Episode 1

Words on the US Election

Presented By Tim Rocks
23 Oct 2024 Listen time 23mins
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Words on the US Election

In the debut episode of Words on Wealth, Chief Investment Officer Tim Rocks is joined by Matt Gertken from BCA Research for an insightful discussion on the upcoming US election and its impact on both the US and global economies. Matt and Tim explore key issues such as rising inflation, generational leadership shifts and the potential policy implications of either a Democrat or Republican victory. The conversation also covers how the election result could shape US relations with China, Russia and Iran.

 

This episode is also available on Apple Podcast. 

Introduction

Welcome to Words on Wealth, a podcast by Evans and Partners that unpacks the key trends and opportunities shaping markets, the economy and your financial well-being. Join us as we make sense of the issues that matter most to you.

Ishara Rupasinghe

Welcome to our new podcast, Words on Wealth by Evans and Partners. I’m Ishara Rupasinghe, Executive Director and Senior Strategy Advisor. Today I’m joined by our Chief Investment Officer, Tim Rocks. Now we’re here to outline what our new podcast is all about and what you can expect to hear from us going forward. Tim, great to have you here.

Tim Rocks

Thanks, Ishara. And just to let you know, going forward, we’re going to have two different podcasts. One will be Words on Wealth on a fortnightly basis, covering a broader range of topics than in the past. Then secondly, we’ll have a weekly podcast called Monday Macro, hosted by me with a five-to-seven-minute summary of recent macro developments.

Ishara Rupasinghe

So, we’re really looking forward to sharing more with everyone each week. Remember to subscribe so you can be alerted to each new episode as it’s released. But for now, please enjoy our first episode, words on the US election.

Tim Rocks

Hello and welcome to Words on Wealth. I’m Tim Rocks, Chief Investment Officer. With me today, I have a familiar voice, hopefully, Matt Gertken from BCA Research, one of the independent research groups that we use. Matt has just told me he’s been traveling back and forth across the US talking about elections and gathering his own information. So that’s going to be the main topic for today. So, let’s get into it. Welcome, Matt, and thanks for joining us.

Matt Gertken

Yeah, thank you very much, Tim. Great to be back with you all.

Tim Rocks

Yeah, so I’ll pass over to you. Let us know where you think the current state of the election is and how do you think it will go critically?

Matt Gertken

Sure, absolutely. Well, let me just start by giving a bit of a rundown about, you know, sort of how I’ve arrived at some of my beginning views and then the way things are changing and you know, how that how that might develop over the next 15 days. And I would also just to highlight at the very beginning that obviously this US election is relevant not only for domestic US politics, which can have a global macro impact. But what we’re seeing, for example, in the Middle East, but also in other areas, is there’s a lot of anticipation abroad and then there will be after effects. And so it’s, and I think the way to really put a point on that is to highlight that we’re seeing a sort of climax in the domestic political conflict that we’ve seen generationally within the baby boomer generation in the United States. We’re seeing that conflict sort of come to a head. Biden himself had to step down. He just was too old and he wasn’t competent. He had effectively lost the election. So we saw generational change in the democratic party. But Trump is still plugging along and in fact doing quite well in the polls. now we sort of have, in a way, the election is sort of symbolizing that we can have the generational transition now or we can have the generational transition in four years. But what we know is that in 2028, Trump will have to step down. can only serve, well, technically you can serve 10 years as president, but you can only serve eight years as elected president. Yeah. And that means in 2028, we’ll have younger or fresher faces. Doesn’t mean we’ll solve all of our problems, of course, but what it does mean is that is that the policymaking process will start to open up a little bit as the very entrenched positions of the older politicians are sort of moved aside. Now, having said that, the election itself is tightening and it should actually be diverging. So, if you have this view that, well, a young, fresh face, Kamala Harris, who also would be the first woman president, who also would be the first woman minority president. So, she should be galvanizing these different constituents that make up the Democratic Party. She should be galvanizing women voters, including Republican women. She should be galvanizing Black voters because at least half of her background is African. Well, her father was Jamaican. You know, there’s supposed to be this sort of multicultural coalescence under her campaign, and that’s what we saw with Barack Obama. But it’s not really happening. And so instead of seeing these polls diverge with Harris sort of moving up, and again, women voters really are the missing link here because we also had, of course, the Supreme Court overturned Roe v. Wade. And so, there was a belief that the abortion issue in particular would motivate women voters. Well, they’re just not really showing that support in the opinion polls in the way that one would expect. In fact, women’s support for Harris is down. So just to kind of bring all this together, what I’m saying is we will have a generational transition in the US, just like in other countries we will develop over time a more multicultural society, et cetera. But the truth is that Harris isn’t that great of a candidate. And Trump is actually still speaking to a lot of the same structural issues that Americans are struggling with, plus inflation, which is the new one and which is really motivating a lot of discontent. So that leaves you where you are today, where we had a 55 % chance of Harris being elected, but my confidence level, frankly, is falling as we get into the final two weeks.

Tim Rocks

Right. And so you’re saying that the major issue really has become the economy and the perception is that that she has not done a good job on that or the administration has not done a good job on that.

Matt Gertken

That’s right. And then when that question comes up, course, everything is very heated and very partisan right now. But I think if we try to be analytical about it, the issue is that yes, the unemployment rate is low, but the cumulative inflation is high. And so, in other words, the price level is 25% higher than it was when Biden and Harris took office. And voters are blaming the ruling party. They’re blaming the political establishment for that spike in prices. And when you go to them and you say well, yeah, but now prices are down and the Federal Reserve has achieved inflation target of 2%. Well, they’re not in the mood to reward politicians for a 25% price increase over the past three and a half years.

Tim Rocks

Yeah. Okay, well, so the US gets the president they deserve. So, what does that all mean then do you think perhaps we could talk about that economically and then then politically or geopolitically?

Matt Gertken

Yeah. And let me just say one last thing. You know, like I said, I started with the high probability, well, not high probability, but 55 % probability that the Democrats would win. And the reason was, incumbency, it’s only been four years. Statistically, U.S. elections are like clockwork. And if you’ve been in power eight years, you’re almost certain to lose the election. But if you’ve been in power four years, you tend to get re-elected. The other thing is this expanding economy where even though we have inflation, we also have a very low unemployment rate and consumers have been outspending. So that’s where I started with that 55 % probability favouring Harris. And as I said, my confidence is just sort of getting sapped here at the end because we’re not seeing the polls develop the way that one would have thought. Now, when I look at that, what I see is these structural issues. And so, then as we go forward in time, we have to recognize, first of all, yeah, it’s still possible that Harris could win. Okay. But second of all, if she doesn’t win, we know that the Americans are still going to have to deal with these structural issues. Trump is mostly about immigration. The Trump movement was born out of a desire to close the border. The Democrats made a mistake by letting in 11 million people, maybe 8 million, depending on how you count over the past four years. And this has engendered, sort of kept alive that really, that really powerful movement behind Trump. So the first thing Republicans will do if they win is they’ll pass a bill constricting immigration. But by the end of 2025, they also want to renew the Trump tax cuts from 2017. That means that it’s a deadline, you know, because those tax cuts expiring 2025. So, in other words, by the end of 2025, you will see the Republicans, you know, if they win, you will see them cut taxes and cut immigration. And it’s that combination that starts to create the impression that in fact, inflation will be rebounding. And even though Trump is running on a campaign that inflation is bad, he himself is going to have to deal with pretty significant inflation as a result of that policy.

Tim Rocks

Yeah, so that’s right. the inflation comes, or one, directly from terrorists, but two, because you effectively tighten the Labor market because you’re taking away supply. Is that what you’re kind of saying?

Matt Gertken

Yeah. Basically, we’ll have certain sectors. So, you’re solving a political problem and a geopolitical problem, which is this lawless border, unbridled immigration. It’s been generating a lot of tensions. You’re solving that problem. But you’re creating this new problem which is actually slower potential GDP growth and higher real wages in certain sectors, including for food and shelter. Because a lot of Hispanics who are immigrants are working in agriculture and construction. So, the wages go up and that then creates this sort of inflationary pressure that Trump will have to deal with. You know, again, you could say not necessarily the end of the world, he is solving some other problems, but it’s sort of the unintended consequence of his administration.

Tim Rocks

Okay, so that feels like it’s, but it’s a pretty strong two years before those problems become apparent. So in theory, that’s a pretty good economy, not that bad for stock markets in the first year or two, and then question marks about how it evolves and how it might evolve with interest rates as well after that time.

Matt Gertken

I don’t necessarily disagree, but I do wonder, you know, let me take it part by part. One thing is with the markets, we have seen that they sort of rally no matter what. So after most US elections, there’s just a release –

Tim Rocks

It’s easy. Markets go up.

Matt Gertken

Yeah. Right. And the uncertainties removed specifically, but also, of course, yes, we’re in this environment where there’s just sort of there’s a lot of exuberance about Nvidia and tech stocks. So there you go. So that’s very short term. I can’t rule that out. And that’s what happened in 2016, even though some people expected stocks to fall. but a slight leaving that aside, you know, when we get into 2025, that’s when Republicans are actually going to pass these bills. And the first bill will be passed by February or March. If the economy is holding up, then they’ll probably do the immigration bill first because there’s no real reason to cut taxes immediately if the economy is doing fine. But then they’ll circle around in the fall and they’ll cut taxes. So, over the course of the year is when this is going to be kind of priced. I do think we are seeing bond yields move up a little bit right now as we’re talking. And so, I don’t think it’s quite fair to say that the market will wait until Congress passes these laws because if Republicans win full control, the market will just move ahead of time and say, well, we know what they’re going to do. Now that in and of itself, again, isn’t the end of the world. You’re also going to see corporate earnings get spurred. So, I guess I would bring it all together by saying this. Harris will not control the Senate. Republicans are definitely going to win the Senate. So, Harris will not be able to raise taxes. So, you know that there’s no risk of a corporate tax increase. Trump will control the Senate and the House if he wins. So, he will be able to cut taxes. So, from a corporate earnings perspective, this election is great. There’s not higher taxes. There might be lower taxes. And it’s going to stimulate earnings, at least like maybe a 5 % increase in earnings. Could be a little bit more. For growth, growth is going to be very hard to calculate because you’re going to have to add a little bit of growth from this stimulus from tax cuts. But it’s kind of a sugar high because most of the tax cuts are going to the highest income earners who in a lot of cases are just going to save it or put it in the stock market. The other thing is that by cutting immigration, you’re actually reducing Labor force growth. And so you’re mildly reducing GDP growth. So, anyway, your rubric is maybe not wrong that initially Trump is going to create some excitement. He’s going to tax cuts. He’s going to stimulate the economy. But it really might not even last two years is what I’m trying to say, because you might start to see a growth tax come into play earlier rather than later.

Tim Rocks

Yeah. And also because the Fed will see this coming too. So perhaps less tax cuts. And there is, as I understand it, you’ll have a debt ceiling debate early in the term and he does have to pass budget and have a big battle with Congress at that time as well.

Matt Gertken

Right, although, and this is where we should get a little bit more detail about how I’m making some of these calls. The Senate, Republicans have 49 seats in the Senate today. They are guaranteed virtually to keep Texas and Florida. I think you would really be out on a limb if you predicted that Republicans are going to lose Texas and Florida in the current situation. So, they will also gain West Virginia. That’s a virtual certainty. So that means they have 50 seats in the Senate. Now, if Harris won the election, then Tim Walz, the vice president, would cast the deciding vote in a 50-50 Senate. Unfortunately, that’s not going to happen because Ohio, Montana will probably go to Republicans. Trump is going to win there by more than 10 percentage points and he’ll probably carry the Senate seat with him. And the Republican candidate in Montana is quite good. So, they’ll take Montana. That means they’ll have 51 and they might take Ohio, which would mean they’d have 52. So, Republicans will have 51 to 52 seats in the Senate. And that’s almost no matter what. Now, in that environment, first of all, that gives me the confidence saying that Harris won’t be able to do any of the things she’s promising because she won’t control the Senate. But second of all, with Republicans, it means that when they go into past these laws, some of those things won’t be an issue. Like the debt ceiling won’t matter now because if you control the Senate and the House, they’ll just clear it and they won’t give you any trouble. The only way it would be an issue, it would be if Democrats won back the House of Representatives. Now this is possible. It’s about a 10% probability. Someone who’s a Democrat and who’s really bullish about their party might tell you a 20%, but it’s not more than 20%. I would put it at 10%. So, there’s a small chance that Democrats take the House even though Trump wins. Now if that’s true, that’s actually quite worrisome because it means first of all, Trump can’t do anything. So his only tool will be tariffs because he can do tariffs by himself without control of Congress. So, he’d be going around slapping tariffs more aggressively, but he wouldn’t get the tax cuts. And meanwhile, you’d have to worry about the debt ceiling in the budget, which would be very serious clashes with the Democratic House. So, anyway, be on guard when we get the results. And I should have said at the beginning, we may not get the results immediately. It may take several days or even weeks of vote. Recounting and litigation. But once we have the results, if Trump does not control Congress, then you should be prepared for those budget battles you mentioned, as well as an even more aggressive trade policy and none of the good tax cuts that the market wants. And so that’s going to be a disappointment for the stock market. And I think we should be aware of that scenario.

Tim Rocks
Okay, so just final question is impact on some of the geopolitics feels like the Middle East might be the one where a change in government is most important in terms of sort of having a green light to it to for Israel to accelerate their attack on Iran. Is that what you think? Or what are your views on that?

Matt Gertken

Yeah, well, I do think the election, and I started to say this, we’re at a climax in terms of Russia’s conflict with the US over Ukraine. We’re at a critical juncture and maybe the climax over Iran’s nuclear program. And we’re at that climax of the American domestic politics that we talked about at the beginning. So, multiple stories here, multiple sagas that are reaching critical points. And it’s all at the same time. I think Trump would deescalate with Russia, but he would impose the oil sanctions on Iran and enforce them. And so, he would escalate with Iran. And that’s opposite of Harris, where she would negotiate with Iran, but she would double down on Ukraine and escalate the conflict with Russia. And I think both of them will be quite hawkish on China and trade and technology. So, they’re sort of bipartisan on China. They’re very partisan on Russia and Iran. I do agree with you. Iran is the most immediate. And I think we should break this into a few pieces. First of all, before the election, the U.S. probably can’t prevent Israel from attacking Iran but might be able to shape the type of attack so that they don’t attack the nuclear program immediately. After the election, I think all bets are off. Israel may not be restrained. Biden himself might be more aggressive after the election to try to pursue American interests. And if Harris wins, then Israel only has two and half months to get done whatever they need to get done before she comes into office. And once she comes into office, she’s going to want to negotiate with Iran and she’s going to tell Israel to sort of calm down. So, Israel will, I think, be more aggressive if Harris is the winner to try to get some dirty work done and that could involve a unilateral strike on the nuclear program. If Trump wins… Israel then has the ability to sort of slow down the pace so that when it when Trump comes into office they can coordinate a joint plan of attack and by plan of attack, mean possibly airstrikes against the nuclear program but otherwise just a containment strategy to try to force Iran to freeze their nuclear program and So it would still be an escalation. And so I think when you put all this together, you know, the Middle East is definitely going to be with us for the next few months. And then depending on the election outcome, we could even have a bigger conflict next year. The whole contrast to all of that is if Harris wins because she really will be leading Europe to support Ukraine in another campaign to take back their territory. And in that case, Putin will start to be threatened. And so, where the escalation will take place is really between the US and Russia next year rather than in the Middle East.

Tim Rocks

Right. There are just so many moving parts to all that. Fascinating as usual, Matt, thank you so much for your time. And we’ll obviously be watching very, very closely what happens over the next couple of weeks, but then over the next few months. So, thanks again.

Matt Gertken

Yes, thank you, Tim. Thanks for having me.

Tim Rocks

All right. See you all. Bye.

Disclaimer

This podcast was prepared by Evans and Partners Proprietary Limited AFSL number 318075. Any advice is general advice only and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Where this presentation refers to a particular financial product you should obtain a copy of the relevant PDS, TMD, or offer document before making any investment decisions. Past investment performance is not a reliable indicator of future investment performance. Directors, employees and officers at Evans & Partners and its related entities may have holdings in securities listed. Any taxation information is general and should only be used as a guide.

 

 

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Tim Rocks
Chief Investment Officer

Disclaimer

This podcast was prepared by Evans and Partners Pty Limited AFSL 318075.

Any advice is general advice only and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Where this presentation refers to a particular financial product, you should obtain a copy of the relevant PDS, TMD or offer document before making any investment decisions. Past performance is not a reliable indicator of future performance.

Directors, employees and officers of Evans and Partners and its related bodies corporate may have holdings in the securities discussed. Any taxation information is general and should only be used as a guide.

This communication is not intended to be a research report (as defined in ASIC Regulatory Guides 79 and 264). Any express or implicit opinion or recommendation about a named or readily identifiable investment product is merely a restatement, summary or extract of another research report that has already been broadly distributed.