Blain’s Morning Porridge, 30^th Sept 2024: 1 Month to the US election, who will win and what will it mean?

Lord Vetinari understood democracy perfectly: one man, one vote. He was that man, and he held that vote.

One month till the US election – how prepared are markets for what comes next? Who will win? In the short-term the election will change little around fractured US politics and the strength of the economy – long term it may hasten the end of America as global hegemon.

Something wicked this way comes.

I spent too-much time in London last week, and asked many different people two simple questions: who will win the US election, and will it matter? Most folk in London reckon the momentum is with Harris, and therefore there is little to worry about – a bit of policy gridlock and maybe the threat political polarisation turns into domestic strife like on Jan 6^th 2021.

Who knows…. There is a substantial bias against Trump across Europe, but Europeans don’t have the vote. This is a decision for Americans. (Heaven help us…)

This morning’s Porridge is in three-parts as there are three things to consider.

• Who will win?
• What will their policies mean for markets?
• What will be the long-term consequences?

Who will win?

I shall award myself a No Sh*t Sherlock medal for saying the election remains too close to call.

We’re all aware the presidency is determined by the peculiar structure of the US electoral college with is determined by how many states a candidate wins and the number of winner-takes-all votes each state has in the college. Aside from the 7 critical swing states, we know states which will almost certainly be Blue (226 EC votes) or Red (219 EC votes). To win 270 votes of the 538 on offer it’s down to the how the 7 swing states see their 93 votes fall. The Democrats need 44 EC votes to win. The Republicans need 51.

Because the electoral college votes aren’t weighted equally by the number of voters, it means individual Republican votes count fractionally more than Democrat ones when comparing the presidential vote to the overall vote. The maths translate into Kamala Harris needing about a 3.5% majority in the popular vote over Trump nationally to translate into the EC votes require for her to win the presidency. (Confused? You will be…)

Most polls predict Kamala Harris will win the largest total number of votes – although a recent Gallup Poll over the weekend put the Republicans ahead by 3%, meaning she might be as much as 6.5% behind Trump in the EC vote! That is a hill for her to climb, and for the Trump/Vance ticket to defend – especially at this week’s VP debate.

The result will depend entirely how the key states vote and the demographics in them will play out.

The first critical issue is Turnout – voters need to be coached to go the polls and vote, and in this is typically a Democrat strength, being a broad church and better organised party than Trump’s MAGA Republicans. However, with SuperPac money from Musk et al, Trump’s campaign is focusing ground logistics on the battleground states – particularly Pennsylvania, but also to pay the costs of lawyering up (with proper lawyers rather than the clown-show that coalesced around Rudi Guiliani in 2020) ahead of challenges that may emerge from some of the voter registration and eligibility changes enacted in Republican states after the 2020 ballot – and Trump will be concerned to ensure opportunities aren’t missed.

However, let’s start with Anti-Incumbent Bias – the key voter issue likely to lose Harris the election.

2024 has seen the largest number of votes cast in democracies around the planet in history. The 30 odd democratic plebiscites had one thing in common – in every single one the incumbent party has been hit hard. No matter how well the government of the day was doing in terms of managing economies, they were punished because of voter perceptions things had got worse under their control.

The most important factor was inflation. Higher interest rates and an electorate struggling with higher fuel and food bills, soaring rental and mortgage costs, rising credit card debt, auto and loan rates – and that’s an awful lot of unhappy voters. Inflation and the response has been the dominant factor impacting voters since the energy price-spike caused by the Ukraine War. Inflation is always, always a regressive tax that hits the poor hardest – and because it hits everyone to a greater or lesser degree every member of the electorate feels their standard of living has declined.

Voters reckon inflation must be someone’s fault and instinctively blame government incompetency – even though it was a price surge caused by wholly exogenous events; Ukraine. That’s not a distinction any politician will miss – Trump is more than happy to blame Biden for the gift of inflation.

It’s very fertile ground for opposition parties to pin incompetence upon. Really smart politicians notch it a level higher – populism; MAGA blames the rising sense of relative poverty on uncaring corrupt elites in power, jobs being stollen by “unfair” foreign competition, and blame everything else from crime to housing, care, educational and welfare crises on immigrants – coming over here to steal our nation. And, Anti-Incumbent Bias can be frothed and whipped higher by misinformation and fake news.

To win the US election, Kamala Harris would have faced a steep slope no-matter who she had been standing against. She faces a competent and ruthless Donald Trump prepared to dump any of the niceties of campaigning. No stone will be left unthrown. Trump is what you see is what you get.

At present all 7 of the swing states are all too close to call.

North Carolina          (16 EC votes)            Trump +3

Wisconsin                  (10 EC Votes)           Tie

Georgia                      (16 EC Votes)           Trump +3

Pennsylvannia          (19 EC Votes)           Tie

Arizona                      (11 EC Votes)           Trump +2

Michigan                    (15 EC Votes)           Harris +2

Nevada                      (6 EC Votes)             Harris +2

Each can win with just three states falling their way:

• Harris wins with PA, MI and WI. Without PA she would need at least three other states.
• Trump wins with PA, NC, and GA. Without PA he would need three other states, or to win WI and MI.

Voter demographies will be critical – women and college educated voters are more likely to vote Harris, men and non-college educated votes are generally more likely to go for Trump. Young men dislike Trump, but favour crypto and Elon Musk. Harris may lose in PA and MI because both Muslim and Jewish voters will push back on Biden’s Mid East policies – this may change as the rising tensions in Lebanon make a wider Mid-East conflict more likely. Jews are less likely to vote Trump, but not voting Harris could be enough to lose her PA.

Harris is losing out on Latino and Black American male votes – anything been a 10% to 20% switch to Trump according to polls – enough to lose key states. One surprising feature may be unionised labour – the Teamsters have not endorsed Harris and less than 30% of union members favour her according to polls. That hints Trump may be strong in the industrial heartlands, which is critical in MI and PA. Same thing in MI where 200,000 Muslims not voting for Harris costs her the state.

The election remains… all to play for. My gut tells me Trump may win it.

What will policies mean for markets?

Market commentators often overplay the significance of economic policy on markets, citing the incompetence of UK Premier Liz Truss, managing to overturn the UK Gilts markets and the stability of state in a single misjudged month on policy ineptitude. Nothing as dramatic is likely to follow the US – we all know what to expect from Trump… surprises and we are inured to them.

Some of Trump’s list of policy choices make for “interesting” sound bites – like further deregulating Crypto for the “52-million” Americans who consider it an election priority, according to Crypto Shills pushing their nefarious products. (That 52 million appears to be a number plucked from thin air, then doubled.) Trump will promise whatever to win a vote, and will then ditch it – and I’m sure the Fed will explain to him his national Bitcoin Strategic Reserve would simply support a direct threat to the sanctity of the US dollar while making Crypto whales richer.

Trump, being the economic magician he is, will immediately reduce inflation. (Actually, the Fed already did that..) He will maintain his 2017 tax cuts. He will further ease taxes on the wealthy to promote “trickle-down”, ease corporate taxes to boost production and, drill, baby, drill to create an energy-boom (which will trigger a collapse in oil prices shutting down the marginal fracking voters he’s seeking to woo in Pennsylvannia!) His promise to boost global trade by ending the Ukraine war, thus reducing energy costs is met with horror in Europe. Slashing taxes and cutting energy prices will appeal to the stock market but will cause some concern in bonds at the speed the deficit rises.

The biggest issue under Trump will be his threat to impose huge tariffs on imports from China, but also 10-20% on others – which is bound to create a wave of inflation and supply-chain issues.

Harris will raise taxes on the wealthy to help fund supportive noise about housing subsidies and food costs. Her best option is to continue the boost to the US economy Biden’s Inflation Reduction Act has achieved in driven the innovation of a green economy.

What will be the Long-Term Consequences?

You can’t help but watch the US election and not wonder what the long-term outcome will be. The degree of polarisiation and the pettiness of politicians is staggering. The most common theme of the election thus far: Were Biden and Trump really the best choices the USA could give its’ citizens?

Perhaps there is an answer in history. We’re all aware of long-term economic cycles such as the Kondratieff or K-Wave. Since the dawn of industrialisation, they’ve moved in roughly 60-year cycles – with two themes; the emergence of technology that completely changes the economic paradigm, and the rise and fall of new global hegemons. The tend to follow their own cycle of conflict followed by consolidation and the emergence of new tech.

You can trace it back to the beginning of the industrial age in the mid-18^th Century with Great Britain replacing France as the hegemonic power in Europe because it was richer (mercantile power from trading) with growing wealth and productive capacity domestically from the age of steam.

The UK funded and won the first global war from the “Glorious Year of 1757” right through to Waterloo in 1815, ushering in peace, prosperity and the rapid industrialisation of Europe and then the US. While the UK consolidated its empire, the next wave ran from the years of revolution (1848 to 1900) with renewed conflict in Europe (and the US Civil War) , with Prussia decisively defeating France in 1870 and becoming the dominant continental power during a period of swift technological change.

The next conflict wave cycle began in the 1900s with the race between Germany and Britain to build Dreadnoughts, the First World War, the destructive Great Depression, isolationism, the Second World War, and post-colonial conflict. The critical change that heralded it, and set its’ tone, was the replacement of the British Empire by the USA as the reluctant new global hegemon. It was an inevitable shift as the economic power of the USA grew to exceed Britain’s. It took 40 years before the Americans understood the responsibility being the world’s foremost economy carried, becoming The Arsenal of Democracy in the 1940s.

After the destruction wrought by the 1900 wave, the second wave that began in the 1960s created growth and prosperity unparalleled in our relatively brief human experience. The global population ballooned as disease, hunger and want were effectively addressed for the first time. A time of great hope and the great society and we have Donald Trump standing for president as the cycle ends? Funnily enough, as the US wanes, it is again reverting to isolationism and trade barriers.

Back in 1900 few folk were watching America or expecting an American Century. They were watching the industrial arms race between Imperial Germany and Britain. The last 2 economic cycles, from 1900 to 1960 and from 1960 till the election of 2024 can properly be called the American Century, when American power, culture and the mighty dollar embraced and excited the whole world.

There is a developing consensus in the global markets that change is afoot and the risks of conflict and crisis have risen. Now a new cycle is beginning.

Will America be replaced as global hegemon? Analysts look at how the US dollar is no longer so secure as the world’s currency. Increasingly trade is bypassing the need to convert profits into dollars to be invested in the most liquid of liquid assets, US Treasury Bonds and Notes – which have the ancillary benefit of funding the US government. Nations are no longer looking at the USA as the world’s policeman – increasingly they see ‘Merica as an unwieldy, unaware and increasingly unreliable ally. The look at American politics and the path towards authoritarianism it seems headed down.

America’s Virtuous Sovereign Trinity of a Strong Currency, a Sustainable Bond Market and Political Competency appears to be cracking. It’s easy to conclude the end of the American Century will coincide with the end of the American Dream.

Some look to China as the next Global Hegemon. Given China’s own economic criris and particularly its demographic issues, they may be looking at the wrong nation in Asia.

Perhaps India may be a better bet.

Out of time, and back to the day job..

Bill Blain

Author of the Morning Porridge, founder of Wind Shift Capital

www.morningporridge.com

www.windshift.capital

billblain@morningporridge.com