Good morning, everybody. This is Michael Cembalest with the October 20, 24, Eye on the Market podcast. Two topics. This time it was just going to be on the presidential election. And then last week when I was in London, this China stimulus package got announced. I think it's kind of a big deal, at least in the context of recent history in China.
So I want to spend some time on that at the end, because I do think it's a bit of a turning point for China itself. But first, the election. And obviously we're going to do what we always do every four years, which is to compare the candidate on policies that are of interest to investors. But I wanted to start with something a little bit different this time.
There's a group called Starts With US, or then they're also called builders and, and they focus on polarization issues. And they sent me a video that they're allowing me to play, which I want to play for you. So this is a video of debates between Romney and Obama, and Bush and Gore. Just take a listen. It's less than a minute.
Congratulations to you, Mr. President. On your anniversary. I'm sure this was the most dramatic place you could imagine if you're here with me. So I I'm going to continue defend my record and defend about the propositions against what I think are exaggerations. I got some of the details wrong last week and some of the examples that I used, and I'm sorry about that and are going to try to do better Now, Governor Romney and I both agree that our corporate tax rate is too high, so I want to lower.
Let's come back to something the President agree on, which is the key task we have in healthcare, is to get the cost down. So those were debates from before 2016. Has anybody heard any kind of presidential debate that sounded anything like that since 2016? I haven't. And, and that's a real disappointment. And you know, we all know why that's taking place.
This election is shaping up to be the most polarized in at least the last hundred years. And I'm saying that because we update this chart every time there's a presidential election, and it ranks administrations and candidates according to their ideology, and this comes from voting records in Congress, they go the, the vote for you data actually goes back to the, I think, the first Congress in 1787.
And this has been used for 40 years or so since the early eighties, this kind of spatial estimation approach to, to look at a clusters of politicians according to their voting and policy preferences. And you can see here the pendulum swinging back and forth, and so again, I thought that, you know, Biden and Trump were the, Trump 2016 were the ideological extremes.
They're being outdone this time around. Harris, you can see all the way on the upper left since World War Two. Harris is the sixth most liberal slash progressive candidate, and outdone only by Warren, Sanders and a couple of people that are retired. And for Trump, 2024, since Trump has no voting history, we can proxy it by looking at his primary supporters in the House and the Senate, and I've listed some of them there, and he'll be familiar with some of those names.
And Vance himself is the sixth most conservative senator since World War Two. So a parallel between Vance and Harris as being the sixth most liberal and conservative senators since World War Two. And you can see here that this pendulum is going to swing in, in an unprecedented direction no matter who wins this election. So keep this all in mind as we walk through the policy differences that we're about to take a look at.
I've shown this chart before. I do want to show it again, because I think it's relevant. These are all of the senior Cabinet members and other senior positions that worked for Trump in his first administration. And I thought it was notable that there are, there are now as many that have repudiated his candidacy as there are people that are endorsing and supporting his candidate explicitly.
And then there's a smaller group of people that have had no public comment. So, again, this is, this is updated for the latest statements from Barr and Haley, who shifted from disavowing him to now endorsing him. And there's an even match between his endorsements and repudiation amongst people that worked for him in his first administration. So let's, let's get started with fiscal policy, because in some ways that's the most important thing in terms of spending and revenues.
And Harris's proposal is clearly the more, quote unquote, responsible of the two. I can imagine Paul Ryan having heart failure when he looks at the Trump fiscal proposals compared to Harris. And the Harris proposals are kind of a standard redistributionist approach where you've got $1.3 trillion of taxes on the wealthy, $2.8 trillion of taxes on corporations over the 10-year budget window.
Both of those used to extend the tax cuts for people with less than $400,000, and adjusted gross income and a variety of entitlements for families and homebuyers, and if you take all of this at face value, it would expand the, it would have about a $1 trillion net negative impact on the deficit compared to the CBO baseline. And now I don't think you're supposed to take this at face value, that there's a likelihood of a divided government and narrow margins, and neither candidate's proposals will probably be passed as initially articulated.
But it is, it's an indication of, of where we're heading based on each candidate, depending on who wins. So again, keep that trillion dollar number in mind, which is the net -$1 trillion impact on the deficit, because the Trump version is going to be a lot bigger than that. I do want to comment, though, the largest component of the tariffs of the, of the Harris fiscal plan is an increase in corporate tax rates, and a whole bunch of other kind of broadening the tax base and things.
As I mentioned in the higher you got higher corporate tax rates, higher buy back taxes, and it taxes global minimum taxes under tax profits rule. I mean, they're taking several cuts at this, and one thing that's interesting is you heard in that debate, both Romney and Obama agreed that corporate tax rates too high. One of the reasons they both agreed that with that position, was U.S. companies kept inverting out of the United States, which means they were re domicile for tax purposes because OK'd corporate tax rates other than in the U.S. were dropping for 20 years constant in the U.S., and so companies just kept re domicile outside of the United States.
No companies were seen re domicile or inverting into the United States, which was the kind of simplest proof that corporate tax rates from a competitive perspective were too high. So the TCJA gets passed in 2017 and inversions for tax purposes essentially ceased with. If all of the Harris corporate tax proposals get implemented, the U.S. is going to end up at the top of the scale again relative to the major OECD countries.
And you could see those inversions start up, and you could also see corporate taxes as a share of GDP rise to their highest level since the early 1980s. But again, that's, that is, that's a, that's not a bug, that's a feature. And the idea here is to finance entitlement growth and lower- and middle-class tax cuts with taxes on corporations and high-net-worth people.
Now, it's been hard to come to, to accurately assess the Trump fiscal policy because it changes every time he gives a speech in a new city. But this is the best that we understand it right now. The impact on the deficit would be three to four times worse than Harris. He's got some revenues from a 10% universal tariff.
I'll come back to that and from repealing some of the clean energy subsidies. But boy, there are some monstrous tax cuts here. I think the right question to ask is what tack, what taxes is Trump proposing not cutting? So he wants to extend all the individual tax cuts, extend all the business tax cuts, eliminate taxation of Social Security benefits, repeal the Salt cap, which has to do with the deductibility of state and local taxes on federal returns, and, and cutting the corporate income tax further.
You know, these, this costs lots of money at a time that the government has high levels of debt and deficits. And you know, there have been some estimates that this would raise that, the universal tariff would raise around $2 trillion. That's a very fudgy number. Really fudgy. In order to do that, you have to, a lot to make all sorts of assumptions on elasticities of imports to tariff levels.
In other words, if the tariffs are higher, how much do imports go down? You have to estimate the share of the burden to importers and exporters. You had a lot of these estimates usually exclude retaliation impacts. They exclude subsidies for U.S. firms that are harmed by the tariffs, which, remember the Trump. They had a do last time when the farmers were getting hurt.
So I have the least amount of conviction, I have all the numbers I've just cited is the $2 trillion revenue benefit on the budget from the 10% universal tariff. And I think this is one of the reasons why Jason Furman in The Wall Street Journal, now the Journal now, this is not the Times. The Journal allowed Jason Furman to publish Top Hat and the title was Harris is the say for economic choice.
Both candidates have bad ideas, but Trump's are worse. Okay, there you go. Now, it's hard for me to get too excited about either one of these fiscal plans because they both would make the deficit and debt situation worse, and both of them will bring forward this day of reckoning that we're showing here in the in the chart. The only difference is the degree.
And the chart is the, is in the early 2030s, the U.S. is projected to see an interest on the debt, plus entitlements exceed federal revenues for the first time on a, on a structural basis, not just a technical one. So this day of reckoning will occur even sooner based on either candidate. Just, you know, really much sooner if the Trump thing got implemented as, as imagined. Then again, I don't think it will give in tight margins in Congress and the likelihood of split government.
Now, tariffs, you all know the story. Trump wants a 10% universal tariff, 60% tariff on China. One of the things. Notice how the Repub, the Democrats haven't really fought Trump on the tariffs, even at the peak. How about this? Even at the peak of inflation in the United States when there was a lot of pressure on the Biden administration to bring inflation down, they never proposed repealing the Trump tariffs.
That shows how strongly and how much universal consensus there is in Washington right now. You know, to be positioned against China from a tariff perspective, China is the most mercantile country in the world, right? I mean, that's been clear for years. There's a mercantile mercantilism index that gets computed by big think tanks, and they look at forced local production and exchange for market access, export subsidies, theft of intellectual property, favoritism of domestic companies, manipulation of exchange rates.
And you know, China's off the board, the most mercantile country in the world. And you know, after China joined the WTO 20 years ago, U.S. manufacturing job losses accelerated, labor income shares declined, opioid addiction rates rose. So I get it. I understand the country is now willing apparently to pay a price for, for rolling back the globalization pendulum.
But now energy, you know, Biden, Biden, sometimes unfairly gets tagged as an anti-energy president. To be clear, production of natural gas liquids, natural gas and crude oil has hit a new high under the Biden administration. They didn't necessarily take a plug to it. I think what people miss there is a couple of things they did on the margin.
They slowed down permitting of drilling on federal land and things like that. But it's, I think, it's difficult to position the Biden administration and Harris, by extension, as being violently opposed to the, to oil and gas. And, and, you know, I don't even think that export ban on LNG for certain projects is going to stick. What they have done is instead of a stick approach to oil and gas. They've used a carrot approach to renewables.
And the cost of that could be, you know, anywhere from $1 to $3 trillion by the end of the decade. And we don't even have a good read on those numbers yet. And you can start to add those are because of subsidies and incentives for renewable power, carbon capture, bring in hydrogen battery storage, EVs, you name it. As you can see here, this is an issue.
Electricity prices in the United States are starting to pick up these, that $1 to $3 trillion cost, and they're rising most sharply in California, but also New York, also in Pennsylvania and also in Texas relative to places where production gets outsourced to like China and India. And as a progress marker, the renewable share of final energy consumption is now 8%, up from four in 2010.
But this is a long journey. If we're still at less than 10% renewables as a share of final energy consumption, and we're early in that journey, and over the last four years or so, of all the 47 categories in the U.S. report, the highest amount of inflation, transformers and power regulators. So this electrification journey that we're going to go on is going to be kind of expensive.
Now last thing on energy. Harris appears to have changed her position on hydraulic fracturing, and I can understand why it still represented 61% of all primary energy consumption in 2023. In other words, if you look just at oil and gas and Engels from unconventional hydraulic fracturing sources, it was about 60% of total energy consumption in the United States.
So it's a little bit too soon to ban fracking, if that's the case. You know, it is the position she's obviously come to. Plus, Pennsylvania is an important swing state, and a lot of those counties, you know, Obama and then Biden won by very narrow margins that have a lot of oil and gas. So immigration, I once in a while, I always like to use a quote that's dripping with historical irony.
And here's one for, you know, great nations can be in a position where they can't control their own borders. Senator Joe Biden, 28, who then proceeded to become President and oversee the largest migrant surge that ever has occurred. So this, this next chart we're showing here is a proxy for undocumented border crossings. They were averaging somewhere between 500,000 to one million a year, and then surge to over three million in 2023.
Immigration for investors is a complicated topic because it increases the labor supply, puts less pressure on the Fed for investors. Those are good things. It puts less pressure on the Fed to tighten policy rates, and it also increases the workforce at a time of very low organic U.S. birth rates. The problem is unmanaged immigration, and the surging migrant flows also put a lot of budgetary pressures on U.S. cities.
S&P just came out with a very scary report on Denver and Chicago and New York, and some of the other cities where the migrant flows have shown up, and explaining how it's resulting in billions of dollars of offsetting budget cuts. So you know, immigration is kind of a two-edged sword. When it's well managed, it tilts more towards the positive.
And when it's poorly managed, it tilts more towards the negative. And just to put some numbers on it, the CBO, right, which is a kind of bipartisan, not a player in all the polarized debates, the CBO estimates that the Biden administration released an extra 2.3 million undocumented immigrants in the U.S. in 2023, and that doesn't include another 800,000 people that came in that they were detected crossing the border, but they weren't apprehended.
So Harris is reportedly moving to the right on immigration. But to be clear, I don't think there was room for her to move any further left in 2019 when she was running for president, she proposed decriminalizing to a civil offense on lawful border crossings. So we'll see. Obviously, there's a huge difference between the candidates on immigration, inflation and price controls.
There's been obviously a surge and in the percentage of families who see inflation as the most important family financial problem, and we're actually starting to see a lot of pressure on the consumer, whether it's rising default rates on subprime auto, rising credit card default rates, a lot lower intentions of certain major goods purchases. And so Harris has responded with some kind of price gouging, price control mechanism that she hasn't explained.
My favorite article on it was Josh Barro, who some of you may remember as a very progressive reporter that used to write for The Village Voice. He wrote an article in The Atlantic, then the title of the article was “Harris's Plan is Economically Dumb But Politically Smart.” The Vice President's campaign promises make no sense to people acquainted with supply and demand, but they might win elections.
I think he did a better job than I could in explaining what to think about it in terms of narrow some of Trump's comments on, you know, Russia can do whatever it wants with countries that don't fulfill their obligations are among the more terrifying statements that I've heard from a president or former president in my lifetime. That said, you know, if, if you just dispassionately look at the numbers, NATO's, except the United States, NATO was so far below the 2% spending agreement that in 2006 they explicitly codified that 2% spending agreement in 2006.
And it took 18 years from then until now for NATO to finally reach the 2% target. And if you add up all the unpaid amounts at zero interest, if you add up all the unpaid amounts from NATO countries, since then, it's about one-and-a-half trillion. So I do understand some of the citizenry in the United States being a little bit frustrated with the NATO's indirect burden on them in terms of the regulatory state.
The charge are going to look like the way you would think they would. Look, the Biden administration can set a new record, at least as long as the data exists from the early 80s in terms of the number of economically significant rules passed during each presidency. And, and the same goes for another regulatory barometer, which is the number of pages of regulation in the Federal Register, which fell under Reagan, fell under Trump, and then it kind of went back up under Biden.
And so here we're using Harris and Biden as a proxy for Harris, which I think is fair. What's interesting about the regulatory state issue, though, is irrespective of who wins, there were four big decisions at the Supreme Court next year, which could, which would really represent among the biggest rollbacks in the regulatory state that we've had since the 1980s.
And just to quickly tick through them, it was the end of Chevron deference, which means no more out of automatic deference to government agencies by the courts. When there's a dispute about interpreting federal legislation, there's, there was the expansion of the Major Questions Doctrine, which means that any agency action that has, quote unquote, vast economic and political significance has to require clear congressional authorization.
And you can't just rely on the agencies to do, to kind of figure it out. The statute of limitations for challenging federal regulations now starts at the time of injury. What does that mean? It used to be, let's say, six years or something from the time that a bill was passed. So if a bill was passed 10 years ago, you couldn't challenge it.
It's now six years since it started impacting you. So if the bill was passed 10 years ago, but you just launched your company last year, you can challenge it. So these are the kind of things that have been changing in the Supreme Court that I think are going to shift the pendulum on regulation, irrespective of who wins. I wanted to.
So that's, that's the end of the kind of political discussion. Just to sum up, it is a very polarized election. And you know, the most likely outcome is some kind of split government, which tends to have the least amount of negative implications for investors. But if there is a GOP sweep or a Democratic sweep, I think you could see more profit taking and, and more caution in the market while people wait to see where the dust settles and what the policy outcomes might be, particularly given that, that Harris has mentioned eliminating the filibuster for Roe v. Wade.
And then the question is, how do you prevent the filibuster from being used on other topics once you open that Pandora's box? So that's enough about the election. Stay with me just for a couple more minutes because I want to talk about this China stimulus package that was announced. I'm just, I'm usually wary about stimulus packages. Countries sometimes engage in reforms and stimulus packages to, to draw in foreign capital, and only to then destroy it again. Argentina's done that seven times since 1826 when they became independent.
China did it at the end of the 1990s. And I remember there was this reform movement. A lot of capital came in, and then the largest government bank, get it at the time, went bankrupt. And then a couple of years ago, MSCI raised China's weight in the index to 40% in the Emerging Market Equity Index. And then right after that happened, China engaged in a whole bunch of anti-market policies that ended up destroying a lot of investor money.
So understanding that history, let me just say why I'm positive on the stimulus package. And I think it is a bit of a turning point. Our sources in China are telling us that government officials are now a little bit more receptive to domestic and foreign investors, saying, look, you've got to do something. We're starting to see more parallels with Japan in 1990, and we all know how I ended up.
And, and the economic data are showing little sign of getting better. So it's possible, particularly after the bad August data, that, that China's been listening to these people in terms of why China acted. Now that's not a hard one to figure out. I've got some charts in the, in the piece this week. The money supply growth is cratering.
FDI investment is fleeing China like there's a plague there. The PMIs are slowing. The residential floor space starts, which is an important metric for China on housing has dropped to the level that it last was in 2008. There's an activity monitor we look at that looks at real-time data on coal, electricity, steel production, motor vehicle sales, telecom equipment production, things like that.
That has rolled over completely this year. Commercial residential property prices are still falling. Consumer confidence is terrible. China equities have been at a disaster zone compared to not just the U.S., but also Japan and the rest of the emerging markets. So it's, I don't think it's difficult to understand why the pressure was building on China to do something.
We have a description in the piece of all the different monetary and fiscal measures that they announced to support the economy and markets. One of the ones I found interesting was a loan guarantee program to allow state-owned enterprises to buy vacant homes to convert to social housing. So it's got a lot of words in it. But basically it's the equivalent of having the FHA in the United States buy vacant homes to clear the excess supply and convert them into subsidized housing.
So I thought that was a positive thing. The market reaction has been a pretty big knee jerk, 10 to 15% or even 20% increase in Chinese equities since the package was announced. It put most China equity categories and firmly positive territory for the year. And what's interesting is from a valuation perspective, the jump is fairly minor. So that shows you just how beaten up China was.
And here we look at both the A-shares and a broader basket of Chinese equities. The PE multiple have gone up by, let's say two, but they're down by 10. So I still think there's room for, if these, if these stimulus measures get enacted and if they get followed up with fiscal stimulus, I think there's room for Chinese assets to perform well here.
The big question we get from investors, which I think is a fair one, is, is China a trade or is it a portfolio investment? Over the last 14, 15 years, China has been a trade, because when you look at nominal GDP growth, it does not track whether it's high or low. It doesn't translate into earnings or equity market gains for investors.
And in the United States and in Europe and in other countries that are worth investing in, earnings and equities grow faster than nominal GDP. In China, they've grown slower. So, and that requires a more structural change. And I'm not there yet. So for me, this is a trade. It's an interesting one, but it's still a trade. So thank you all very much for listening, and great to see and hear from everybody that I saw in London last week.
And we will talk to you again soon, possibly before the election if anything happens. So bye.
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Title card: JP Morgan, Eye on the market. JP Morgan. October 2024, Mind the Gap. Image: a large fissure cuts through the central part of North America and divides the landscape dramatically. Video feed on the right. The speaker Michael Cembalest has short hair glasses and a dark shirt. He addresses us from a virtual backdrop which shows a room with a decorated bookcase and a window overlooking a city.
(SPEECH)
Good morning, everybody. This is Michael Cembalest with the October 2024 Eye on the Market Podcast. Two topics this time. It was just going to be on the presidential election. And then last week when I was in London, this China stimulus package got announced. I think it's kind of a big deal, at least in the context of recent history in China. So I want to spend some time on that at the end because I do think it's a bit of a turning point for China itself.
But first, the election. And obviously we're going to do what we always do every four years, which is to compare the candidate on policies that are of interest to investors. But I wanted to start with something a little bit different this time. There's a group called Starts With Us, and they're also called Builders, and they focus on polarization issues. And they sent me a video that they're allowing me to play. Which I want to play for you.
So this is a video of debates between Romney and Obama, and Bush and Gore. Just take a listen. It's less than a minute.
And congratulations to you, Mr. President, on your anniversary. I'm sure this was the most romantic place you could imagine here with me. So I--
I'm going to continue to defend my record, and defend my propositions against what I think are exaggerations.
I got some of the details wrong last week in some of the examples that I used, Jim. And I'm sorry about that. And I'm going to try to do better.
Now, governor Romney and I both agree that our corporate tax rate is too high, so I want to lower it.
Let's come back to something the president I agree on, which is the key task we have in health care, is to get the cost down.
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Text: insults aren't just insults. The more we chip away at civility, the closer we get to lawlessness and anarchy. Polarized speech has real repercussions. #bringbackcivildebate
(SPEECH)
So those were debates from before 2016. Has anybody heard any kind of presidential debate that sounded anything like that since 2016? I haven't. And that's a real disappointment. And we all know why that's taking place.
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Text: Polarization. Graph: A scatter plot chart with a horizontal axis representing political ideology from most liberal to most conservative. It features dots connected by lines to show the positioning of U.S. Presidents, 2024 candidates, and key politicians over time, with recent figures like Biden and Trump positioned at opposite ends of the spectrum. The graph emphasizes the growing ideological divide, with liberal figures on the left and conservative figures on the right.
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This election is shaping up to be the most polarized in at least the last 100 years. And I'm saying that because we update this chart every time there's a presidential election, and it ranks administrations and candidates according to their ideology.
And this comes from voting records in congress. The vote view data actually goes back to the, I think, the first congress in 1787. And this has been used for 40 years or so, since the early 80s. This kind of spatial estimation approach to look at clusters of politicians according to their voting and policy preferences. And you can see here the pendulum swinging back and forth. And so, again, I thought that, you know, Biden and Trump were the, Trump 2016 were the ideological extremes. They're being outdone this time around. Harris, you can see all the way on the upper left.
Since World War Two, Harris is the sixth most liberal/progressive candidate. And outdone only by Warren Sanders, and a couple of people that are retired. And for Trump 2024. Since Trump has no voting history, we can proxy it by looking at his primary supporters in the house and the senate, and I've listed some of them there. And you'll be familiar with some of those names. And Vance himself is the sixth most conservative senator since World War II. So a parallel between Vance and Harris as being the sixth most liberal and conservative senators since World War Two. And you can see here that this pendulum is going to swing in an unprecedented direction, no matter who wins this election.
So keep this all in mind as we walk through the policy differences that we're about to take a look at.
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Text: Trump endorsements and disavowals. Graph: A bar chart that displays the positions of former Trump Cabinet members and other senior officials regarding Trump's 2024 candidacy. It categorizes individuals into three groups: those who have repudiated or disavowed Trump (in red), those endorsing Trump (in green), and those who have made no public comment (in yellow). The visual highlights that a notable number of former officials have disavowed Trump, while a smaller group has publicly endorsed him.
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I've shown this chart before. I do want to show it again because I think it's relevant. These are all of the senior cabinet members and other senior positions that worked for Trump in his first administration. And I thought it was notable that there are there are now as many that have repudiated his candidacy as there are people that are endorsing and supporting his candidate explicitly. And then there's a smaller group of people that have had no public comment.
So, again, this is updated for the latest statements from Barr and Haley, who shifted from disavowing him to now endorsing him. And there's an even match between his endorsements and repudiations amongst people that work for him in his first administration. So let's get started with fiscal policy, because in some ways, that's the most important thing in terms of spending and revenues.
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Text: Fiscal Policy. Graph: A stacked bar chart illustrates the 10-year budget deficit impact of proposed fiscal policies by Harris, categorized by various measures such as corporate tax hikes, taxes on the wealthy, and spending on areas like childcare and healthcare. The chart shows positive revenue effects from tax hikes (in blue) and negative deficit impacts from spending on items like tax cuts and social programs (in gold and red), with an overall net deficit effect (in red). The largest deficit increase comes from tax cuts, while the largest revenue gain is from corporate tax hikes.
(SPEECH)
And Harris's proposal is clearly the more, quote unquote, responsible of the two. I can imagine Paul Ryan having heart failure when he looks at the Trump fiscal proposals compared to Harris.
And the Harris proposals are kind of a standard redistributionist approach, where you've got 1.3 trillion of taxes on the wealthy, 2.8 trillion of taxes on corporations over the 10 year budget window. Both of those used to extend the tax cuts for people with less than 400,000 in adjusted gross income, and a variety of entitlements for families and homebuyers. And if you take all of this at face value, it would expand, it would have about a 1 trillion net negative impact on the deficit compared to the CBO baseline. And now I don't think you're supposed to take this at face value that there's a likelihood of a divided government and narrow margins, and neither candidates proposals will probably be passed as initially articulated.
But it's an indication of where we're heading, based on each candidate, depending on who wins. So, again, keep that trillion dollar number in mind, which is the net -$1 trillion impact on the deficit, because the Trump version is going to be a lot bigger than that.
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Text: Fiscal Policy. Graph: A line and bar chart that compares U.S. corporate tax rates with OECD ex-U.S. tax rates from 1981 to 2015, alongside the number of U.S. corporate inversions (shown in blue bars). The U.S. corporate tax rate (in red) remains higher than the OECD average (in yellow), while the number of inversions—when companies relocate their headquarters overseas to avoid taxes—increases notably from the early 2000s as the gap between U.S. and OECD tax rates widens.
(SPEECH)
I do want to comment though. The largest component of the tariffs-- of the of the Harris fiscal plan is an increase in corporate tax rates, and a whole bunch of other kind of broadening the tax base, and things. As I mentioned, you've got higher corporate tax rates, higher buy back taxes, NIT taxes, global minimum taxes, under tax profits rule. I mean, they they're taking several cuts at this.
And one thing that's interesting is you heard in that debate, both Romney and Obama agreed that corporate tax rates is too high. One of the reasons they both agreed that, with that position, was, US companies kept inverting out of the United States, which means they were redomiciling for tax purposes because OECD corporate tax rates, other than in the US, were dropping for 20 years. Constant in the US. And so companies just kept redomiciling outside the United States. No companies were seen redomiciling or inverting into the United States, which was the kind of simplest proof that corporate tax rates from a competitive perspective were too high.
So the TCJA gets passed in 2017, and inversions for tax purposes essentially cease.
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Text: Fiscal Policy. Graph: A bar chart that compares the effective corporate tax rates on new investments across various countries, with Japan and Italy having the highest rates. The U.S. (under proposed Harris 2025 and 2028 tax plans) is projected to have higher rates than its current rate, placing it above countries like Germany and France, but below Japan and Italy. Lower corporate tax rates are seen in countries like Switzerland and Singapore.
(SPEECH)
If all of the Harris corporate tax proposals get implemented, the US is going to end up at the top of the scale again relative to the major OECD countries. And you could see those inversions start up, and you could also see corporate taxes as a share of GDP rise to their highest level since the early 1980s. But
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Text: Fiscal Policy. Graph: A line chart shows the U.S. corporate income tax as a share of GDP from 1980 to 2030, with historical data in blue and projections under Harris policies in gold. The historical line fluctuates around 1.5% of GDP, peaking near 2.5% in the early 2000s, while the projected line under Harris policies remains relatively stable at around 1.5% of GDP through 2030.
(SPEECH)
again, that's not a bug, that's a feature. And the idea here is to finance entitlement growth and lower and middle class tax cuts with taxes on corporations, and high net worth people.
Now,
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Text: Fiscal Policy, Trump deficit impact could be three times to four times worse. Graph: A stacked bar chart shows the 10-year budget deficit impact of Trump's proposed policies, with the largest deficit increases coming from tax cuts (e.g., lower corporate income tax, extending individual tax cuts) and the repeal of social security benefit taxes. Revenue increases from tariffs (e.g., a universal 10% tariff and 60% China tariff) are shown in blue, but they are relatively small compared to the significant deficit increases, which lead to a large net deficit (in red) of over $4 trillion.
(SPEECH)
it's been hard to come to accurately assess the Trump fiscal policy because it changes every time he gives a speech in a new city. But this is the best that we understand it right now. The impact on the deficit would be three to four times worse than Harris. He's got some revenues from a 10% universal tariff. I'll come back to that. And from repealing some of the clean energy subsidies. But, boy, there are some monstrous tax cuts here.
I think the right question to ask is, what taxes is Trump proposing not cutting? So he wants to extend all the individual tax cuts, extend all the business tax cuts, eliminate taxation of social security benefits, repeal the salt cap, which has to do with the deductibility of state and local taxes on federal returns, and cutting the corporate tax further. You know, these this costs lots of money at a time that the government has high levels of debt and deficits. And you know, there have been some estimates that this would raise, that the universal tariff would raise around $2 trillion. That's a very fudgy number, really fudgy.
In order to do that, you have to a lot to make all sorts of assumptions on elasticities of imports to tariff levels. In other words, if the tariffs are higher, how much to imports go down? You have to estimate the share of the burden to importers and exporters. You have a lot of these estimates usually exclude retaliation impacts. They exclude subsidies for US firms that are harmed by the tariffs, which remember Trump they had to do last time when the farmers were getting hurt. So the least amount of conviction I have of all the numbers I've just cited is the $2 trillion revenue benefit on the budget from the 10% universal tariff.
And I think this is one of the reasons why Jason Furman in the Wall Street journal, the Journal, now, this is not the Times, the Journal allowed Jason Furman to publish an op-ed, and the title was Harris is the safer economic choice. Both candidates have bad ideas, but Trump's are worse. OK, there you go.
Now,
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Fiscal policy: Both candidates will likely bring forward the day of reckoning, the only difference is the degree. Graph: A line chart compares entitlement spending, mandatory outlays, and net interest payments (in red) with government revenues (in blue) as a percentage of GDP from 1965 to projected data in 2035. The red line that shows spending rises sharply around 2020 and is projected to exceed revenues by a growing margin, which indicates a significant budgetary shortfall. The chart highlights the widening gap between spending and revenues over time.
(SPEECH)
it's hard for me to get too excited about either one of these fiscal plans because they both would make the deficit and debt situation worse. And both of them will bring forward this day of reckoning that we're showing here in the chart. The only difference is the degree. And the chart is, in the early 2030, the US is projected to see in interest on the debt, plus entitlements exceed federal revenues for the first time on a structural basis, not just a cyclical one. So this day of reckoning will occur even sooner based on either candidate just, you know, really much sooner if the Trump thing got implemented as imagined.
And again, I don't think it will, given tight margins in Congress, and the likelihood of split government. Now,
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Text: Tariffs and Trade. Graph: A bar chart compares China’s score on various mercantile practices relative to the rest of the world, with a score of 100 being the best and 0 the worst. Categories like public ownership of the private sector, protection of trade secrets, and barriers to market access show lower scores, indicating restrictive or unfavorable practices. The chart emphasizes China's strong mercantilism, with practices such as forced technology transfers and limited receptivity to foreign direct investment.
(SPEECH)
tariffs. You all know the story. Trump wants a 10% universal tariff, 60% tariff on China. One of the things, notice how the democrats haven't really fought Trump on the tariffs. Even at the peak-- how about this? Even at the peak of inflation in the United States, when there was a lot of pressure on the Biden administration to bring inflation down, they never proposed repealing the Trump tariffs. That shows how strongly and how much universal consensus there is in Washington right now to be positioned against China from a tariff perspective.
China is the most mercantile country in the world, right? I mean, that's been clear for years. There's a mercantilism index that gets computed by big think tanks, and they look at forced local production and exchange for market access, export subsidies, theft of intellectual property, favoritism of domestic companies, manipulation of exchange rates and, you know, China is off the board, the most mercantile country in the world. And after China joined the WTO 20 years ago, US manufacturing job losses accelerated, labor income shares declined, opioid addiction rates rose. So I get it, I understand the country's now willing apparently to pay a price for rolling back the globalization pendulum a little bit.
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Text: Energy. Graph: A stacked area chart shows the production of crude oil, natural gas, and natural gas liquids in trillions of BTUs per month from 2000 to 2024. Crude oil production (in blue) remains relatively steady until a significant increase after 2010, while natural gas (in gold) and natural gas liquids (in red) show rapid growth, particularly after 2010. By 2024, natural gas liquids contribute the largest share, highlighting the growing importance of these energy sources.
(SPEECH)
Now, energy. You know, Biden, Biden sometimes unfairly gets tagged as an anti-energy president. To be clear, production of natural gas, liquids, natural gas and crude oil has hit a new high under the Biden administration. They didn't necessarily take a club to it. I think what people missed there's a couple of things that did on the margin. They slowed down permitting of drilling on federal land and things like that. But I think it's difficult to position the Biden administration and Harris, by extension, as being violently opposed to oil and gas, and I don't even think that export ban on LNG for certain projects is going to stick.
What they have done is, instead of a stick approach to oil and gas, they've used a carrot approach to renewables. And the cost of that could be anywhere from 1 to $3 trillion by the end of the decade. And
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Text: Energy: cost of subsidies and incentives for renewable power. carbon capture, green hydrogen, battery storage and EV adoption could be S1-S3 trillion. Graph: A line chart compares residential electricity prices in California, New York, Pennsylvania, and Texas from 2016 to 2024, as multiples of the average price in China and India. California consistently shows the highest prices, followed by New York, with both states experiencing sharp increases after 2020. Pennsylvania and Texas have lower, more stable prices, with Texas showing a slight rise toward the end of the period. The chart reflects regional disparities in electricity costs within the U.S.
(SPEECH)
we don't even have a good read on those numbers yet. And you can start to, and those are because of subsidies, and incentives for renewable power, carbon capture, green hydrogen, battery storage, EVS, you name it. As you can see here, this is an issue.
Electricity prices in the United States are starting to pick up that 1 to $3 trillion cost, and they're rising most sharply in California, but also in New York, also in Pennsylvania, and also in Texas, relative to places where production gets outsourced to like China and India. And as a progress marker, the renewable share of final energy consumption is now 8% up from 4 in 2010. But this is a long journey. If we're still at less than 10% renewables as a share of final energy consumption.
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Text: Energy. Graph: A scatter plot shows the percentage increase in Producer Price Index (PPI) component inflation for 47 core goods categories since 2018. The highest inflation is seen in transformers and power regulators, which have risen by around 70%, while other goods exhibit progressively smaller increases. Some categories show minimal inflation or even slight deflation, as indicated by data points closer to 0% or below.
(SPEECH)
And we're early in that journey. And over the last four years or so, of all the 47 categories in the US PPI report, the highest amount of inflation, transformers and power regulators. So this electrification journey that we're going to go on is going to be kind of expensive.
Now,
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Text: Energy, Why Harris Might Have Changed Her Position on Hydraulic Fracturing. Graph: A stacked bar chart shows that hydraulic fracturing accounted for 61% of all U.S. primary energy consumption in 2023. The largest portion comes from oil, gas, and natural gas liquids (NGLs) from unconventional sources requiring hydraulic fracturing, followed by conventional oil, gas, and NGLs. Smaller contributions come from coal, nuclear, and renewable sources such as solar, wind, hydro, and biomass. The chart highlights the significant role hydraulic fracturing plays in U.S. energy production.
(SPEECH)
last thing on energy. Harris appears to have changed her position on hydraulic fracturing, and I can understand why. It still represented 61% of all primary energy consumption in 2023. In other words, if you look just at oil, gas, and NGLS from unconventional hydraulic fractured sources, it was about 60% of total energy consumption in the United States. So it's a little bit too soon to ban fracking, if that's the case. You know, is the position she's obviously come to. Plus, Pennsylvania is an important swing state, and a lot of those counties, you know, Obama and then Biden won by very narrow margins, that have a lot of oil and gas.
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Text: Immigration.
(SPEECH)
So immigration, once in a while I always like to use a quote that's dripping with historical irony. And here's one for you. No great nation can be in a position where they can't control their own borders. Senator Joe Biden, 2008. Who then proceeded to become president and oversee the largest migrant surge that ever has occurred.
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Text: Immigration. Graph: A line chart shows the total number of U.S. Customs and Border Protection enforcement actions from 2017 to 2024 (projected), used as a proxy for undocumented border crossings. The chart indicates a sharp increase in actions from 2019 to a peak in 2022, followed by a slight decline in 2023 and 2024.
(SPEECH)
So this next chart we're showing here is a proxy for undocumented border crossings. They were averaging somewhere between 500,000 to 1 million a year, and then surged to over 3 milion in 2023. Immigration for investors is a complicated topic because it increases the labor supply, puts less pressure on the Fed. For investors, those are good things. It puts less pressure on the fed to tighten policy rates.
And it also increases the workforce at a time of very low organic US birth rates. The problem is, unmanaged immigration and the surging migrant flows also put a lot of budgetary pressures on US cities. S&P just came out with a very scary report on Denver, and Chicago, and New York, and some of the other cities where there the migrant flows have shown up, and explaining how it's resulting in billions of dollars of offsetting budget cuts. So, you know, immigration is kind of a two-edged sword. When it's well managed, it tilts more towards the positive. And when it's poorly managed, it tilts more towards the negative. And just to put some numbers on it, the CBO, right? Which is a kind of bipartisan, not a player in all the polarized debates, the CBO estimates that the Biden administration released an extra 2.3 million undocumented immigrants in the us in 2023. And that doesn't include another 800,000 people that came in, that they were detected crossing the border, but they weren't apprehended.
So Harris is reportedly moving to the right on immigration. But to be clear, I don't think there was room for her to move any further left. In 2019 when she was running for president, she proposed decriminalizing to a civil offense unlawful border crossings. So we'll see. Obviously, there's a huge difference between the candidates on immigration.
Inflation
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Text: Inflations and Price Controls. Graph: A line chart illustrates the percentage of U.S. families who believe inflation is the most important family financial problem from 2004 to 2024. The percentage remains relatively low and stable until a sharp increase occurs after 2021, reaching over 40% in 2024. The accompanying text suggests that concerns about inflation have grown significantly in recent years, and it comments on the political strategy behind addressing inflation concerns.
(SPEECH)
and price controls. There's been obviously a surge, and in the percentage of families who see inflation as the most important family financial problem, and we're actually starting to see a lot of pressure on the consumer, whether it's rising default rates on subprime auto, rising credit card default rates, lower intentions of certain major goods purchases. And so Harris has responded with some kind of price gouging, price control mechanism that she hasn't explained. My favorite article on it was Josh Barro, who some of you may remember is a very progressive reporter that used to write for the village voice. He wrote an article in the Atlantic. Then the title of the article was Harris's plan is economically dumb, but politically smart.
The Vice President's campaign promises make no sense to people acquainted with supply and demand, but they might win elections. I think he did a better job than I could in explaining what to think about it. In
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Text: NATO, Europe's Unpaid Bill is $1.5 trillion. Graph: A line chart compares U.S. defense spending as a percentage of GDP with that of NATO (excluding the U.S.) from 1968 to 2023. U.S. defense spending has steadily decreased since the 1970s but remains significantly higher than NATO's spending, which has remained relatively flat. The chart also includes the NATO defense spending agreement target, highlighting that NATO countries (excluding the U.S.) have consistently spent below the agreed target.
(SPEECH)
terms of NATO. Some of Trump's comments on, Russia can do whatever it wants with countries that don't fulfill their obligations, are among the more terrifying statements that I've heard from a president or former president in my lifetime. That said, you know, if you just dispassionately look at the numbers, NATO, except the United States, NATO was so far below the 2% spending agreement that in 2006 they explicitly codified that 2% spending agreement in 2006. And it took 18 years from then until now for NATO to finally reach the 2% target.
And if you add up all the unpaid amounts at zero interest, if you add up all the unpaid amounts from NATO countries since then, it's about one and a half trillion. So I do understand some of the citizenry in the United States being a little bit frustrated with the NATO indirect burden on them.
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Text: The Regulatory State. Graph: A line chart tracks the cumulative number of economically significant rules issued by U.S. presidents by month 40 of their presidency. Biden shows the steepest increase, surpassing 250 rules, followed by Obama and Trump with more gradual increases. Earlier presidents like Reagan, GHW Bush, and Clinton have lower totals, highlighting the rising trend in regulatory activity in recent administrations.
(SPEECH)
In terms of the regulatory state, the charts are going to look like the way you would think they would look. The Biden Administration set a new record, at least as long as the data exists from the early 80s in terms of the number of economically significant rules passed during each presidency.
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Graph: A line chart tracks the number of new pages added to the Federal Register per year, using a 4-year moving average, from 1961 to 2024. The number of pages rises sharply in the 1970s, levels off in the 1980s, and fluctuates around 70,000 to 80,000 pages in more recent decades, with another upward trend starting after 2020. Shaded areas indicate periods of increased regulatory activity.
(SPEECH)
And, and the same goes for another regulatory barometer, which is the number of pages of regulation in the federal register, which fell under Reagan, fell under Trump, and then kind of went back up under Biden. And so here we're using Harris. And Biden as a proxy for Harris, which I think is fair.
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Text.
(SPEECH)
What's interesting about the regulatory state issue, though, is irrespective of who wins, there were four big decisions at the Supreme Court next year, which would really represent among the biggest rollbacks in the regulatory state that we've had since the 1980s. And just to quickly tick through them, it was the end of Chevron deference, which means no more automatic deference to government agencies by the courts when there's a dispute about interpreting federal legislation. There was the expansion of the major questions doctrine, which means that any agency action that has, quote unquote vast economic and political significance has to require clear congressional authorization. And you can't just rely on the agencies to kind of figure it out.
The statute of limitations for challenging federal regulations now starts at the time of injury. What does that mean? It used to be, let's say, six years or something from the time that a bill was passed. So if a bill was passed 10 years ago, you couldn't challenge it. It's now six years since it started impacting you. So if the bill was passed 10 years ago, but you just launched your company last year, you can challenge it. So these are the kind of things that have been changing in the Supreme Court that I think are going to shift the pendulum on regulation and irrespective of who wins.
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Text: China Stimulus Package.
(SPEECH)
I wanted to-- so that's the end of the kind of political discussion. Just to sum up, it is a very polarized election, and you know, the most likely outcome is some kind of split government, which tends to have the least amount of negative implications for investors. But if there's a GOP sweep or a democratic sweep, I think you could see more profit taking, and more caution in the market while people wait to see where the dust settles, and what the policy outcomes might be, particularly given that Harris has mentioned eliminating the filibuster for Roe v Wade. And then the question is, how do you prevent the filibuster from being used on other topics once you open that pandora's box? So that's enough about the election.
Stay with me just for a couple more minutes, because I want to talk about this China stimulus package that was announced. I'm usually wary about stimulus packages. Countries sometimes engage in reforms and stimulus packages to draw in foreign capital, and only to then destroy it again. Argentina's done that seven times since 1826 when they became independent. China did it at the end of the 1990s. And I remember there was this reform movement. A lot of capital came in, and then the largest government bank, Gtech at the time, went bankrupt.
And then a couple of years ago, MSCI raised China's weight in the index to 40%, in the emerging market equity index. And then right after that happened, China engaged in a whole bunch of anti-market policies that ended up destroying a lot of investor money. So understanding that history, let me just say why I'm positive on this stimulus package. And I think it is a bit of a turning point. Our sources in China are telling us that government officials are now a little bit more receptive to domestic and foreign investors saying, look, you've got to do something. We're starting to see more parallels with Japan in 1990, and we all know how that ended up. And the economic data are showing little sign of getting better.
So it's possible, particularly after the bad August data, that China's been listening to these people. In terms of why China acted now, that's not a hard one to figure out.
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Text: Why China Acted Now. Four graphs: China's M2 money supply: a line chart shows the percentage growth of China's M2 money supply from 1995 to 2024, with a general downward trend after peaking in the early 2000s. China FDI monitor: a bar chart illustrates inbound and outbound foreign direct investment (FDI) in China from 2000 to 2024, which shows a recent decline in net FDI due to rising outbound investment. China composite PMIs: a line chart tracks China's Purchasing Managers' Index (PMI) for both manufacturing and non-manufacturing sectors, which shows fluctuations with occasional dips below the growth threshold of 50. China residential floor space starts: a line chart shows the square meters of residential floor space starts from 2005 to 2024, which indicates rapid growth until a sharp decline starting around 2021.
(SPEECH)
I've got some charts in the in the piece this week. The money supply growth is cratering. FDI investment is fleeing China like there's a plague there. The PMIs are slowing. The residential floor space starts, which is an important metric for China on housing, has dropped to the level that it last was in 2008.
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Four graphs: China economic activity monitor: a line chart shows year-over-year changes in China's economic activity, with a sharp decline from 2021 to 2023. China commercial and residential property prices: a line chart tracks year-over-year changes in property prices from 2013 to 2024, which shows a significant drop after 2021. China consumer confidence: a chart shows an index of China's consumer confidence from 2012 to 2024, with a sharp decline in recent years after peaking around 2021. China underperformance: a line chart compares the performance of the MSCI China index with MSCI USA, Japan, and Emerging Markets (EM), which shows China’s relative underperformance since 2021.
(SPEECH)
There's an activity monitor we look at that looks at real time data on coal, electricity, steel production, motor vehicle sales, telecom, equipment production, things like that. That has rolled over completely this year. Commercial and residential property prices are still falling. Consumer confidence is terrible. China equities have been a disaster zone compared to not just the US but also Japan, and the rest of the virgin market. So it's I don't think it's difficult to understand why the pressure was building on China to do something.
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Text: Major policies annouced this week. A chart.
(SPEECH)
We have a description in the piece of all the different monetary and fiscal measures that they announced to support the economy and markets. One of the ones I found interesting was a loan guarantee program to allow state owned enterprises to buy vacant homes to convert to social housing. So it's got a lot of words in it, but basically, it's the equivalent of having the FHA in the United States buy vacant homes to clear the excess supply, and convert them into subsidized housing. So I thought that was a positive thing. The
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Text: Market Impact So Far. Two graphs: China equity returns since September 23, 2024: a bar chart shows the total return in U.S. dollars for various Chinese equity subcomponents, with several sectors posting gains, led by consumer staples and financials. China year-to-date (YTD) equity returns: a bar chart shows the total return in U.S. dollars for Chinese equities in 2024, with most sectors experiencing negative returns, particularly consumer services and discretionary sectors, while a few, like utilities, show positive returns.
(SPEECH)
market reaction has been a pretty big knee jerk, 10 to 15% or even 20% increase in Chinese equities since the package was announced.
It put most China equity categories in firmly positive territory for the year. And
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Graph: A line chart shows the forward price-to-earnings (P/E) ratios for China A Shares and the MSCI China Index from 2014 to 2024. Both indices have fluctuated over time, with peaks around 2020, followed by declines, and currently, the MSCI China Index maintains a lower P/E ratio compared to China A Shares, which shows a slight upward trend in 2024.
(SPEECH)
what's interesting is, from evaluation perspective, the jump is fairly minor, so that shows you just how beaten up China was. And here we look at both the A-shares and a broader basket of Chinese equities. The PE multiples have gone up by, let's say, two, but they're down by 10. So I still think there's room for, if these stimulus measures get enacted, and if they get followed up with fiscal stimulus, I think there's room for Chinese assets to perform well here. The
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Graph: A line chart compares China’s nominal GDP growth, MSCI China earnings, and MSCI China Index levels from 2006 to 2024. While China’s GDP (in red) shows steady and significant growth, MSCI China earnings (in gold) and the MSCI China Index level (in blue) remain relatively flat and volatile, which indicate that GDP growth has not translated into proportional earnings or equity market gains for investors.
(SPEECH)
big question we get from investors, which I think is a fair one m is China a trade or is it a portfolio investment? Over the last 14, 15 years, China has been a trade because when you look at nominal GDP growth, it does not trend, whether it's high or low, it doesn't translate into earnings or equity market gains for investors. And in the United States, and in Europe, and in other countries that are worth investing in, earnings and equities grow faster than nominal GDP, in China, they've grown slower.
And that requires a more structural change, and I'm not there yet. So for me, this is a trade. It's an interesting one, but it's still a trade. So
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Title card: JP Morgan, Eye on the market. JP Morgan. October 2024, Mind the Gap. Image: a large fissure cuts through the central part of North America and divides the landscape dramatically.
(SPEECH)
thank you all very much for listening, and great to see, and hear from everybody that I saw in London last week. And we will talk to you again soon, possibly before the election, if anything happens. So long. Bye.
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Logo: JP Morgan.
