Dominic Chu (5:13)

I mean, Dan, that's an amazing view to have an insight to have and with some of the numbers to back it up as well. Because I was just thinking to myself how much we can say politics actually plays into the moves that we see on Wall Street. And it actually looks like it does to a certain degree. But it's not just on Wall street per se. It's also in places like in Europe and Asia as well. Now, let, let's kind of take it to that next kind of level, that next layer of the Onion, right? So we know that we see moves in the election cycle play out in markets and currencies and everything else globally. Has that changed in a Trump era where the president elect spends a lot of time making these types of headlines? We haven't really seen the kind of, I guess, rhetoric or the kind of jawboning, saber rattling, whatever, whatever term you want to use from president elects, typically in the past, not as forceful as President Elect Trump has made. So are we going to see a bigger result because of the headline statements coming out of the incoming administration?

Dan Clifton (6:22)

Well, it's definitely not a conventional administration. And just to give you context, when I got in this business 20 years ago, we would look at healthcare stocks and defense stocks, and it's pretty clear there were some industries that were more sensitive to the election itself. Now we're talking about a wider range of financial assets, and Trump is part of that because he's aggressive. But what I would argue is that this is the way it was before the Berlin Wall went down and then the Berlin Wall went down. And when the Berlin Wall went down, the world globalized geopolitical risk came out of the market and inflation came down, interest rates came down, and that made things a lot more domestic and a lot more peaceful, per se. And what I'm arguing to you from a global, just from a macro perspective, is that we're moving back to sort of a pre Berlin Wall going down period, where now you have slightly higher inflation, slightly higher interest rates, more geopolitical conflict going on. And you're starting to see all that kind of wonderful free trade that has benefited us for 30 or 40 years beginning to reverse. And if that's the case, then just no matter who the candidate is, you're going to see Washington and public policy have more impact on financial markets going forward. And so what I would argue is that this election was an election that was a referendum on the speed at which America would deglobalize. We're going to deglobalize no matter who won the election. But under Trump, it's going to happen faster. And that means that you're going to see much, much bigger moves if Trump wins. And he ended up winning. So that's one key point. But then where he's involved is amazing. I mean, like, think about this. The appointment of RFK to be Health and Human Service Secretary is just a major disruptor in the food and healthcare industry overall. And so it's a very different playbook because there was, you were always operating between the 40 yard lines between Republicans and Democrats. Now we're like between the end zones. Like the range of outcomes here have widened and if that's the case, it makes it much more interesting but to your point, much more impactful for investors. And so I feel bad for people who've been trained in stock picking like yourself. They're very good. They know how to identify balance sheets. But you have to have this Washington overlay now, both from a macro and from a bottom up perspective in terms of how public policy could impact individual securities.

Dominic Chu (8:53)

It's interesting because it resonates with me as a football fan because as many football fans know, oftentimes the scoring, right, the actual offense or plays happen in the red zone and not in between the 40 yard lines. So it sure seems as though we're moving towards the red zone, not in any kind of a political commentary, color commentary or anything else, but because we're, we're at the 20 yard line now and there could be a score anytime soon. Dan, I want to go back to something that, you know, you mentioned that kind of struck a chord with me. You told, you talked about this idea that when there became a more certain outcome for this particular election, that we saw the move higher that we saw in the market, right? This red sweep, it's going to be better for business, it's going to be better for the market. There's going to be maybe theoretically less regulation, you know, that sort of thing. And it all plays out right. But there's also, and there has been this conventional wisdom, and I know you've heard it before, right, that Wall street likes that word gridlock. In Washington, D.C. we are most likely to have gridlock when there is a split Congress or between Congress and the White House come January, we're not going to have that anymore. It is the gop, that red sweep. What does that mean Wall street should prepare for in the next term, in the, say six, the next six to 12 months. Gridlock is maybe no more, but there are reasons why it could be. And that has to do with the numbers in the Senate and the House, is that right?

Dan Clifton (10:25)

That's absolutely correct. So what I try and do is say what can we do by executive order where we don't have to worry about Congress and what do we need to do by Congress? So I try and separate those out. And what's interesting about this cycle is that you had both Harris and Trump talking more about things you can do by executive order. Immigration, deregulation, energy. Right. And so we can walk you through all that. But on Congress you are talking about the third election in a low in a row where you have less than five seats separating the House of Representatives. Right now it looks like the Republican majority is only going to be two or three seats. And until they replace the Trump appointments from the House that are going to go into his administration, the Republicans are not going to have a functioning majority overall. So I still believe even though you got this kind of Republican sweep, you are still in a very gridlock situation because the House is very narrow and the Senate still requires 60 votes on non fiscal matters overall. And so that's why we're saying, okay, what can we do on executive order? It's very likely Trump's going to shut the border down on day one. And that means that the immigration stocks should do well. And they've been rallying here. Those are going to be for profit prisons or immigration enforcement level stocks. The second is that it's very likely that Trump is going to remove the emissions requirement on LNG liquefied natural gas export facilities. And so when that happens, you're going to get more construction of liquefied natural gas export facilities. It's also going to help the natural gas producer stocks overall. So those are things that can happen pretty quickly and we would anticipate them right after he gets sworn into office. And then you'll see some deregulation in health care, some for profit education areas. And I think what people are really watching is whether he gets rid of the IRS tax preparation system, where the IRS is now preparing taxes and competing with HR Block and Intuit overall. So there's a lot right there and probably more than what we've seen in the past. So now you go over to Congress and you say, what are the options in Congress? Well, what do we have to do versus what do we want to do? And what we have to do is we have to extend all the expiring tax provisions at the end of 2025. So we're facing the largest fiscal cliff in US history the end of 2025. And I think the market looked at that and said having one party makes it easier to get a deal through, through even though it's a very narrow majority. And that type of deal would have been a lot harder. We are also going to hit the debt ceiling on January 1st. That will then lead to what we call extraordinary, extraordinary resources being used. And we're probably going to wind up raising the debt ceiling in July or August. You probably want to have one party control for the debt ceiling as well. So that's why I say it's very nuanced in how you think about divided versus full government. I tend to think that we have many of the kind of gridlock benefits that the market likes, but we also have one party control in the areas that we have to deal with legislation. If we don't extend all of those tax cuts, you have a $400 billion tax increase on middle class families next year. And obviously, if we don't raise the debt ceiling, which we will, but if we don't raise the debt ceiling, you would have a pretty catastrophic event in financial markets because it could lead to a default on the U.S. debt.

Dominic Chu (13:45)

All right, so those are all points that are kind of like the known unknowns. Right. We are prepared because those things are actually on a calendar. We can see those deadlines coming up. We can kind of see, based upon forecasts, some of the government spending issues that are going to arise. So there are ideas that have a lot of debate on Capitol Hill and then there are policies that can actually get done and get implemented. To your point there, how do you actually determine what is worth paying attention to and actually making portfolio moves for? And then what is worth just sitting back, letting it play out? Because at the end of the day it might just be noise.

Dan Clifton (14:29)

Yeah. So I would say that there's really three parts of our process. Number one is we look at what the macro effects of Trump or Harris are going to. And so we made a decision that we think Trump is a strong dollar candidate and that he is going to lead to higher bond yields. And so from a macro screening perspective, we could say, okay, what's the impact of a higher dollar? Well, a higher dollar is going to be good for US Domestic companies relative to multinationals. And what's the effect of higher bond yields? Who is that going to affect? Well, home builders would be negatively impacted if mortgage rates are going up because bond yields are going up. Right. And so before you even get into policy, we just kind of want to know what that top of the surface is going to be. And then we break ourselves down into what can actually pass into law. And that's why I say the executive orders are very easy. What can Trump do? The second is what is likely going to happen on trade policy. And so on our view, Trump is very likely going to put tariffs on China. He's going to threaten to put tariffs on the rest of the world. That remains to be seen if he's going to do that. So what we do is we look at where the exposure is to China and we have ways of doing that. We look at companies that have revenue in China, we can look at that. It's very quantitative. And then what we do here is that we go through the lobbying disclosure reports of every U.S. company. So we see which companies are lobbying on China tariff related issues and we screen them out. And what you see is there's some industrial companies, some tech companies, some life science tool companies. And we figure out where that exposure is. And it's pretty cool stuff and very differentiated than what other people do in our business overall by using that kind of public lobbying data to get to those answers. And then we figure out, okay, what is likely going to pass into law in Congress. So I'll just tell you, this is the first election in my lifetime where I saw defense stocks rooting for a Democratic presidential candidate to win. It just never happened before. Right. But Trump says he's going to end the wars. And you know, you can logically get to that point of view. And yet we want to be a little bit differentiated because we want to know what Trump's priorities are and their space and their C cables and they're all different things that he's involved in that are high in the air and below the ground. And those are areas that we want to be invested in if Trump wins. Because we're not saying defense is going to go down. He it's just going to get reallocated and we want to know where that reallocation is. So that's our process. I hope I'm answering your question on kind of how we drill deeper into it.

Dominic Chu (17:08)

Sure. So can I follow up on that then? Because you've kind of laid out some of the broad strokes. Can you actually help us understand and break down the areas of policy? You mentioned a handful of them just now. Right. That tend to have the most direct impact on the trade on Wall street, so to speak. Right. I mean, you kind of these defense stocks, healthcare maybe. And by the way, let's talk about regardless of who's in office because there are some obvious, you know, we talked about Trump trades versus Harris trades. But there are certain areas that you focus on that are always going to be a focal point, no matter who's in power in the White House. Economic policies, of course, obvious. Right. The Fed is also watching, you know, watched closely by investors. But. But what exactly is what takes up the bulk of your time?

Dan Clifton (17:55)

Yeah. So excellent question. So I would say that every company is focused on taxes and trade right off the bat because that impacts them. And, you know, I think the market just kind of slept on what the 2017 corporate tax rate cuts were going to do. And then it happened, and they were like, whoa, look at all these forward earnings estimates going higher. And not just on domestic income with the rate, but the way we changed the international rates, the way we allowed trillions of dollars to get repatriated back. So tax has a really outsized impact on all companies. Now, trade is really the big. The big issue, because in our view, if you just hit tariffs In China, it's $50 billion. We're a $25 trillion economy. It really affects individual companies. It may not affect the macro, but what's interesting to us is that if Trump comes in and doubles those tariffs on China that he did in 2018, then what we'll see is the supply chains begin to move. And then when the supply chains move, where are they going to go? Well, we think they're going to go to India. We think India is the greatest beneficiary of that. They'll go to other places as well. And so those are kind of the macro areas that we try and find. But I'll give you this great data point. In 2005, the SEC made companies fill out what their top risks were of their company. And they do it every year. They do it on their forms. And from there, we can gauge where that is. In 2006 or 2008, we'll say the financial crisis. 26% of companies said the government was their top risk. Most of those companies were healthcare, defense, and to a certain extent, utilities. Right. And that makes sense. Today that number is 52%. 52. We've doubled half of the S&P 500 is saying the government is their top risk. That is amazing to us.

Dominic Chu (19:45)

Right?

Dan Clifton (19:46)

And so now it's broadening out. Now it's in industrials. That's infrastructure bill, Inflation Reduction act, chips act, those types of issues. It's technology companies which have always had the lowest risk. And very interestingly, again, watch this. You know, Trump is going to win dollar higher, yen lower. There's your yen carry trade he's actually exacerbating the yen carry trade. And as you know, that then feeds into technology stocks. And so we had been like long Nasdaq and technology stocks into a Trump victory again, something I never thought I would do. And then finally you got the banks. The banks are the big trade, or were the big trade into the election because it very likely that you're going to have less financial regulation. That's in Basel iii. It means more merger activity. Those are the broad areas that we get asked about. And now the big one, I think that's changed over the last couple couple of days is the Department of Government Efficiency Doge, which is a major topic amongst investors. And is that going to impact the government contractors? I'll give you this point. I mean, people knew that clean energy stocks would get hit on a Republican sweep. That was like not a hard thing to figure out. But the government contractors, the companies that receive the most revenue from government services, have actually done worse than the clean energy stocks here under the anticipation that there will be contracting reforms and spending cuts under a Trump administration. So that's a lot to keep us busy. But it's now across all sectors. And it used to be a lot more narrower this time, you know, years ago. And today it's impacting every sector, every company. And that's why we think every company needs to have some sort of window into how the government is operating and how it can impact their company, because it could meaningfully impact their earnings.

Host (21:44)

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