if Biden wins

As I’ve mentioned once or twice before, a former work colleague of mine was writing, presciently, as early as 1990 that neither major US political party had much relevance for ordinary Americans any longer. Democrats had a social justice program but no economic strategy; Republicans didn’t stand for much of anything, and were in danger of being captured by religious cultists.

damage from Trump

It’s thirty years later, and the basic story remains true, I think. It has set the stage for the election of Trump, an inept and unsavory businessman with anti-science and white racist views plus a fondness for dictators, especially Vladimir Putin. His campaign, to put the best face on it, called for revitalization of the South and Midwest, areas hurt by the demise of basic industry over the last half-century and abandoned by both parties, through a return he fantasized for the country to the world of the 1950s. Despite the fact that this “solution” is flat-out crazy, rank-and-file Republicans fell right in line with Trump’s idea. Many independents, too.

The results are about what one might have predicted: economic growth had slowed to close to zero even before the pandemic, foreign investment into the US was drying up; domestic firms were shifting operations abroad to escape his white racism that precluded hiring many highly skilled foreigners. In my view, we have only begun to feel the negative economic effects of his blundering. And in vintage Trump form, he has hurt most badly the people who have trusted and supported him.

The most visible damage to date from the Trump administration, however, is its epic coronavirus failure. More than simply pandemic denial, Trump has politicized routine safety precautions, like wearing a face mask, turning them into partisan political statements impermissible for his followers to make. The result has been a domestic death toll so far that’s horrifically higher than elsewhere, and pandemic cases reaching new peaks here while the rest of the OECD is at maybe a tenth of the March-April highs.

if Biden wins

If Biden wins, repairing the damage from Trump’s extending and deepening the pandemic-induced domestic downturn will be his first, and most difficult, priority, I think.

The counterproductive Trump tariffs were put in place by executive order, so they can presumably quickly and easily be reversed. The damage to the US “brand” can also be repaired to some extent by ending Trump’s anti-foreigner and anti-diversity measures.

On the other hand, the US is way worse off than it was four years ago. In addition to the unnecessary suffering and loss from the pandemic, creaky domestic infrastructure is four years older. The tax system remains unreformed, unless we call lowering taxes for the ultra-wealthy a “reform.” Because of this, the federal budget was in deficit before coronavirus-related spending. Now it’s worse. Also, as I mentioned above, in true Trumpish fashion, nothing has been done about the legitimate grievances of Americans left behind by structural change.

In short, there’s lots to do, both promises not kept and new messes made.

Government finances put into disarray by Trump will eventually have to be repaired. This process can be gotten to voluntarily or, unfortunately the more likely case, through an eventual crisis of confidence–a decline in the dollar or a refusal of professional investors to buy Treasuries. That could be years down the road, however–I truly have no idea.

the Wall Street worry: higher taxes

The front line, but specious, anti-Democrat argument is the Republican staple that Democrats raise taxes. The facile, but correct, I think, counter is that higher taxes on rising income is a better situation all around than lower taxes on lower income. We already have the latter now, with little of the really permanent economic damage Trump has put in motion having kicked in yet.

Will a Biden administration have the willingness to really reform the tax system by attacking entrenched special interest tax breaks? Who knows?

a market rotation?

The defining characteristic of the Trump presidency in stock market terms has been the extreme aversion of equity investors to stocks exposed to the domestic economy. Presumably, a Trump loss would trigger a substantial rally in laggard domestic-GDP-linked names–as cheap, with improving prospects. My guess is that Trumpish back-to-the-Fifties issues wouldn’t participate fully, if at all. Maybe their joining in would signal that the rally was nearing an end.

timing?

I don’t know. Most election experts were wrong in 2016, so I’d expect Wall Street to be cautious about reshaping a portfolio around either candidate. On the other hand, the bigger the bet that Trump is a combination “useful idiot” and George Wallace redux, the greater the outperformance over the past 2 1/2 years. This would argue for an early portfolio shift for successful managers, not to eliminate entirely the bet that Trump will continue his trademark turn-lemonade-into-lemons, but to come closer to neutral to protect gains already made. However, Trump seems to be doubling down in recent days on the idea that overt white racism and pandemic denial is his best chance for reelection. So maybe it’s too soon to think the worst is over.

a different path

I’ve always found that if I’m stuck on an either-or where I have no idea how to choose, the best thing to do is to reject the idea that I need to choose either. Maybe for me looking for names in Canada, the EU or even Japan is the way to go to reduce my Trump dysfunction bet–at least until I can see the US situation more clearly.

the biggest constant

If Trump is such a loser, why has the stock market gone up during his term?

–the biggest reason is that money policy has constantly been extraordinarily loose, partly to offset the substantial negative effects on GDP of Trump’s trainwreck trade agenda. With cash yielding nothing and Treasuries close to that, money seeking liquid investments pours into stocks. At some point, interest rates will rise and stop the flow. But with the US reeling from the coronavirus, I don’t think that’s any time soon.

–about 50% of the earnings of the S&P 500 come from outside the US. Of the rest, half comes from Europe and the remainder from emerging markets and Japan. In my view, equity investors really want the second 50% and hold the first because they’re forced to.

2 responses

  1. Hi do you think big internet companies would be meaningfully hurt by tighter regulation in the next few years? Thanks

    • Thanks for your question. The regulatory tightening that I see right now is the administration’s resistance to tech firms hiring highly-skilled workers from abroad. Affected firms will likely respond by moving some operations out of the US. Bad for the US economy, mildly inconvenient for the firms. Internet firms will also likely end up paying higher taxes, although this will likely be some years off and (my guess) won’t really make much difference to the overall investment case for them. My greatest worry is the reputation being done to the US national “brand” by the Trump campaign of racial hate now under way. Its support for this is already hurting Facebook, I think. In a broader sense than this, post-WWII, for example, many Americans refused to buy German automobiles because of their disdain for Hitler. If the US ends up being linked with Trump instead of being “the land of the free” in the minds of the rest of the world, US companies may begin to receive similar treatment. For firms that dominate their product space, earnings would likely be unaffected, but I think PEs would begin to contract. Foreign expansion might also be less well received by locals.

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