By Gary Shilling
In terms of political mudslinging, this election, believe it or not, doesn’t equal the 1828 slugfest. Followers of the incumbent, Boston patrician and Harvard-educated John Quincy Adams, said Andrew Jackson’s wife was a “whore” and an “adulteress” while his mother was “a common prostitute.” Not to be outdone, Jacksonian newspapers said Adams had premarital relations with his wife and called him “The Pimp” who procured young girls for Czar Alexander I when he was minister to Russia. But aside from titillating election fun and games this year, what are the portfolio implications of the outcome?
You’d hope that whoever is the next President will rise to the responsibilities of the world’s most powerful office. Still, the baggage of the campaign and, more importantly, the wishes of the voters will propel either Hillary or Trump to win in November and will influence her or his actions as President.
After more than a decade of declining real incomes for all but the top households in Europe and North America, voters are “mad as hell, and not willing to take to it anymore,” in the words of Howard Beale in the old movie, “Network.”
So they’ve rejected mainstream politicians for not delivering purchasing power growth, and turned to the fringes. Voters are intrigued by their wild, illogical and inconsistent accusations and promises to limit immigration and imports that they say have robbed middle-class Westerners of jobs and decent incomes.
In France, the far right and anti-immigration National Front is led by Marine Le Pen, who may be the next President. The recently-elected head of Britain’s Labor Party, Jeremy Corbyn, is way to the left of his predecessors, who looked like Thatcherites by comparison. Spain, Italy and even Germany have meaningful extreme left and right parties. In Austria, the candidates of the two parties that have dominated since World War II didn’t even make it out of the recent run-off for the post of President.
In Canada, leftist Justin Trudeau replaced conservative Stephen Harper as Prime Minister last year. And in America, avowed socialist Bernie Sanders calls for free college tuition, Medicare for all and other massive income transfers that vastly exceed his proposals to tax the rich. He’s given Hillary a tough run and pulled her even further to the left.
Trump is anti-immigration, anti-Muslim and inconsistently anti almost everything else but appeals to those who want to take the country back from the forces that have dominated in recent decades: political correctness, suppression of free speech by far left college students and administrators, a feeling of victimization by minorities, multiculturalism and a government that is so obsessed with human rights that likely terrorists can’t be locked up.
A Trump win would confirm that take-back-America sentiment is dominant, and give him license, as Chief Executive, to pursue vigorous protectionist and anti-immigration policies. The mass killing in Orlando by a Muslim terrorist on June 12 would provide a tremendous tailwind.
Trump’s loose cannon reputation would no doubt be negative for stocks, at least initially. Markets hate uncertainty, which he epitomizes. Commodities would tank in anticipation of trade wars that would curtail imports of raw materials and lead to a possible global recession.
Nevertheless, Treasury bonds and the dollar, the globe’s prime safe-havens, would no doubt rally as foreigners as well as Americans piled in.
Machiavelli wrote, “It’s better to be feared than loved,” and ironically Trump’s plans to build a wall on the Mexican border and bar Muslims along with other outrageous protectionist threats could create widespread fear and drive global investors to these safe-haven refuges. Also, as worldwide retaliation and trade wars unfolded, it’s the U.S.—the net buyer of the globe’s surplus goods and services—that wins.
Congress follows the presidential election returns and would back Trump, especially since his coattails would insure continued, and perhaps enhanced, control by Republicans.
If Clinton wins, stocks might initially rally in relief because it wasn’t Trump, the unpredictable. But then they’ll probably continue the flatness that commenced with the end of Fed QE in late 2014. She would push for more income redistribution and regulation in response to her own instincts and Sanders’ pressure from the left, but would be stymied by gridlock with Congress, assuming it’s still Republican-controlled.
The dollar and Treasurys would still be safe havens, but less so than with Trump. Commodity price weakness would no doubt persist as slow global economic growth continues, the result of working off the massive excess debt accumulated in the 1980s and 1990s.
Until the election is settled, I recommended lots of cash in your portfolio. Still, look for huge fiscal stimuli later, regardless of the election outcome, as the new Congress and President react to the pressure to promote middle-class income growth.
Monetary policy is impotent, and fiscal austerity is history, with the federal deficit down from $1.4 trillion in 2009 to $479 billion in the year through May. Republicans and Democrats can agree on infrastructure sending, and huge outlays for roads, bridges and mass transit are clearly needed. Furthermore, if Republicans control Washington, look for substantial military spending as hawks point to Chinese expansion in the Pacific, the growing Russian Empire in Ukraine and elsewhere and the end of Japan’s post-World War II anti-military mentality as well as nuclear threats from North Korea and Iran.
Gary Shilling is an American financial analyst and commentator who appears on a regular basis in publications such as Forbes magazine, The New York Times and The Wall Street Journal. He is President of A. Gary Shilling & Co., Inc., editor of A. Gary Shilling’s Insight, and member of The Nihon Keizai Shimbun Board of Economists. He is featured frequently on business shows on radio and television, and as a recognised orator, addresses conventions of global business groups like the Young Presidents’ Organization.