12 Nov 2020
6 November 2020 | Jupiter Independent Funds Team
‘It’s outrageous’ protested a young Democrat voter on Radio 4 on Wednesday, ‘that so many people have voted against us!’. That’s democracy for you. As the cliff-hanger US election staggers towards an outcome with Biden as President (pending Trump’s legal challenges), the Democrats retaining the House but with a reduced majority and the Republicans perhaps just retaining the Senate, both sides must be ruing what might have been.
If Trump and his supporters think they were robbed, whingeing about the electoral system is not the answer. But if the result is disappointing for Republicans, it is every bit as bad, worse even, for the Democrats: shooting at what was widely billed as an open goal thanks to Covid, the torching of the US economy and mass unemployment, a blue-wave landslide victory in prospect, their underwhelming performance must be bitter-sweet. Their only consolation, is seeing the back of Trump.
Pollsters and bookmakers are sure to suffer the indignity of yet another post-mortem as to why they got it wrong again. But as we have discussed before, the history of most US elections is that notwithstanding what folk might tell a pollster in public, in the anonymity and privacy of the polling booth roughly half the electorate votes Republican and roughly half votes Democrat. Presidential hopes and fortunes ride on Electoral College maths and whether the candidate is on the right or wrong side of ‘roughly’, often in only a handful of states which make the difference.
As we ponder the possibility of a divided Congress if the Senate remains Republican or is tied when the new administration takes office in January 2021, the more radical areas of Biden’s manifesto would struggle to make much headway, particularly those which are fiscal in nature and require the consent of Congress. Unless he can build political consensus by persuasion, a Republican senate would be an effective block.
The most immediate test is likely to be the resurrection of round 3 of the Covid fiscal stimulus package recently binned by Trump: Democrats wanted a minimum commitment of $2.2 trillion while Republicans refused anything exceeding $1.6 trillion. More broadly, Biden’s failure to deliver on his promise of a significant redistribution of wealth by ‘progressive taxation’ and unwinding Trump’s successful tax reforms, accompanied by giving significantly greater powers to trade unions and allowing free-collective wage bargaining would be sure to have political consequences among left-wing Democrats seeking profound social change. Climate change policy to bring the US in to line with the Paris Climate Accord and to deliver a net-zero carbon economy by 2050 may prove another flashpoint.
With Trump gone, might Biden be pushing on an open door? Or will Republicans dig in and Biden exercise his Presidential Decree and use executive powers ‘in the national interest’ to force through a radical re-shaping of US energy production and consumption and the accompanying federal, state and private infrastructure investment estimated at $6.7 trillion? Will it be tested in the Supreme Court, now with a conservative majority?
In many ways, foreign policy is a much easier place to make progress. Having recognised that Trump mined a rich populist seam with regards to China, particularly among blue-collar workers who would normally be solid Democrat core voters, Biden is likely to be as robust with China, albeit probably in a less corrosive way. While there might be constructive dialogue with Beijing, Democrats are as nervous of the long-term strategic threat posed to the hegemony of America’s super-power status as Trump was. Like it or not, Trump has been instrumental in redefining America and the West’s approach to China. Critical of China’s human rights abuses and its stance on Hong Kong, for Biden there will be no return to the active kow-towing towards the Chinese Communist Party as seen under the Obama administration, despite Biden being Obama’s former Vice President.
Biden has been explicit that in Europe, his priority is the United States’ relationship with the EU over any great desire to nurture the ‘Special Relationship’ with the UK. This heralds a significant reversal on Trump’s policy. Biden is strongly ‘pro’ EU integration and an avowed antagonist of Brexit, his opinions coloured and complicated by his Irish ancestry. He is antipathetic towards the UK and no friend of Boris, a significant challenge the UK government must overcome particularly in pursuit of a UK/US trade deal. But if Biden is serious about a much more constructive approach to NATO, he would be wise to embrace the UK given its acknowledged extensive military and intelligence expertise and experience, certainly compared with every other European member of the bloc with the possible exception of France.
From an investment perspective, equity investors, by nature optimists, are looking for positives. They might be disappointed with the relatively muted fiscal expenditure outlook, but on the other hand the risks posed by reversing tax reform, egregious welfare spending, tighter regulation and greater unionisation are also blunted. As ever, the real barometer of a harder-nosed appreciation of developing sentiment is more likely to be seen on the foreign exchanges and in bond yields. As the perceived risks of a ‘hot’ economy and excess longer-term inflation recede and with the likelihood of interest rates staying lower for longer, US Treasury yields have fallen as fixed income investors lose some of their pre-election apprehension.
Finally, it is worth reflecting on the opening paragraph and the young lady’s indignation at so many Americans not seeing her point of view. It was a very interesting observation made by Richard Neal, a sworn enemy of Trump and a long-time veteran Democrat Congressman and Chairman of the powerful House taxation Ways & Means Committee, in a pre-election Q&A session: he said that however much he wanted to see Trump defeated, the politics of Trumpism are enduring. As he said, the core challenge to the Democrats is to ask themselves why poor, working class folk, those who should be the Democrat Party’s natural core constituency, have deserted in droves to vote for a Republican billionaire property developer with whom they have seemingly nothing whatever in common. One thing is for sure: judging by this election, the Democrats still have not found the answer.
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