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This podcast has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only as defined by local laws and regulations. Please read other important information which can be found on the link at the end of the podcast episode.
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Okay, well, that was some election. Welcome Everybody to the November 6th post election eye on the Market podcast. This one's called Hamilton, which is like Hamilton with a K. And I'll explain why. You know, politics is a full contact sport. We all know that. And when you're running for office, you play the hand that you're dealt. Sometimes it's a good hand, sometimes it's a bad hand, but you play the hand you're dealt and you do so aggressively. And I'll explain why I'm mentioning that in a minute. I'm going to get to all of the obvious issues around the implications of a Trump victory for markets and economics, but I want to do something a little bit different first, just for a couple of minutes. Look at these results. Harris reportedly has underperformed Biden in almost every single county in the United States. Trump came closer to winning New York than Harris came to winning Florida. Trump's currently ahead nationally by about 5 million votes. Think about if the popular vote compact were in place. For whatever reason, states like California would be obligated to give all their electors to to Trump. And Trump even fought Harris to a practical draw in Clark County, Nevada. And for those of you that remember former Senate Majority Leader Harry Reid, you know, it's a highly unionized place and Reed was very popular there. And so this would kind of be like Harris fighting Trump to a draw in Rand Paul or Mitch McConnell's county. So these results were kind of remarkable. And as an investments person and an economics person, I couldn't avoid thinking the following. How would I have played this hand if I were dealt it? Okay, the labor force participation rate's almost at an all time high, so the job markets are really strong. That's a selling point. There has been a significant expansion under the Biden administration of reshoring and FDI related job announcements. After having dipped onto the Trump years, clean energy spending was allocated almost 3/4 to GOP districts, including some of the most important districts in the swing states, North Carolina, Georgia, Michigan, Nevada and Arizona. And the CHiPs act resulted in a surge in manufacturing construction in places like Arizona, in places like Ohio and New Mexico. And you also had the highest year to date returns in the equity market in an election year since 1936. And these equity market returns have contributed to the best solvency measures for corporate defined benefit plans in 20 years. And yet the Biden and Harris teams collectively working on this election weren't able to convert that effectively into turnout at the polls. And so I think there are some tough questions and interesting questions to ask about that. And look, the food and inflation surge was very painful, but by most accounts, analytically, it subsided. And yes, it was the worst food and inflation surge since the late 1970s. A lot of it was brought on by the administration's policies. But as we show in the piece, wage growth has been outstripping rents. So as bad as the inflation surge has been, median workers have been keeping ahead of it. From a wage perspective, growth is steady so far this year. And the reason that's important in this context is the another thing the administration, the Harris team, had going for it was despite all the precedence of yield curve inversions leading to recessions, the Fed was able to raise rates to stem inflation without causing recession for the first time in 60 years. And so I'm kind of struck by this kind of information and how it seems to have such little impact on the voters and the exit polls showing very gloomy perceptions of economic conditions. And, you know, the. There's this quote from the Hamilton musical, who lives, who dies, who tells your story? And I remember during could you go anywhere in the 1990s without seeing Bob Rubin on television or hearing Bob Rubin on the radio or reading about Bob Rubin in print, talking about the successes of the Clinton presidency when Reagan was president? The same goes for Don Regan, who never stopped talking, and James Baker, who didn't talk as much, but was very effective when he did. Same goes for Tim Geithner. Geithner's work on restoring faith and confidence in the banking sector after the financial crisis was. Was kind of a cornerstone of Obama's second run for, you know, run for second term. And the common feature here is just like Alexander Hamilton, who was the first Treasury Secretary, these four treasury secretaries both understood finance, but were excellent communicators and understood that their role was to relentlessly and tirelessly and aggressively sell the achievements of the administration. And so with all of that backdrop, I'm going to ask the uncomfortable question, which is, was Janet Yellen, a former college professor and Fed chairman, the right person at the right time to have in that seat to tell the story, to tell the story of bidenomics, particularly since the president himself was incapable of doing so? And just as an exercise here, and I know this is an exact one, I ran a Google Trends analysis to see what kind of overall recognition slash digital Media footprint slash, impact on society Yellen was having in the months leading up to the election. And it pales in comparison to Steve mnookin before the 2020 election. And most people I know couldn't identify Steve Mnookin a police lineup. Manukan was the former Secretary of Treasury under the Trump administration. So there, there's an issue here of who's telling the story, how good are they at doing it? Because that's what politics is all about. That phone ringing is my wife. She's probably agreeing with this, disagreeing with this line of thinking. So anyway, let's get to the, to the rest of what we have to talk about today, which is the Trump trade, the markets and the prediction odds saw this coming starting in late August, early September, when Trump's odds were improving, you started to see some traditional Trump affiliated sectors doing better, whether that was energy, defense, bitcoin financials and then short positions in treasuries and renewables. As elections go, this was a pretty, it was, it was easier this time around to associate sectors and industries with different candidates because their views were so different. The markets are going up this morning and I understand why the, the first course of business of this new administration might be a focus on deregulation and, and tax cuts. Its inflationary consequences might come later. But let's take a look at that for a minute. Here is the fiscal policies that the, the, that the Trump people talked about and the Trump himself talked about during the campaign. You know, it's a, it's an enormous amount of tax cuts financed primarily with a 10 universal tariff where the amount of money that gets raised from that, nobody knows. And there's a lot of questions procedurally about whether or not the President even has the ability unilaterally to impose that kind of tariff now. He, or whether he'll have the governing margins in, in, in the Congress to implement that legislatively. I think without question, the Trump presidency grows fiscal deficits and brings the kind of day of reckoning forward. And you're starting to see that already in the bond markets, which we'll talk about, there's a pretty clear economic consensus on tariffs. Now the economists, and I'm not one, right, but the economists at Chicago and at mit, at the IMF and at the trade association, wherever they are, they may be wrong. But the universal perspective here is that these things are negative for, for inflation, growth and employment in the long run, particularly universal tariff. You know, we'll see. But as I mentioned, the markets saw some of this coming in advance. This Next chart shows the how that as the Trump odds on the left axis were picking up, you started to see kind of a lockstep pickup in the 10 year treasury rate. And before that when Trump odds were declining, you saw a decline in the ten year Treasury. So over the last three, four months, the ten year has been trading kind of as a bellwether on a Trump presidency. And remember long rates and this is one of the more important charts and concepts and I think people should talk about right now. Long rates have already been behaving quite differently from other Fed cut periods. Normally when the Fed starts easing, you they'll see a rally in the long rate or you'll see a modest little blip up of 10 or 20 basis points until the Fed really is committed to easing. And then it comes down. The tenure has been rising kind of in a straight line almost ever since the first Fed cut. And so now that's not all Trump. Some of that is the fact that inflation expectations embedded in the TIPS markets have risen again and are at the high end of the range that they've been at over the last couple of years. So you know, that's, that's, that's part of it. But when you take the rising inflation expectations and you combine them with the potential issues of, of deportations and tariffs, you know, you kind of potentially put the Fed on their back feet. The markets are currently pricing in a, let's call it 3 and a half percent funds rate by the middle of next year. Are the economists at J.P. morgan's investment banks still think that's plausible? I think we have to take quite a very deep look here at the market consequences of some of the Trump policies if they happen. And because remember, the Fed didn't start easing until it was clear that you were starting to get some relief on wage growth which was beginning to spiral upward. And the lowest quartile of wages in particular. The Fed didn't really start talking about easing until those started to roll over. And by the way, they're still growing at 5% a year. So if you, if you get a U turn in the lowest quartile of wages and wage growth are picking up there because of deportations, shrinking the labor market, I think that puts the Fed in a tough spot. And you know, the country needs immigrants. The problem is, is it doesn't need them on a lawless basis. It doesn't need them on a chaotic basis and it doesn't need them in, in a way that causes huge financial distress for cities. But of the charts in the eye in the market that we released today looks at New York City. And just like the federal government, New York City has the mayor and the mayor puts out there his financials through the Office of Management and Budget. And then there's an independent controller that looks at those numbers. While the independent controller last year when they looked at the New York City figures said you're, you're underestimating asylum, asylum expenses by like $10 billion. It was the single biggest discrepancy in the comptroller's entire report. And you're starting to see some of the, some of the similar size numbers show up at the state level, too. So I think a lot of, when I, when I read a lot about, about these immigration issues, Democrats tend to focus on things like immigrant contributions to growth and, and, but are ignoring some of the surge immigration implications on asylum expenditures in cities that are still trying to recover from COVID anyway. So that's the, that's the real dynamic right now. That's important, I think, to look at which is the supply side benefit of a deregulatory agenda by, by the Trump administration against its inflationary impulses related to the labor markets and related to tariff policy and related to overall deficit policy, where you'd get, where you get higher debt and higher deficits. Now, there are some constraints on a Trump agenda that we should keep in mind. The governing margins in the House might be single digits. We don't know yet. My guess is that they'll be single digit governing margins in favor of, of either party. The filibuster still in place, by the way, for all those Democrats that were recommending that Biden blow up the filibuster in favor of some policy. Think of how you'd feel about that right now with Trump controlling that decision. And then you've also remember, this is the ironic part. The Trump dominated Supreme Court passed a lot of legislation, made a lot of legislative rulings over the summer that essentially constrain executive rule in favor of requiring clear congressional legislation. So and that, that was the kind of Chevron deference and the other rulings that we wrote about in July. So ironically, the Trump administration will come in here and have less ability to do cabinet level rulemaking than either Obama or, or Trump himself did in 2016. And just to, to wrap up, you know, we have a country where half the people are ecstatic at the result and roughly half the people are going to be despondent. Regardless of your politics, people should generally try to keep them, their partisanship away from their portfolios There's a lot of examples of how that tends to happen in a negative way. During COVID This was a great paper. During COVID 19 University of Chicago looked at partisan mutual fund teams, whether they were partisan Democrat, partisan Republican. They both underperformed the nonpartisan mutual fund teams because the nonpartisan teams were able to look dispassionately at the opportunities and didn't politicize everything. Same for individuals. Individuals tend to be a lot more optimistic and take more risk in their portfolios when their preferred political parties in power. So of course that means that sometimes they leave a lot of money on the table when their pervert party is not in power, irrespective of market economic conditions. And investors aren't the only ones to do that, right? Stock analysts are more optimistic when their preferred party is in power. And the same goes for bankers and credit analysts who are more optimistic when their party wins the presidency. So anyway, I think the lessons that we've learned as investors over many years is to is to make sure and keep some the partisans. I'm going to give up on that word, but keep it away from your portfolio. One last comment that I want to make given the incoming administration and we'll have a lot more to say about markets investments in economics in the weeks ahead. Specifically, we're going to have to take a very close look at the procedural issues associated with universal tariffs. Vaccines are among the greatest achievements in biomedical science. I don't think there's any question about that. We have a table in the Eye on the market this week. We had the same table earlier this year that shows by the eight or nine of the most important vaccines what the annual case and death rates were before the vaccines were introduced and then how they kind of plummeted or basically disappeared once the vaccines were introduced. I just think it's important to keep that in mind if someone like Robert Kennedy Jr. Is going to be anywhere near public policy and public health the way that the Trump administration during the campaign suggested he might be. I don't know whether they're going to put him up for cabinet position or he would simply be a non, a non, non Senate confirmed senior advisor. But vaccines are among the greatest achievements in biomedical science and people just need to keep that in mind. And I, I put a bibliography together if you want to really learn more about Robert Kennedy Jr. What he's done and what his views are. I, I have a bunch of links in the Eye on the Market that you can access and I for one am very concerned about his impact on scientific discovery and scientific method in this incoming administration. So excuse me while I retire to my undisclosed location. Thanks very much for listening to this first cut on the election outcome. Again, this is a this is a pretty clear cut mandate for the GOP and we're going to be taking a close look at both the supply side and inflationary consequences in the weeks ahead. Thanks for listening.
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Michael Semblist's Eye on the Market offers a unique perspective on the economy, current events, markets and investment portfolios and is a production of JP Morgan Asset and Wealth Management. Michael Semblist is the Chairman of Market and investment strategy for J.P. morgan Asset Management and is one of our most renowned and provocative speakers. Michael for more information, please subscribe to the Eye on the Market by contacting your JP Morgan representative. If you would like to hear more, please explore episodes on itunes or on our website. This podcast is intended for informational purposes only and is a communication on behalf of JP Morgan Institutional Investments, Inc. Views may not be suitable for all investors and are not intended as personal investment advice or a solicitation or recommendation. Outlooks and past performance are never guarantees of future results. This is not investment research. Please read other important information which can be found at www.jpmorgan.com disclaimer EOTM.