The election as referendum on America: how well does the “system” work, and for whom?
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MR. MICHAEL CEMBALEST: Good morning and welcome to the Eye on the Market for late September. In our September 8th piece, we reviewed many of the market and economic issues at stake in the election. So with one month to go, I just wanted to briefly mention two last topics. The first is the election as a referendum on the US. And the second is how should we think about the rising possibility of a very, very contested election process?
So on the first point, I was reading some J.P. Morgan Investment Bank research at the end of August, and they had a piece where they recommended that investors position for rising odds that Trump gets reelected. And the primary point of their argument was the protests that are going on and that if those protests are seen as violent, that could materially affect voting patterns. They cited some other research they had read showing that demonstrations at a county level in 1960 through 972 in the United States boosted Republican vote outcomes by about 2 to 8%.
And I know it sounds very mathematical, but this is not 1960 and 1972 when most Americans still trusted the federal government as an antidote, as a prevention from chaos, and when violent crime rates were quickly rising. And in a poll this month, around 60% of respondents said they thought the administration’s response to the protests were harmful, compared to only 30% that thought they were helpful. And I guess my response to the investment banking piece is that while some voters may see the administration as guardians against lawlessness, there may be just as many, if not more voters who see the current administration as purveyors of it.
In any case, I think rather than focusing on the protests in isolation, this election may be a referendum on how well the overall system works in America and for whom. And I took the World Bank high income universe, and I broke it down into a lot of different categories, using a lot of different sources to see how does the US stack up against the rest of the world, ‘cause I think that may also be influencing how people vote this year.
So unsurprisingly, and there’s a chart in here that shows you all these rankings, the US ranks at the very top for equity investors and for entrepreneurs. We have lower regulatory burdens, lower tax burdens. It’s much easier as a manager of a company to hire and fire people, easier to do business, and the legal system is oriented to resolve commercial disputes quickly and fairly. All of those things contribute to top decile profits growth and equity returns.
Now let’s look at for workers, how does the system work for workers? The US ranks above average on median income, whether adjusted for purchasing power or not, on housing costs, and the OECD has a measure of a better life that looks at jobs, housing, work/life balance, environment, and personal safety. And the US ranks still above average on those kinds of things.
But that’s where the rankings start to slip after that. There are cracks in the US judicial and legal system. The US now ranks median or below on judicial independence and corruption. The US ranks below median on homelessness, basic education, on math, science, and reading, healthcare, including COVID mortality. The US ranks very poorly on income distribution, generational mobility and poverty, and ranks at the very bottom on civil and criminal justice and discrimination.
So some of these problems have existed for decades, of course. But I think this year, voters are going to be more inclined than ever to judge an incumbent president, on whether his administration made some of these problems better on the margin or made them worse. So you can take a look at the chart that shows these different rankings, ‘cause I have a feeling that this broader context and referendum is going to be more impactful on the overall voting patterns than the protests in isolation.
So what kind of election results are we going to get and when? Everybody is aware right now that there’s going to be a surge in mail-in voting this year. Could be 40%, 50% in some states, nobody really knows. And given the relentless criticism of the mail-in voting process by both Trump and his attorney general, I had included on Labor Day an election primer on how the election works.
And what we said at the time is still true, which is on January 6th, Congress will almost certainly do one of three things: Either announce a president based on the Electoral College results, or announce a contingent election that’s held by the House to choose a new President if the Electoral College fails to produce a candidate that gets a majority of accepted votes, or if the contingent election fails to produce a winning candidate, designate the speaker of the House as a temporary acting president until sufficient rounds of voting in the contingent election in the House determine a winner.
And I think I may have made it sound simpler than it is, because the primer that we had didn’t cover all of the steps that are fraught with potential for legal uncertainty, judicial interpretation, gamesmanship in this kind of stuff. And with the president of the United States being cited as having declined to commit to a peaceful transfer of power, you know we want to take another look at this. So what we did in this week’s piece is to look at some of the uncertainties that we didn’t discuss in our Labor Day piece. I’m just going to tick through them really quickly here, and you can look at this for more detail.
But six weeks from November 3rd to December 14th when the Electoral College meets sounds like a long time but may not be. And one of the primary reasons is in states that have requested automatic recounts, those absentee ballots may end up having to be counted twice.
There have been Supreme Court decisions that require states to extend voting deadlines from having your mail-in ballot received on Election Day. And now that they’re requiring it be postmarked on Election Day. And there are going to be countless opportunities for election lawyers to file court challenges, alleging violations and all those kinds of stuff, all of which could result in more than one set of electoral results being submitted from a state.
In the prior primer, I mentioned that in most states it’s the secretary of state in each state that oversees and certifies the election results, and that’s true. But in other states, the governor and the state legislature as well may have equal standing. And they may just decide to submit a separate slate of electoral results to the Congress, to the Electoral College. And then Congress would have to sort out which electoral state to approve.
The other thing that’s important to point out is if some electoral votes are not reported by December 14th or they get rejected by Congress for procedural reasons, there’s a chance that Congress would select the president based on less than 270 electoral votes. In other words, if 20 electoral votes from the state of Pennsylvania just were not submitted in time or were thrown out, Congress could select the president based on whether or not someone who received a majority of the electoral votes that were submitted.
So instead of needing 270, you would need 270 minus ten, which would be half of the 20 plus one. So there are circumstances under which election lawyers would have an incentive to tie up states in the courts for as long as they possibly could, hoping that their results would get thrown out of both the numerator and the denominator of Electoral College.
And that opens up a whole string of unknowns, which is what if a state doesn’t complete its vote count until after the 14th? Will Congress accept the results? It could be unconstitutional, against federal law to count electoral votes submitted after the 14th ‘cause that would mean that the process is not uniform across all states, which is one of the requirements.
What if a state submits results by the 14th but have only counted 97% of the ballots and know that there’s a small number of absentee ballots that remain uncounted? That may also be unconstitutional. And then there’s also issues about faithless electors. What would Congress do if the Electoral College were really close in early December, but on the 14th a few electors decide to throw the election to another candidate or to abstain from voting to force a contingent election?
So there’s a lot of scenarios that we walk through in here. And of course there’s always the nightmare scenario that you almost had in 1876 of dueling inaugurations, where each party declares a different winner. Like most Americans, I think I’m praying for time so that this process can be carried out fairly and accurately and that we have a winner that’s clear well before the Electoral College meets in December.
But again, given the rising and relentless criticism of the mail-in voting process by the president and some members of his cabinet, we thought it was important to update everybody on what we know and we don’t know about the process itself. So more to come hopefully shortly after Election Day, thank you.
FEMALE VOICE: Michael Cembalest’s Eye on the Market offers a unique perspective on the economy, current events, markets and investment portfolios, and is a production of J.P. Morgan Asset and Wealth Management. Michael Cembalest is the Chairman of Market and Investment Strategy for J.P. Morgan Asset Management and is one of our most renowned and provocative speakers. For more information, please subscribe to the Eye on the Market by contacting your J.P. Morgan representative.
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