Donald Trump is losing his touch with the markets. Taking credit when stock prices rise has been a hallmark of his presidency, but investors seem to have decided it doesn’t matter whether he stays or goes so long as the US government spends, spends, spends.
Polls aggregated by RealClearPolitics show a double-digit lead for Joe Biden in the presidential race and they also point to the Democrats retaining control of the House of Representatives. Currently, Republicans hold a majority in the Senate but, since the start of October, polls indicate Democrats could take the upper house of Congress, too.
This blue wave scenario would make certain that another $2.2tn package of federal pandemic support would be approved and that’s just for starters. The Committee for a Responsible Federal Budget (CRFB) estimates that Mr Biden’s policies will result in an extra $4.45tn on infrastructure alone in the 2021 to 2030 budget window.
Digesting the sheer scale of spending promised, analysts decided that a Democrat clean sweep will be good for companies, more than offsetting the potential impact of higher corporation tax.
Green wave of dollars is what really counts for markets
Assessing all of Mr Biden’s plans, the CRFB’s middle estimate is that they will add $5.6tn to the national debt by the end of the decade. President Trump isn’t much less profligate. Should he win a second four-year term, the CFRB’s middle estimate is that his policies will put $4.95tn on the national debt. Interestingly, while the highest estimate for costs looks bad for Biden, the lowest estimates suggest that his policies could help America reduce some of its debt through growth.
Longer term, there are questions about the sustainability of such largesse, but more immediately the priority is kick-starting the American economy. Expansionary fiscal policies are a given from Democrats or Republicans. So, the real reason for the positive market reaction to blue-wave indicative polls is that a decisive election result removes uncertainty.
Delay to the next round of Covid-19 relief highlights the problem when the relationship between Congress and the president is caustic. Initially Mr Trump threatened to walk away from negotiations with the House of Representatives but, perhaps realising that this could be electoral suicide, he returned to the table with a $1.8tn programme of his own.
The $400bn disparity between the Trump administration’s proposals and those put forward by House of Representatives chair Nancy Pelosi isn’t over $1,200 support checks for American families. Almost entirely, the difference is down to Ms Pelosi’s desire to increase funding for state and local government authorities that face budget shortfalls.
Here is where the ideological faultlines between Democrats and Republicans are evident: the latter fear the legacy of emergency support could be expanding federal government’s role in normal times, too.
Continued impasse between Congress and the Oval office over stimulus matters immensely, as it could delay economic recovery. Beyond that, there are two baskets of concern: 1) how over the next two to four years the likely election winner’s policies will shape the outlook for international relations, trade, tax and regulation of companies; and 2) will the victor’s ideology be more or less conducive to arresting secular factors in the decline of America and, just as importantly, its currency.
Policy still second fiddle after Harris and Pence trade blows
Covid-19 is especially bad news for an obese 74-year-old male like Mr Trump, but he has made a spirited return to campaigning. His rival, Joe Biden, is 77 – so it was widely noted that last week’s vice-presidential candidates’ debate had potential to be more than an undercard bout.
Republican Mike Pence faced off against Kamala Harris, running on the Democrat ticket with Mr Biden, in an exchange that only somewhat expanded on policy. Unfortunately, with the Covid-19 crisis and intense personal focus on Mr Trump, it was very easy for the discussion to sidestep details.
Until recently, the narrative had been that a Democrat sweep would be bad for stocks due to regulation and plans to raise tax. Those fears may be cancelled out by stimulus optimism, but investors should still think about what a return to the pre-Trump level of 28 per cent corporation tax would mean.
Antitrust recommendations made to the Democrat-controlled House of Representatives in a report into technology companies are also incendiary. The call to curtail, or even break up, Amazon (US:AMZN), Apple (US:AAPL), Google’s parent Alphabet (US:GOOGL) and Facebook (US:FB) hasn’t sparked a major rerating of their shares yet, but would be seismic if enacted.
Arguing that a Republican administration is best for big tech is, however, wrong. Given his capricious nature, it’s conceivable that Mr Trump would want to see companies who have censored his supporters online being punished. Possibly the best result for the companies under scrutiny is still a Biden presidency and Congress remaining split, giving an opportunity to present softer stances on corporation tax and big tech as political compromise, not cronyism.
Only the Supreme Court would check Democrat supremacy if a blue wave sweeps presidency and Congress. Students of history will know the federal judiciary won’t necessarily side with corporations. One of the court’s most famous rulings was in 1911, when it declared JD Rockefeller’s Standard Oil Company an illegal monopoly, clearing the path for its break-up.
Dispute over the composition of the Supreme Court’s bench has been rife in the run-up to these elections. The death of Justice Ruth Bader Ginsburg in September created a vacancy that Republicans have scrambled to fill with a conservative, although President Trump’s attempt to appoint Amy Coney Barrett is controversial.
Republicans cried foul when President Obama tried to alter the Supreme Court’s alleged conservative bias late in his administration. Democrats are entitled to call double standards, given Ms Bader Ginsburg was a prominent liberal. Still, suggestions that they will use a big election win to add roles for more Supreme Court Justices infuriate conservatives.
Moving progressive voices toward parity means constitutional interpretation could be more benign for campaigners on issues such as pro-choice abortion rights. A strong Democrat government may also want to introduce measures for police restraint, which will prove divisive and probably require federal judicial rulings, too. Gun control, however, will once again be a bridge too far against a febrile backdrop.
For investors, the most material aspect of Supreme Court business could be the extent to which they decide healthcare is a human right. Constitutional resistance is a barrier to Democrat attempts to enshrine medical insurance provision and potentially take it further with the Medicare4All programme, a cause dear to Kamala Harris in particular.
How this shapes up will be crucial to the insurance and healthcare provision companies whose business models would be upended by a more interventionist government.
Parties divided by ideology and personal enmity
Playing politics with people’s livelihood is one thing, but both Mr Trump and his adversaries have been accused of doing the same with lives. Vice-president Pence laid that charge on Ms Harris in their debate, suggesting that Democrats in the House of Representatives are so reluctant to see the Trump administration credited for expediting a Covid-19 vaccine that they are going out of their way to hold up approval.
For his part, Mr Trump has rushed back from convalescence, drawing criticism for playing fast and loose with the wellbeing of his security detail. Poor observance of Covid-19 protocol in the White House was even hinted at by Republican chair of the Senate, Mitch McConnell, as the reason his contact with the president has been via remote channels.
Refusing to be cowed by the virus is another reckless example of toxic masculinity in the eyes of Mr Trump’s detractors, but Americans also like a fighter. The country was founded on a frontier spirit of freedom and individualism, so plenty will identify with a do or die attitude, however literal that has turned out for many vulnerable people.
Externalising the threat also plays well and Mr Trump’s vernacular makes it clear whom he blames for the pandemic. Frequent references to the ‘Chinese virus’ show disregard for the safety and feelings of Chinese Americans who could face racial abuse.
On the international stage, however, the president’s firm stand against China’s superpower ambitions has moved the dial on a foreign policy strategy that previous administrations had badly misjudged.
Strategic pivots and keeping America great
Passionately anti-Trump media channels are keen to neutralise policy on China as an election issue. They emphasise that both Democrats and Republicans are resolved to champion US interests and ensure trade with China is conducted on more advantageous terms. Yet it took a political outsider in Mr Trump to galvanize America’s response to its new great rival.
Huawei’s pre-eminence in 5G network solutions was a wake-up call. It proved that Chinese companies are more than capable of their own world-leading innovation and America cannot afford complacency. Accusations of technology theft are hard to prove but better protection for intellectual property is worth the tough US stance on tariffs.
Strategic industries are to be guarded jealously, but they’re not the only hallmark of American hegemony that has eroded. Ever since the Second World War ended, the US dollar’s status as the global reserve currency gave a unique advantage. But now the greenback's pre-eminence looks less secure.
Even after the Bretton Woods system ended and other currencies stopped pegging their exchange rate to the dollar, and after the dollar moved off the gold standard, countries wanted dollars as a hard-currency reserve asset. That applied to central banks and the treasuries of multinational companies. Furthermore, dollars are a practical necessity when all major commodities such as oil, iron ore and copper are priced in them.
The exalted status of its currency has allowed America to borrow from the rest of the world and fund vast trade deficits with other countries. Whoever wins the presidential election in November will prioritise boosting economic growth, but the dollar’s decline is a secular trend and the government’s actions will affect how damaging that will be.
Ultimately, the attractiveness of a currency depends on the strength of its issuer’s economy, so the potential GDP growth on the back of massive fiscal plans means investors are unlikely to make a monumental pivot from the dollar. Alternatives are emerging, however.
Demand for China’s renminbi has strengthened as it recovers from coronavirus and moves towards opening its capital markets to foreign investors. The issuance of European Union bonds and a more co-ordinated approach to fiscal policy by the bloc could also see the euro rally, especially if stimulus finally sparks prolonged and meaningful growth for the eurozone. The emergence of cryptocurrencies also provides a secure medium for transactions and exchange.
All of which means that there will be plenty of competition for capital and perhaps a multilateral approach to reserve currency status going forward. The power of American sanctions will be diminished, so we really could be facing the end game of so-called dollar imperialism.
Therefore, wielding that power while it is still effective is crucial. President Trump’s attitude that America had for too long gotten a ‘bad deal’ on trade – and its proportionate share of funding for international bodies – is not ill-founded. For now, the prize of access to the American consumer and the importance of dollar funding are major levers to improve terms for the US.
Whether Mr Biden or Mr Trump’s fiscal stimulus plans are voted for, the fact is that the Federal Reserve must create trillions of dollars to pay for it. The incredibly low yield on US Treasury bonds means lending to the federal government is priced unattractively, so the danger is the dollar will weaken.
That might not be terminal; after all, other countries must also borrow and spend to stimulate their economies. But America needs to be smarter than it has been in the past about giving others a free ride. If the Trump presidency is near its end, his successor should keep that in mind.
