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Big yellow taxi

Will next month’s US presidential vote go down as the Big Yellow Taxi election? Recall the defining words of Joni Mitchell’s eponymous song – “you don’t know what you’ve got till it’s gone”. In the song, the big yellow taxi took away Joni’s old man. In November, maybe democracy gets taken away. The cab driver? Intuition says “Donald Trump”, but – at least according to one notion – more likely it’s Joe Biden.

Maybe we should start with a digression: democracy – even in the world’s richest and most powerful nation – does it really matter to investors? What do we care about democracy’s roll call, from the 1689 English Bill of Rights, to the French and American versions (both declared in 1789) through to the US Civil Rights Act of 1964, the erosion of which might decisively affect November’s poll? Such things neither guarantee good investment returns, nor does their absence preclude them. So why get hung up?

Put as cynically as that, most would object. But the truth is self-evident that economic growth does not depend on representative democracy. Authoritarian states can generate consistently good investment returns without it (think of Singapore or Hong Kong). In the case of China, this looks to be true even of a state that does not bother with the pretence of the rule of law.

Yet what’s different about the western world and its hegemon, the USA, is that affluence has been built – however imperfectly – on the foundations of representative democracy and the rule of law. Additionally, the consensus of its citizens is based on the premise – even the promise – of eternal growth. As the British-Czech philosopher, Ernest Gellner, said: “When the Danegeld Fund is growing steadily, you can bribe most of the people most of the time.”

But when growth falters – when it struggles to meet the sense of entitlement of affluent voters – then the foundations are threatened. If, increasingly, economic life is played as a zero-sum game – even though the rules specifically say otherwise and the assumption is the cake always gets bigger – then the losers will be unhappy. It can’t be otherwise. That’s when relationships start to fracture; when groups, which have little more in common than sharing a common strip of ground, forget to put aside their differences. Superficially, they squabble over their identity; in effect, they are fighting about how the cake gets divvied up.

In that context, the health of the world’s biggest democracy matters for investors. So, in this presidential election, apparently made existentially important by both that and the presence in the red corner of a wrecking ball such as Donald Trump, which candidate is the lesser of the two evils – the 73-year-old white male who describes himself, with characteristic hyperbole, as “a very stable genius”; or, in the blue corner, the 77-year-old white male who is known for being a nice guy, but not much else?

The economic plans of the two candidates have been well picked over; arguably, they are not even that important if this election is of profound, long-term importance. Sure, Mr Biden will take the economy to the left (a little), with likely increases in corporation tax and the top level of income tax plus possible toughening of capital gains tax. His spending will target social mobility, with particular emphasis on education, but that is likely to be dwarfed by an enormous economic stimulus bill early in his presidency. Should Mr Trump remain in the White House, that is also likely to be true. He has been stymying a proposed stimulus bill in Congress so he can dangle it as a ‘come on’ to wavering voters.

Clearly, however, either president’s scope for action will be affected by the balance of power in Congress, especially as elections for the Senate (the upper house) coincide with the presidential election. It is just possible – although highly unlikely – that Mr Trump can remain in the White House while the Republican party loses the Senate. In which case, his second term – more even than the first – would rely on ruling via executive orders and via the Supreme Court.

More likely is that a win for Mr Biden will coincide with the Democrats taking the Senate and thereby controlling both houses of Congress. In which case, how will Mr Biden, and perhaps more importantly, the Democratic party, behave – reasonably or vengefully? Vengefully means the party might ditch the filibuster, the time-honoured tactic by which Senate opposition blocks controversial legislation (although ‘controversial’ increasingly means any legislation proposed by the other side). Similarly, it might mean taking over the Supreme Court by creating new spaces – currently it is limited to nine judges – and filling them with Democrat nominees. Both measures are being justified as a sensible means of getting retaliation in first. But either would also mean a major escalation of the USA’s politico-cultural trench warfare.

The assumption is that Mr Biden, a centrist and a practical politician, would resist such moves, especially that of meddling with the Senate; this, after all, is the institution for which he has deep affection, not surprising since he has spent 36 years of his 47-year political career there.

What is more in doubt is that Mr Biden would push against a force that we might caricature as undermining US capitalism. Part of its insidiousness is that it does not even have a name, although it falls under the philosophical umbrella of ‘critical theory’; hence its best known offshoot, ‘critical race theory’, which has politicised the Black Lives Matter movement. Put very simply, critical theory reveals itself by taking political correctness to its ultimate conclusion. Thus, for instance, even to discuss what is politically correct is incorrect.

This might sound trivial except it only allows permitted opinions and ends with the nastiness of, say, ‘cancel culture’ that shuts down university-campus debate. More important, arguably it has already captured the bureaucratic machine, especially personnel departments, throughout the US public sector and widely within the private sector (even in the UK, for instance, which FTSE 100 company does not now have a head of diversity and inclusion in its HR department?).

At its extreme, the danger of critical theory taking over the mind-set of USA Inc. is that it brings a Leninist certainty that solutions can only come from the top. Its ultimate form would be a stultified state-controlled capitalism of approved companies, quite similar to the way China seems to be heading. Sure, such companies would feature their winners and losers and, as such, would offer the usual risks and rewards to equity investors. Without the counter factual of knowing what investment would be like under a more vibrant form of capitalism, we might not even notice. Yet expressed as the question, ‘which would you prefer, investing within vibrant capitalism or stultified capitalism?’, the choice is obvious.

If this sounds too much like America’s continual fixation with Invasion of the Body Snatchers, then it might be. Every nation is partly cemented by a narrative of fear, the USA especially, whose myth is fighting religious oppressors and greedy kings before facing communist conspirators. It would be no surprise if the high priests of critical theory turn out to be no greater threat to America’s apple pie than Pete Seeger and Paul Robeson in the 195os or Bob Dylan and Malcolm X in the 1960s.

Still, why take the chance? The Democratic machine has already been captured, so Mr Biden can’t change that. After four years of a Democrat in the White House, critical theory will be the boll weevil in America’s cotton field. The only solution is a vote for Donald Trump. Or, at least, that’s what America’s old-school liberals are saying. They don’t like him, but can live with his chaotic narcissism. They hate the thought of Joe Biden; nothing personal, though. Mr Trump hears them and is stomping critical race theory on the stump.

Whether it will do him any good is another matter. The Good Judgement Project of so-called ‘superforecasters’ has Mr Biden 86 per cent likely to win, with the Democrats 77 per cent likely to control both houses of Congress.

Investors should be relaxed about that if the tables tell a story. They tot up the inflation-adjusted returns produced by the Dow Jones Industrial Average for the past 15 presidents, going back to Herbert Hoover, who won in 1928. The returns are calculated from the day the winner took office until he left. They show clearly that the best returns have been generated during Democratic incumbencies. Bill Clinton’s and Barack Obama’s eight-year terms generated the best rates of annual compound growth; Hoover’s and Richard Nixon’s (both Republicans) the worst.


Table 1: Donkeys beat elephants
PresidentPartyWhen in officeTime (yrs)Equity returns (% pa)*
Bill ClintonDemocratic1993-20018.013.1
Barack ObamaDemocratic2009-178.010.1
Dwight D EisenhowerRepublican1961-698.09.1
Gerald FordRepublican1974-772.57.5
Ronald ReaganRepublican1981-898.07.4
Donald TrumpRepublican2017-214.07.2
Franklin D RooseveltDemocratic1933-4512.16.4
George HW BushRepublican1989-934.04.7
John F KennedyDemocratic1961-632.84.1
Harry S TrumanDemocratic1945-537.82.1
Lyndon B JohnsonDemocratic1963-695.21.7
George W BushRepublican2001-098.0-6.0
Jimmy CarterDemocratic1977-814.0-9.6
Richard M NixonRepublican1969-745.5-11.5
Herbert HooverRepublican1929-334.0-29.9
Source: US Dept of Labor; *annualised return for Dow Jones Ind Ave, inflation adjusted (see text)


Not just that, but Table 2 shows what would have happened if each party’s terms were somehow strung together in a continuum. Start with $1,000 invested in the Dow when Hoover took office in March 1929 and the amount would have shrunk to an inflation-adjusted $509 assuming Mr Trump leaves office in January 2021 (and that the Dow is at its current level). In contrast, $1,000 invested when Franklin D Roosevelt took office in March 1932 would have become $11,753 by the time Mr Obama completed his second term in January 2017.


Table 2: Is something happening here?
After the election of . . Amount invested ($)Republican presidencyYears in officeReal equity return (% pa)Amount returned ($)
19281,000Herbert Hoover4.0-29.9241
1952241Dwight D Eisenhower8.09.1485
1968485Richard M Nixon5.5-11.5248
1972248Gerald Ford*2.57.5297
1980297Ronald Reagan8.07.4526
1988526George HW Bush4.04.7633
2000633George W Bush8.0-6.0386
2016386Donald Trump4.07.2509
After the election of . . Amount invested ($)Democratic presidencyYears in officeReal equity return (% pa)Amount returned ($)
19321,000Franklin D Roosevelt12.16.42,119
19482,119Harry S Truman7.92.12,492
19602,492John F Kennedy2.84.12,789
19642,789Lyndon B Johnson5.21.73,044
19763,044Jimmy Carter4.0-9.62,033
19922,033Bill Clinton8.013.15,443
20085,443Barack Obama8.010.111,753
Source: Investors Chronicle


The message contained in that huge difference is that Republicans, supposedly the party of business, don’t assure superior returns any more than the Democrats, somewhere to the left of Republicans, means worse returns. Some consolation, perhaps, if the big yellow taxi does take away democracy on 3 November.