Blain’s Morning Porridge – March 12^th 2024: The US Election: Who will determine who wins, and what are the Opportunities?

“Democracy is the worst form of government except for any of the alternatives….”

The US Presidential Election is the most important market/political event this year – but boils down to how a mere 170,000 Americans in key states and demographies will vote on Nov 5^th. What they are thinking on the day will determine how markets play out. Understanding the election mechanics is key to spotting the opportunities.

I was in Switzerland last week, running a “fireside chat” with Paul Horvath, CEO of Orchard, the highly-successful global alternative asset manager, in front of an audience of Swiss Financiers. We were debating how the US election is likely to play out in terms of events and opportunities, and what will be the factors to watch. Paul is an active Republican. We both knew we were unlikely to agree on everything – my politics don’t align with Republicans (Scotsmen are genetic socialists at heart!) – but we discussed how the consequences of the coming Nov 5^th Election will be pivotal for markets in many surprising ways, and how potential investment scenarios around the Election may play out.

I am constantly told politics don’t really matter for markets – which is utterly wrong. Politics set critical parameters for the economy: taxes, spending, tariffs and paint the market landscape and tone. In this market, the future path of globalisation, interest rates and debt quantums will matter profoundly.

In January 2021, following the Capitol Insurrection, senior republicans assured me Donald Trump was done. Yet, 38-months later Trump owns the Republican Party. Following Super Tuesday he is now the party’s candidate to fight Biden for the Presidency.

However, neither Trump nor Biden are as strong as their delegate haul suggests. In the primaries Trump was only scoring around 60% of the Republican votes. Nikki Haley was beaten in all but a few contests – but her share of the vote highlights the actuality up to 40% of Republicans would prefer anyone to Trump. A significant number of Democrats also preferred to vote “someone else” against Biden, the incumbent. The fact Muslim voters were able to swiftly organise as a block against him was extraordinary – but the litmus test won’t come till the election: would they really vote for Trump the Islamophobe, or were they just making a protest?

Most American voters would rather not be choosing between Trump or Biden – they would prefer new leaders from a younger, relevant political cohort. Following Biden’s aggressive State-of-the-Union Speech on Thursday the Republicans chose to respond with their youngest “soccer-mum” age Senator to illustrate the future of the party. It seems to have backfired; her pre-recorded mom-and-apple-pie rant from her kitchen looked staged and was poorly scripted. No one is quite sure if she was targeting US voters, or auditioning to be Trump’s VP.

To understand the US Presidential Election one needs to understand the surprisingly small number of votes that actually matter. The total US electorate is some 250 million voters. We pretty much know how every street in America votes – it’s completely predicable which states will be blue and which are red. Turnout at the last vote was 64% with Biden getting 81 million votes and Trump at 74 million. But, because of the way the vote is structured in terms of the state-based electoral college, it actually boils down to how 170,000 – 200,000 key swing voters in the suburbs of a few cities in the following states vote. The battlegrounds in 2024 will be:

• Georgia – Atlanta
• Arizona – Phoenix
• Wisconsin – Milwaukee
• Michigan – Detroit
• Nevada – Las Vegas
• Pennsylvania – Philadelphia and Pittsburgh
• North Carolina – Charlotte

The business of predicting US presidential elections boils down to understanding exactly what these 200k voters will be thinking on Nov 5^th.

We all think we know that US elections are won and lost on the “Economy, Stupid!”. If that was the case, we’d expect Biden to be a shoe-in. The US economy has proved itself the fastest growing in the developed world, robust growth, resilient to the inflationary break, and with steady and strong job creation. Wages are rising.

However, the reality is different. The US Economy has left many Americans behind – a dynamic Paul referred to during our chat as “The Great Divide”, a topic I will be returning to later in future Morning Porridge blogs. Gains have generally accrued to the top 10-20% of workers and owners. You can trace back the trigger to the monetary distortions caused by QE and ultra-low interest policies creating a speculative stock market frenzy and the largest ever transfer of wealth to the already wealthy.

Soaring stock prices have created more millionaires that ever, but the middle classes have been squeezed while the bottom 40% of US workers have become dramatically poorer and less able to cope with inflation, higher debt repayments and rising costs. Inflation is famously a regressive tax on the poor. Their costs have soared to service burgeoning credit card debt, unaffordable mortgages and 20% plus car loans – their discretionary spending has crashed.

This is the constituency Trump has recognised and claims to represent through his populist MAGA politics; American workers who are not sharing in the robust, resilient, high growth, wealth-creating “great society” – he has taught them to blame the liberal elites. To win the election the Republicans are assiduously targeting the key swing demographic groups in the electorate in the target cities. These include groups that once voted en-masse for the Democrats, but may now swing to Trump’s Republicans. They include Hispanics (60k voters of Hispanic extraction turn 18 each month and become eligible to vote), Male African-North Americans, Muslims and suburban mothers – including the “soccer-mum” demographic.

All Trump needs is a fairly modest swing from Black and Latino voters to transform the wafer-thin Demographic majorities in key swing cities into Republican fiefs. It appears to be happening. His managers are acutely aware of how suburban women swung against Trump following the Supreme Court’s decision to reverse abortion rights two year ago. They are targeting them with election winning reality-bites such as the perceived rise in violent crimes against American women by illegal-immigrants, and the rising drug use in Democrat states. These are the stories Republicans will be flagging and pushing ahead of November to illustrate Democrat incompetency vs crime, drugs and the Border. There is little comparable for Democrats to play against Trump’s rock-solid 40% MAGA support base.

It gets even more complex when the issue of third-party presidential candidates, such as RFK Jnr, or the possibility of other “no-labels” candidates on the presidential ballot. How these names affect the electoral calculus will be critical. At the moment, the Democrats look more vulnerable. (That said, I’ve heard Biden/Haley would be the dream election-winning ticket!)

Assuming Trump is able to garner the swing votes he needs to win the Presidency – what then happens to the numbers enabling him to govern? Congress is likely to remain in Republican hands. The Senate is predicted to remain split 50/50 in which case the Vice President will have the casting vote. (If a third party candidate wins a state or two, it is possible that neither Trump nor Biden get the 270 electoral votes needed to claim victory. If that were to happen, the 12th Amendment dictates that the House pick the President, which presumably would be Trump, but the Senate picks the VP, meaning Kamala Harris remains a heartbeat away from power.)

If Trump wins there could be five major themes to invest:

1. Oil – despite Biden’s attempts to curb big-oil, his attempts to rein it in actually made it more efficient and larger. Trump will further open US oil – but by doing so could lead to oversupply and a glut, meaning it could be a short-lived rally.
2. Ukraine – Trump will be keen to demonstrate his “art-of-the-deal” by closing with Putin. His deal will likely give Russia Crimea, the disputed eastern Ukraine provinces, but also a swift end to current sanctions, allowing Russian oil back into the global market, pushing prices lower, potentially triggering a downward oil-price boost to the global economy (but wrecking high-margin oil producers). Any such deal could cause enormous resentment in Europe and would likely be seen as appeasement by many, further widening the transatlantic gulf.
3. Taxes – Trump will be able to extend the Tax cuts he imposed in 2017, further boosting the US economy.
4. Sovereign Debt and the US$ – by maintaining tax cuts Trump raises the spectre of the US raising further debt from already “unsustainable” levels according the debt vigilantes. Trump will press for swifter interest rate cuts – raising the issue of Fed independence. As debt becomes a larger burden it will impact the dollar to an increasing degree – potentially a Virtuous Sovereign Trinity crisis with confidence falling in the dollar, rising bond yields as global buyers strike on the debt quantum, and doubts as to how Trump’s Republicans will solve the problems.
5. Global Trade War – Trump has oft commented on his desire to impose significant tariffs on foreign goods (10%) from Europe (still a notional US ally), and 50% on China in order to support US jobs. This would likely trigger recession, trade war, and further push Europe away from the US. (Other senior Republicans believe Trump is only threatening tariff rises – and is simply wielding them as “negotiating” tools.)

If Biden wins the problems will be somewhat different. He will likely face a gridlocked congress limiting his policy options. That may mean Trump’s previous tax cuts will be retired, effectively raising taxes while the US economy is acutely vulnerable to the risk of recession, causing consumer discretionary spending to break down on a debt, inflation and tax triple whammy. However, a geopolitical crisis with Europe over Nato could be averted. What you might win on the swings, you lose on the roundabouts.

Perhaps the biggest fear is what happens if we have another close election and Trump loses? Can you imagine him meekly accepting a second defeat? Unlikely. We will no doubt see a “Stop-the-Second-Steal” campaign accompanied by disinformation, deep-fake news and violence. When the insurrectionists stormed the Capitol on Jan 6^th they were largely unarmed – if it happens again….. the shots could become the opening salvo of the second US Civil War. That is not a zero probability outcome.

The bottom line is there is still plenty to watch and play for in the coming US election.

Out of time, and back to the day-job…

Bill Blain – Market Strategist – Author of the Morning Porridge