Blain’s Morning Porridge 13^th September 2024: Inequality lies at the core of polarised US Politics – it’s not about tariffs or borders, but corporate behaviours.

“Corruption is paid for by the poor.”

Its neck and neck in the US election. Trump promises to MAGA through tariffs, autocracy, spending and tax cuts. But the core problem behind increasing polarisation is rising inequality – undermining the fundamentals of the American dream and justice.

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Bill’s Pub to Club Swim:

Let me remind readers about Bill Blain’s Pub to Club Swim on September 14^th. It’s a Charity Event in support of Wessex Heartbeat, the cardiac care charity. I will be swimming 2.5 miles down the River Hamble as a thank you to the Medical Staff who care for cardiac patients and their families. You don’t have to anything except click the link – here – and make a donation.

Without Heartbeat, well, you would not be reading the Morning Porridge.

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It might be time to start placing stones on the board ahead of the US election – even though it remains too close to call. In times of great uncertainty, my thinking is Gold may be a smart opening play.

Working out all the scenarios requires insights, but mostly a crystal ball. While I have neither, I know a man who has. I ran a fire-side chat with Paul Horvath, CEO of Orchard Global, on Wednesday with investors in Zurich. (Paul is a Republican. Fair to say… I am not. I am a pragmatic realist.) I learnt much from our conversation – and stress what follows is my read of the election, not Paul’s – he remains a genuine Republican, intent on what is best to see his country thrive.

But let’s start with the news Elon Musk is on course to become the first dollar trillionaire. A single man among 8 billion of us will be worth roughly 1% of global GDP. How wondrous. Assume he lives another 30 years – he would have to spend roughly $92 million per day… every day. and that’s without considering the interest on it.  Think what, or more critically who, that money could buy. Think about what it could fix and solve. Although you can’t take it with you, Musk will be taking it too Mars…

Musk’s wealth is relevant to the election.

How much tax did Musk pay last year? Tesla made $4.4 bln in profits, but paid zero federal taxes. Since 2017, when Trump slashed US corporate taxes to 21%, many of America’s largest companies have been able to record zero taxes, while using their profits to fund massive stock-buy backs – pushing executive bonuses upwards. It’s not uncommon for CEO’s salaries to exceed corporate tax bills at many large US firms. Heresy you scream! 

What made Musk so wealthy? His genius? The society that enabled him? How many of his staff at his various ventures did he make redundant with minimum payoffs from X, Tesla, Space X in the last year?

Hold that thought, and let’s go back to the election.

Tuesday’s US presidential debate was a cosmetic tactical win for Kamala Harris. Full marks to her for so clearly unsettling and defeating Donald Trump. But, it likely means absolutely nothing in terms of who will be the next President of the United States of America.

• The debate simply reinforced the intentions of voters who had already decided they were supporting Trump or Harris. (The undecided voters – according to the post-debate surveys – apparently weren’t much swayed.)
• Even Taylor Swift’s endorsement of Kamala won’t turn the dial by much because of the structure of the US electoral college. Musk’s endorsement and funding of Trump (and we wonder what he expects of his money), is likely to be more significant in terms of young men’s votes – he’s got a gazillion followers but is more respectable than the vile Andrew Tate as a role model.
• Because of the way the Electoral College works, it’s increasingly likely the next President will be determined by how a relatively tiny number of Black and Latino males in Georgia and North Carolina, and critically, oil-fracking workers in Pennsylvania, cast their votes!  They are not Harris voters.

Trump’s VP pick, JD Vance’s role is this election is simple: to secure Pennsylvania. (Plus, he is also there to ensure his wealthy hedge-fund patrons; Peter Thiel, Bill Ackman et al, get their expected return on their investments in Trump.)

Remarkably, I’ve been told the Republican voter registration teams have secured some 400,000 new voters in Pennsylvania, dwarfing Democrat efforts – remember Biden won the state in 2020 by less than 80,000 votes. Trump is pushing hard on the fracking agenda – “drill baby drill” – even though under Biden the US oil industry has become hyper efficient and produces more oil than ever ever. Expansion would be commercial suicide – further crashing the oil price, and putting most of the Turkey frackers voting for Christmas out of business…. Yet, frackers could decide the election!

My guess the election is marginally going Trump’s way on the basis he’s stronger in these key groups in the three critical swing states. Harris has got the Women’s vote, but historically, Pennsylvania has never elected a woman to any position of significance.

However, the critical outcome isn’t actually Trump or Harris as president, but how the election pans out in the Senate and House:

• A Dem Clean Sweep,
• A Rep Clean Sweep, or
• No Overall Control

These are the three possible scenarios. I’ll be watching the projected numbers in each senate and house race carefully ahead of Nov 4^th to figure each scenario’s likelihood. To be brutally frank, a no outright control election with the President, Senate and The House on different sides could be the best outcome – forcing discussion, compromise and, perhaps even a resurgence in practical US politics. Without outright control of the Senate and Congress, the amount of damage either Harris or Trump can inflict upon the US economy, and thus global markets, is limited. 

Unconstrained Trump – and what that does to the USA’s Virtuous Sovereign Trinity of the US dollar, the bond market and its’ position as Global Hegemon – could be the worst outcome by accelerating the growing de-dollarisation trend. (That is happening as trade bypasses the greenback though geopolitics, while new payments-tech, tokenisation and blockchain enable direct currency crosses to settle global trades without dollars). Trump’s spending and tax cut plans could lead to a ballooning deficit undermining confidence and foreign demand for Treasuries, even as the rest-of-the World reassesses their US relationship in the face of Trump’s…. weirdness and rank unpleasantness.

The main plank of “serious” Republican support in the financial markers is how Trump will do a “deal” on Ukraine, releasing 7-8 bln barrels of Russian Oil and Gas to solve Europe’s energy shortages, triggering economic growth and recovery. Has anyone asked the Ukrainians what they think? Or noted Draghi’s comments about not repeating the mistake of dependency on Russia again? They think appeasing Russia with Putin squeezing a win is a good thing – it won’t be. Read European history 1935-39.

Unconstrained Harris may be marginally better… she will face the same de-dollarisation trend, while raising slightly lower dollar and treasury market fears because she plans some tax rises. She will reassure other Western nations about being able to deal in a constructive fashion with the USA leadership. Yet, if she wins, it could increase internal domestic tensions within the US if Trump supporters reject the ballot-box again.

To understand the US election, we need to start with an honest understanding of how Donald Trump has driven his massive polarising shift in US politics, building his own strong (fanatical?) political base and using it ruthlessly to capture the once patrician Republican Party. Perversely, his whole campaign thesis is about addressing the populist opportunity presented by growing income-equality across the US economy! 

Respect and full marks to Trump for spotting the opportunity. Steady growth and dramatic stock market gains created enormous wealth and growth in the US economy, especially since 2010. But it has come with costs:

• Ultra-low interest rates drove enormous financial asset inflation – stock values have risen about 4 times faster than economic growth, a distortion caused by artificially low rates, while stock-buy-backs were prioritised over real investment. That wealth has flowed to stock owners.
• Meanwhile, the financialisation of the value of US corporates has accrued returns to owners and directors – not workers through wages or investments in increased productivity that would have enabled higher pay.) The result is an apparently wealthier nation with high-value companies, growth and job creation, but income inequality gapping dramatically wider between rich and poor, between workers and bosses.
• US corporate management focusing on making themselves rich at the expense of workers and customers has occurred as the Rest of the World, particularly China and SE Asia, not only played catch up in manufacturing, but are now in a position when many imported market goods now match and exceed mature western technologies – particularly visible in Chinese autos – which is terrifying news for Europe where cars and car-parts dominate the economy. (Take a look at new hybrid-EV SUVs from China – they are scarily impressive and cheap.)

One reason the western markets are so wedded to AI is the hope the hype around it will become real to re-establish a clear industrial lead over China. (Whatever you do, don’t think South-Sea Bubble at this point….)

That’s the background. What about voters. When social media and the TV present 24/7 coverage of the idyllic lives of the rich, no one likes being left poor – that’s basic human psychology. Trump has played that opportunity, the divide between haves and have-nots, brilliantly.

While the wealthiest 10% of Americans live their best-lives of unlimited luxury and opportunity, the rest are increasingly financially challenged, with the lowest cohorts living without savings, insecure, mired in a punitive debt trap of inflation, impossible interest rates on credit cards and car-loans, and soaring rentals – forget home-ownership. The struggling middle-classes find themselves challenged to stay in the game as costs start to bury their declining disposable incomes and savings.  (We also need to focus on the long-term economic effects on family formation as young workers simply can’t afford the ballooning costs of children and accommodation. This will have enormous demographic consequences in coming years.)

Trump’s play is populism 101. He blamed rising inequality on the political establishment failing the working classes. As a clever populist he identifies enemies for them: domestic elites, foreign competition, and immigration taking their jobs and diminishing their prosperity, while fermenting rising crime. He offers them clear wins, painted in the colours of his questionable deal-making prowess. He will sort offshored jobs and “unfair” competition. He talks loudly about punishing elites who disagree or offend him. The poor, the dispossessed, the MAGA supporters love it – they think Trump is fighting for them.

It’s all piffle. The economic reality underlying Trump’s populism is rising inequality – which US business has connived at.

Who is to blame?

Financialised US corporations have little interest in workers – except in how little they can pay them. They are focused on “shareholder returns”. Democrat themes like diversity and ESG (environment, social and governance) are being dismantled through climate backlash and the conflated war on wokery. The Tech Lords of Silicon Valley are now coalescing around Trump, offering support in return for lower regulatory risks to their businesses, and to advance their own agendas. The crypto bros have induced Trump to embrace BitCoin in return for election support and funding. (He’s even proposing the US holds a strategic BC reserve – even though its’ basis is to undermine the dollar!)

Financialised firms focus on costs, largely by cutting real wages, outsourcing labour and slashing benefits, all to boost the stock price and C-Suite bonuses – yep, I know, I sound like a communist, but that’s the reality.

Global competition is very real, but the reality is US workers are struggling because US corporates don’t pay them enough, and haven’t invested in productivity gains because stock buybacks give bosses bigger bonuses. The US could counter cheaper offshore competition – by outcompeting them. It hasn’t bothered to. Boeing is a great example, sacrificing its dominance of the global airliner market to corporate greed – Airbus is now the global leader. Nothing to do with unfair foreign competition or evil empires, just good old American FUBAR management.

Meanwhile, customers have become an inconvenience – it’s not quality of service, but its complete absence that pays the biggest CEO bonuses.

And just to make it clear, when US workers are struggling to pay their bills, the average American CEO now earns more than 350 times the wage of his/her average worker!

Trump’s solution to the crisis facing America is to further cut taxes to put more money into workers pockets – but these will quickly be consumed by higher rents and rising costs unless the economy changes. He is in favour of cutting corporate taxes (for production in the US) to 15% to encourage businesses to manufacture in the US. Yep, that will boost the stock market and widen the inequality gap even more as US corporates rejoice in paying even less.

Meanwhile he will be imposing increasing trade tariffs on perceived threats – particularly China – to show his supporters how serious he is. The only guarantee that comes with tariffs is rising inflation – which is always a regressive tax on the poorest in society. In effect MAGA voters could well be choosing greater penury.

The Democrat approach acknowledges the insecurity of the poor by proposing higher taxes, including a hike in corporation taxes, to make industry contribute to the rising costs of higher welfare provisions. They need to walk a tightrope to keep financial markets onside re the dollar and bond market, while also rebasing the economy back towards sustainable levels of income equality.

Conventional logic dictates higher corporate taxes will cause businesses to exit the US if taxes rise. But will they? US corporates trade on much higher multiples because they are US corporates. (Largest and most liquid market attracts the most money.) If taxes were higher, they would be balanced (at least in part) for company owners by the higher valuations of US companies.

As for stopping China – the reality is they make stuff cheaper and functionally its as good. It’s called competition. China has cheap labour, the west had the option to invest in productivity, and now AI, to out compete. Maybe we should quit whining… and start winning. Capitalism should always beat authoritarianism.

To make the US work again, it’s time to be honest about wealth, greed, power and how to re-create and rebalance a sane, just and equal society. No one needs a trillion dollars. Time to redistribute wealth so the whole economy can grow. For consumers to consume, they need a share of the upside to enable it.

And finally…  A final reminder – I am doing my Pub to Club Swim tomorrow. 2.5 miles down the Hamble River for Heartbeat, the Cardiac care charity. Wallets out.. please.

Have a great weekend, I’m off for a final training swim and then 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

 

Bill’s Pub to Club Swim