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This guest commentary was written by Peter Atwater of Financial Insyghts.

White House Confidence: A Major Low or The Beginning of a Cascade - mag covers

Last week, President Trump’s approval rating hit a new all-time low, just 34%, bringing with it a rich mosaic of behaviors both inside and out of the White House that fit with a major low in confidence: Executives abandoned  various Trump business councils; fellow Republicans took to the airwaves and to Twitter to condemn the President’s response to the events in Charlottesville; organizations cancelled existing reservations at Mar-A-Lago; controversial figure Steve Bannon exited (or was exited from) the White House; and the President himself raged in a free-form, wildly un-presidential  press conference with  the media dog-piling him on magazine covers, like those above, and in scorching editorials.

If last week was the new administration's Billy Bush video moment, it should mark a major low in the President’s approval rating.  Just like President Trump confounded the forecasters and rose from the ashes of the Access Hollywood tape, his popularity should move dramatically higher from here.

Behaviorally last week, mood collapsed, the crowd panicked and then collectively acted on its fears. Everyone who would and could “sell” Trump has. A significant low should now be in place.

With financial analysts and market pundits linking the strength of the US Dollar and US Treasury yields to the President’s approval rating, both – along with the US stock market – should now see a sharp rebound.

The worst should now be behind the President – at least for some protracted period of time.

That is certainly what General Kelly and the rest of the administration are clearly hoping for. With calm, come September, the White House and the Republican Congress can get back to work executing the Trump agenda.

As a researcher in confidence-driven decision making, what I’ve just described is what I would call my “preferred” scenario. The behaviors and actions we’ve just seen fit the characteristics of a major low in confidence. There should be smoother sailing for the Trump White House ahead.

There is, though, an “alternative” scenario, however, that I feel compelled to raise based on what I see. While a far rarer occurrence, I think it is important to highlight the possibility that what we have just experienced is not a major low, but rather yet another troubling series of events that are part of a fast-moving cascade in confidence – a larger panic in the Trump presidency, as it were.

While panics are extremely rare, I see several meaningful indicators that suggest that one may be unfolding.

First, major White House departures have been a regular occurrence throughout the administration’s short tenure.

White House Confidence: A Major Low or The Beginning of a Cascade - all pres

While Mr. Bannon’s exit is significant, I would note that three weeks ago the resignations/terminations of Mr. Priebus, Mr. Spicer, and Mr. Scaramucci in rapid-fire succession – something that I had expected would mark a major low – did not result in a major bounce in President Trump’s approval rating.  The lift was anemic and shortly thereafter, President Trump’s approval rating rolled over.

One of the phenomena I have observed with the new administration is that the bounces in POTUS approval have become both shorter and shallower. While difficult to see in this chart, the rate of decent for POTUS approval has been accelerating.

White House Confidence: A Major Low or The Beginning of a Cascade - gallup polling

During the 2008 banking crisis, I noticed a similar phenomenon in major bank stocks. Following each new bank failure, the ensuing rally was shorter and shallower. Ultimately, there were no bounces as the market cascaded into the collapse of Lehman Brothers.

While not wishing it, I worry that the same cascading phenomenon is afoot here.

Second, while consistent mainstream media magazine covers, like those above, are typically a great contrarian indicator, that has not been the case with the Trump administration.

These covers, for example, from early February did not mark a major, let alone even a minor, low in POTUS confidence. 

White House Confidence: A Major Low or The Beginning of a Cascade - mags

As the Gallup chart above shows, President Trump’s popularity quickly moved considerably lower.

Finally, I would not underestimate the major impact chronic underconfidence has had on the President and his White House team. As I wrote during the early days of the new administration, “Low confidence motivates or exhausts.”

Since early May, with two very brief exceptions, President Trump’s approval rating has been at or below 40%. That is a very long time for any administration, let alone a brand new one. For President Trump and his team, there has been no honeymoon. 

My concern is that low mood-driven exhaustion is now widespread in the White House. Behaviorally, this kind of environment sets up the potential for impulsive and angry over-reactions to events and situations that would be easily manageable (and managed) by a team with higher confidence.

Watching the President’s news conference on Tuesday, I saw glimpses of chronic underconfidence-turned-exhausted behavior. Unless this past week was a major low, there easily could be more examples that send Washington and the President’s approval ratings into further turmoil. Just consider what this photo from Camp David says about the current mood of the President and his team.

White House Confidence: A Major Low or The Beginning of a Cascade - table trump

To be very clear, I don’t wish for the second “cascade” scenario. The political, social and financial consequences are likely to be dire. Such an event would echo the turmoil of the end of the Nixon administration – likely on steroids given current social mood. Even more, the social divisions that are already evident today would almost certainly increase. Given the reflexivity of presidential approval ratings, the best thing that could happen for Americans' well-being is that confidence in the White House rises.

Over the coming days, I expect that we will see which of the two scenarios is playing out. If this past week was a major low, general optimism should rise along with the US Dollar, US Treasury yields and the US stock market. If, however, this past week was just the next event in a rapidly moving cascade in White House confidence, anger and hostility will quickly return, bringing upheaval to Washington and to American financial markets.

To sum it all up, the Trump White House is at a critical pivot point that has broad implications for America. While I am unclear of the direction, the next move feels big.

EDITOR'S NOTE

This is a Hedgeye Guest Contributor note written by Peter Atwater, founder and president of Financial Insyghts. He previously ran JPMorgan’s asset-backed securities business. He is also the author of the book Moods and Markets (FT Press, 2012) which details how investors can improve returns by using non-market indicators of confidence. This piece does not necessarily reflect the opinion of Hedgeye.