”.

Given that Trump’s plans regarding Russia have been opposed by Democrats, Republicans, and the intelligence community alike, his actions have been interpreted as an assault on what some term “the deep state,” or the collection of policymakers (both elected and not) that guide US policy in certain long-term directions.

According to Saxo Bank head of forex strategy John J Hardy, “the deep state” is shorthand for a force within Washington that is able to guide the US’ ship of state over periods of time longer than presidential terms, and at times despite the stated intentions of elected officials.

If Trump has indeed embroiled himself in a conflict with this entity, then, what does that mean for his policy plans and for the post-Inauguration markets?

The international order

On October 31, 2016, the Financial Times endorsed Democratic Party candidate Hillary Clinton for US president, stating that “the international order of the past 70 years is fraying, maybe even breaking down”, and claiming that “only one candidate has the credentials” to renew the post-World War Two circumstance of American leadership.

In the FT’s view, what some have dared term a “Pax Americana” (apologies to Vietnam, Libya, Iraq, Syria, and others) is imperilled by an increasingly assertive China, a weakened post-Brexit European Union, and an “emboldened Russia”.

This past weekend, president-elect Trump was out with what Hardy termed a series of “loose cannon” remarks wherein he lashed out against various key supports of the international order that the FT hoped Clinton would protect.

One of Trump’s most controversial strikes was against the North Atlantic Treaty Organisation, the military alliance first established as a bulwark against the Soviet Union and then against the Soviet-led Warsaw Pact alliance. In an interview published January 15, Trump told German daily Bild (paywall, in German; Zero Hedge overview here) that “Nato is obsolete,” adding that “[certain] countries aren’t paying what they should” in terms of the organisation’s upkeep costs.

This, of course, flies in the face of current US foreign policy, which since the dissolution of the Soviety Union in 1991 has expanded Nato to include Poland, Hungary, the Czech Republic, Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia, Croatia, and Albania.

Even as the US prepares for Trump’s inauguration Friday, the Washington-led alliance is deploying thousands of troops and a corresponding amount of weaponry to Poland in a move that Kremlin spokesman Dmitri Peskov says “threatens our interests, our security”.

For Russia, no love

Trump’s stated desire to improve relations with Russia is perhaps the most significant contrast between his policy plans and established bipartisan norms. In the wake of his election, the US’ largest journals of record immediately advanced the claim, backed by the Office of the Director of National Intelligence, that the Kremlin had “hacked” the US vote.

On December 9, 2016, the Washington Post cited unnamed sources in support of its claim that “the CIA has concluded in a secret assessment that Russia intervened in the 2016 election to help Donald Trump win the presidency”.

While the phrase “hacking the vote” might reasonably lead one to suspect that Moscow had tampered with the actual ballot count, the issue was in fact the series of leaked emails from the Democratic National Committee and Clinton campaign chair John Podesta that showed evidence of massive corruption within the campaign and the party, including references to “pay-to-play” appointments, collusion with major media outlets to favour Clinton, and an awareness that US allies Saudi Arabia and Qatar were supporting ISIS and other radical Sunni groups in the Middle East.

Syria

Homs, Syria: The US has admitted to lending tacit support to ISIS, Al-Qaeda and other radical groups in its efforts to oust Syrian leader Bashar al-Assad. Photo: iStock

WikiLeaks head Julian Assange has denied that the emails were provided by Russia or any other “state actor”. On October 3, 2016, Politifact quoted cybersecurity firm Taia Global CEO Jeffrey Carr as stating that he believes the “vast majority” of the Podesta emails released were genuine.

In this case, then, the partisan divide centres on the fact that some US voters were more concerned about the emails’ content, while others were more alarmed by the source. But though the war of unvetted documents from unverified sources continues, Russia is far from the only sticking point between Trump and the FT’s “international order”.

The populist threat

On June 15, 2016, the FT endorsed the “Remain” vote in the UK’s Brexit referendum, stating that leaving the European Union would damage “the coherence of the West”. This argument, like the venerable journal’s endorsement of Hillary Clinton, went unheeded by voters.

The twin upsets of Brexit and Trump represented a crushing defeat for an international order that has long pushed free trade, free movement of persons and capital, and a general favouring of the global and general over the local and particular, as the best way to deal with the challenges posed by an increasingly interconnected planet.

At last year’s Davos summit, luminaries like Eurasia Group president Ian Bremmer, former Italian PM Mario Monti, and then-French PM Manuel Valls said a Brexit vote was highly unlikely. At the same conference, the prominent historian and Stanford fellow Niall Ferguson said that “by the time we get to March-April, it’s all over,” adding “I’m really looking forward to […] Trump’s humiliation”.

As it turned out, it was the Davos consensus that was humiliated throughout 2016, with Trump rubbing salt in their Brexit wounds Sunday by stating that “The UK is smart to leave [the EU]… if you ask me, more countries will leave […] people, countries want their own identity”.

The fog of war

Underscoring his ability to infuriate both Democrats and Republicans, Trump also told Bild that the US’ decision to invade Iraq under Republican president George W. Bush “may have been the worst in US history”.

It is important to remember at this point that the Iraq War, for all the popular dissent present in 2003, was supported by both Hillary Clinton and Bernie Sanders as well as 213 of 225 Republican representatives.

Although president Obama, who was not a senator at the time of the Iraq resolution, voiced his opposition to the invasion at the time and campaigned against Clinton in 2008 on an anti-Iraq war platform, The New York Times reported in September that around 5,000 US troops remained in Iraq after eight years of Obama’s presidency, or twice as long as the US’ involvement in World War Two.

Iraq

The long war. Photo: iStock

Given Obama’s fiery anti-Iraq campaign trail rhetoric, then, and despite his series of high-profile “withdrawals”, US involvement in that war was apparently able to persist despite the president’s stated intentions, a circumstance that at least implies a more persistent force within Washington that is able to pursue geopolitical and/or ideological goals independent (to some degree) of the wishes of the president, who in the US is also the commander-in-chief of the country’s military.

If this persistent force can be termed “the deep state”, and if its façon d´être is to pursue strategic goals with some independence from elected officials and by extension the US public, then Trump appears, with both his policy plans and his customary fiery rhetoric, to have placed himself directly in its crosshairs.

What will this mean for his presidency then, given Trump’s apparent isolation from longstanding US policy norms, strategic plans, and bipartisan agreements concerning trade, the economy, and war?

Inaugurating volatility

Since Trump’s election, equity markets and the dollar embarked on a rally that is only recently beginning to fade. This surge, known as “the Trump trade”, saw a multitude of assets gain value based on expectations of economic stimulus and infrastructure investment from the Trump administration.

Recently, however, concerns regarding a potential gap between Trump’s stated plans and the likely reality of his administration have brought USD lower and raised the prices of safe-haven assets such as gold and the Japanese yen. The main question in markets’ collective mind now appears to be whether Trump will in fact have the latitude to depart from longstanding norms concerning free trade, involvement in Middle Eastern wars, and the US’ wary-to-hostile relationship with Moscow.

Domestically, the main points of contention between Trump and the Washington consensus surround issues of protectionism and tax/spending policy. “If Trump continues to stick to a strongly protectionist line, which raises corporate uncertainty on where to concentrate investment,” says Hardy, “this will likely boost USD as it risks further US rate hikes if fewer foreigners are interested in or able to own US Treasuries and because it means a shortage of dollars in the world as the US’ trade deficit might shrink”.

Hardy cautions, however, that such a policy trajectory would be “dangerous for the world as the US is still the world’s global reserve currency without peer – though its days are numbered.”

On the tax and spending front, Hardy says Trump will have a harder time given resistance from legislators, but notes that the president-elect’s ability to reach out to the general public via his (in)famous Twitter account could result in lawmakers running into hard opposition from their own constituents.

“Imagine Trump calling out specific congressmen and their willingness to risk their constituent’s health to protect drug companies’ pricing schemes […] this specific issue will be wildly popular across all lower- and medium-income people”, states Saxo’s head of forex strategy.

In terms of foreign policy, which is perhaps the largest bone of contention between Trump and what one might either choose to call “longstanding policy norms” or “the deep state,” depending on both one’s partisan inclinations and perceptions of the individuals involved, the US’ relations with geopolitical rivals Russia and China are perhaps the largest risk factors for investors wary of volatility.

In the former case, Trump’s rhetoric concerning détente with Moscow is already heavily priced into the USDRUB rate, says Hardy – a market movement that flies in the face of the CIA’s, the Democrats’, and the Republicans’ portrait of Russian president Vladimir Putin as a dangerous dictator who must be opposed and contained.

Concerning the latter, Trump’s demands for an end to subsidies of major Chinese industries, a stronger yuan, and military access to the South China Sea (one of his most controversial first moves as president-elect was a phone call with Taiwan) could prove an even more major sticking-point for his regime.

China

Beijing is extraordinarily unlikely to depart from its stance regarding Taiwan, and what it sees as its ownership of the South China Sea. Photo: iStock

If China is unwilling to meet Trump halfway on some or all of these measures, says the Daily Reckoning’s Jim Rickards, “Trump is prepared to impose tariffs, border adjustment taxes and other penalties on Chinese imports,” with the same publication’s Dave Gonigam stating that “the problem is that Trump will make demands Chinese leaders can’t possibly meet — even halfway”.

If this comes to pass, says Hardy, “it will aggravate market volatility greatly.”

The great divider

The role of the deep state in markets’ reaction to the Trump presidency then, will likely prove complex and subtle. Given the intelligence community’s apparent willingness to delegitimise the incoming president via leaked information that The New York Times (which gave Hillary Clinton a very strongly worded endorsement prior to the election) termed both “unverified” and “unsubstantiated”, and given the persistence of Washington’s traditional stances regarding the linked issues of trade, China, Russia, and war, Trump’s decision to take on the “deep state” may make it a great deal harder for him to push through the immigration, trade, and foreign policy directives that 62,979,879 Americans voted for.

There is little doubt that Trump’s presidency will be an extremely volatile phenomenon within the group of bodies that constitute institutional Washington. Whether this translates into market volatility, in Hardy’s view, depends on which policies Trump can advance from rhetoric into law.

In the Saxo forex chief’s opinion, however, much of this dispute will not come down to ideology or strategy, but rather to Trump’s unique temperament.

“I don’t think we’ll see gridlock in the traditional sense, “ says Hardy; “Trump doesn’t care one iota about partisanship, he only cares about his ratings. If a given action increases his ratings, all else will be sacrificed – everything.”

Donald Trump

“You gotta break some eggs to make an omelette, people. We have the best omelettes at Trump Tower. I love eggs!” Photo: iStock

Full article: Trump Takes On The Deep State (Zero Hedge)

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