Bad news for markets - Trump isn't in charge
Last week was the worst for US stocks since Donald Trump was elected president.
That's worse than it sounds. At the end of the day, the stockmarket has barely paused for breath since Trump was elected. So it didn't take much of a drop to make it a bad week.
See also: Two stocks that could be slammed by Donald Trump
See also: How likely is a UK-US trade deal?
But it's hard to just dismiss it. Because just as the market surge has been driven by hopes that Trump can get things done, it has stalled because of evidence that he can't.
The Republican effort to get rid of Obamacare failed, derailed by dissidents in their own party.
So what happens next?
The biggest problem for Trump – the awkward squad don't want fiscal stimulus
We discussed the background to the US healthcare law on Friday. On Friday morning, Trump told his party to take the deal or leave it. By the end of the day, the vote was called off as it became clear that his party would leave it.
Now, if you're an optimist (and equity markets are nothing if not incurably optimistic), you could argue that with all this healthcare nonsense out of everyone's hair, they can get on with important stuff like cutting taxes and finding money for infrastructure spending.
And you know, you could make that argument. In this narrative, Trump is a no-nonsense guy who doesn't allow himself to be blackmailed by a section of his own party, and instead barrels on with his agenda.
Trouble is, as John Authers points out in the FT, there's a very specific problem here. All of the good stuff that the market wants from Trump – the tax cuts, all that lovely infrastructure spending – relies on shelling out more public money. In other words, it involves more borrowing.
The group of Republicans who blocked the healthcare reform didn't do it because they wanted to keep Obamacare. They did it because they wanted Obamacare repealed entirely, and because Trump's proposal to replace it didn't do that. Not only that, but Trump's replacement was a lot more expensive than first expected (it still saved money, but not as much).
In other words, the people who Trump has to convince on tax cuts and higher spending are the same people who voted to keep Obamacare and stick it to their own party's leadership, rather than replace it with something they weren't happy with.
In terms of ideological purity, this group – the "Freedom Caucus" – seems to be a bit like the Republican party's own little group of Jeremy Corbyns.
In saying that, I'm not making a judgement on their values – I'm a "small government" man myself. I'm just trying to demonstrate how difficult it's going to be to negotiate with these people. Even for a president who told a ghostwriter what to put in The Art of the Deal.
The funny thing is, the market already knew this. It was never going to be easy for anyone to get "fiscal stimulus" through Congress with the US public finances in the state they're in.
The difference is, the market had convinced itself that Trump was different. That he was the man to buck the system. And if it turns out that he's not, then the market could have a long way to fall, given how overvalued it is.
Buy European stocks, sell US stocks
For investors, there's a fairly easy answer. Invest in a different market. Europe, for example.
Why should you invest in European stocks rather than US stocks?
Bank of America Merrill Lynch reckons there are a number of reasons to "buy the dips". At the most basic level, earnings are improving. Analysts' estimates are rising rather than falling (in Europe, they have typically been revised lower by about 10% at this point in the year, over the past ten years ).
John Higgins at Capital Economics agrees on this point. "There is far more room for profits to grow in Europe than in the US, given the respective stages of their business cycles." While margins are close to record highs in the US, in Europe they are below the post-2004 average, but "have begun to trend higher over the past two quarters", according to BoAML.
Free cash flow is picking up too – partly down to a lack of investment by companies. It's now recovered to levels last seen in early 2008.
And Europe is a lot less popular than the US: more than $100bn flowed out of European equities in 2016. European fund managers are more heavily overweight cash than they normally are, too.
Europe is cheap compared to the US as well. On various measures, Europe is anything from 5% (judged by earnings) to nearly 20% undervalued (judged by book value) compared to the US, reckons BoAML.
Finally, Europe doesn't depend on Trump managing to "get things done". It just depends on European politics not completely imploding over the coming year. Don't get me wrong, there's a not-insignificant chance of that happening in 2017. But everyone is expecting European politics to be messy this year. So it's in the price, at least to an extent.
That's not the case in the US. Stocks over there are still priced as though Trump is a miracle worker. Maybe he is. But that's not an outcome I'm keen to risk my money on.