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Oct 17, 2024
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Economy & Markets
Nov 6, 2024
"Kamilton": the 2024 election and who tells your story
Michael Cembalest
Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management
A reflection on the 2024 election and who tells your story. On Trump’s victory: market implications of a supply side boost from deregulation clashing against inflationary impulses of tariffs and deportations. The ten year Treasury will be the most reliable barometer of all. To conclude, an ode to vaccines and an RFK bibliography.
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Descriptive audio
Okay, well, that was some election. Welcome, everybody, to the November 6 post-election Eye on the Market podcast. This one is called Kamilton, 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 and sometimes it's a bad hand.
But you play the hand you're dealt and you do so aggressively. And it's playing out. Why? I'm mentioning that in a minute. I'm going to get to all of the obvious issues around the implications of, of a Trump victory for markets and economics. But I want to do something a little bit different for us 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 is 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 Reid 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 at Delta? Okay. The labor force participation rate is 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 under the Trump year.
Clean energy spending was allocated almost three quarters 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, at the polls. And so I think there are some tough questions and interesting questions to ask about, 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 precedents 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 Derek, he 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, for run for a second term.
And the common feature here is just like Alexander Hamilton, who was the first Treasury Secretary, these former 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 biodynamics, particularly since the President himself was incapable of doing so.
And just as an exercise here, and I know this is an inexact 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, the election. And it pales in comparison to Steve Mnuchin before the 2020 election. And most people I know couldn't identify Steve Mnuchin in a police lineup.
Mnuchin was the former Secretary of Treasury under the Trump administration. So there, there is 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 two.
There. Rest of what we have to talk about today, which is the truck trade, the markets and the prediction odds, you know, 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 and 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 first course of business of this new administration might be a focus on deregulation 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, that the Trump people talked about and the Trump himself talked about during the campaign. You know, it's, 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, or whether he'll have the governing margins in, in, in the Congress to implement that legislatively. I think without question that 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, which we'll talk about. There's a pretty clear economic consensus on tariffs. Now, the economists, I'm not one, right, but the economists at Chicago and at Amity, at the IMF, and that 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 tariffs.
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 ODS 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 bonds were declining, you saw a decline in the 10-year Treasury.
So over the last three or four months, the 10-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, you'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 seat. The markets are currently pricing in a, let's call it, three-and-a-half percent funds rate by the middle of next year, or the economists who J.P. Morgan's Investment Bank still think that's plausible.
I think we have to take a quite a very deep look here at the, at the market consequences of, 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, one source 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 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. One of the charts in the Eye on the Market that were released today looks at New York City. And just like the federal government, New York City has the mayor and the mayor puts out his financials through the Office of Management and Budget.
And then there's an independent comptroller that looks at those numbers. Well, the independent comptroller last year, when they looked at the New York City figure, said, you're underestimating asylum, asylum expenses by like $10 billion was the single biggest discrepancy in the comptroller retired 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, 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, but are ignoring some of the surge immigration implications on asylum, 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 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 either party. The filibuster is 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 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 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, the University of Chicago looked at partisan mutual fund teams, whether they were partisan, Democrat, partisan, Republican, they both underperformed the non-party U.S. and mutual fund teams because the nonpartisan teams were able to look dispassionately at the opportunities and didn't politicize everything, save for individuals. Individuals tend to be a lot more optimistic and take more risk in their portfolios when their preferred political party is in power.
So of course that means that sometimes they leave a lot of money on the table when their preferred 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 of the partisanship, and partisanship, partisanship is going to give up on that word. But keep it away from your portfolio. One last, one last comment that I want to make, given, given the incoming administration, and we'll have a lot more to say about markets, investments and economics in the weeks ahead.
Specifically, we're going to have to take a very close look at the procedural issues associated with, with the universe of 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, this week. We had one 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-cabinet Senate-confirmed senior advisor.
But vaccines are among the greatest achievements in biomedical science that people just need to keep that in mind. And 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 have a bunch of links in the Eye on the Market that you can access. And I for one are 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 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.
(DESCRIPTION)
Text: J.P.Morgan, Eye on the Market, J.P.Morgan
A statue of Alexander Hamilton in front of the U.S. Treasury. Text: November 2024, "Kamilton": the 2024 election and who tells your story. Michael Cembalest sits in an office with shelving behind him and text: J.P.Morgan
(SPEECH)
OK, well, that was some election. Welcome, everybody, to the November 6 postelection Eye on the Market podcast. This one's called "Kamilton," which is like Hamilton with a K, and I'll explain why.
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. I'm 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.
(DESCRIPTION)
Text: 2024 results. Harris underperformed Biden in almost every single county in the US. Trump came closer to winning New York than Harris came to winning Florida. Trump is currently ahead nationally by 1 million votes (Popular Vote Compact). Trump fought Harris to draw in Clark County, NV home to former Senate Majority Leader Harry Reid.
(SPEECH)
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 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, it's a highly unionized place. Reid 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.
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Text:Labor force participation rate almost at all-time highs. Below is a graph titled, US labor force participation rate, showing the percentage of total labor force as a share of population age 25-54 years rising steadily from 74% in 1975 to about 83% in 1990, 84% in 2000, then decreasing slowly to 81% in 2015, rising to 83% by 2020 before sharply dropping to 80% then rapidly rising to 84% again in 2024. Text: Source: Bloomberg J.P.M.A.M., October 2024.
(SPEECH)
How would I have played this hand if I were dealt it? The labor-force participation rate is almost at an all-time high, so the job markets are really strong.
(DESCRIPTION)
Text: ...reshoring of jobs surged under the Biden/Harris administration. Below is a graph titled, Reshoring and FDI job announcements by year, showing jobs announced in thousands at about 20,000 in 2010 rising to 100,000 in 2014, dipping a little then rising to 175,000 in 2017, dipping again in 2019, before rising to 350,000 in 2022 then decreasing slightly to 2023.
(SPEECH)
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 under the Trump years.
(DESCRIPTION)
Text: Biden/Harris clean energy spending was allocated about 75% to red districts...Below is a graph titled Biden/Harris administration clean energy spending in 2021 showing red districts outspending blue districts by billions of dollars in batteries, electric vehicles, and solar, while red and blue spent roughly the same on offshore wind, and only blue districts spent on nuclear, hydrogen, onshore wind, heat pumps/HVAC but at much smaller amounts. On the right is a bubble plot showing democratic districts spending $42 billion and republican districts spending $161 billion with the biggest bubbles being mostly red, and NC, GA, NV, and AZ being the biggest red bubbles. Text: Source:Bloomberg/Enerwrap, June 2024
(SPEECH)
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.
(DESCRIPTION)
Text:..the Biden/Harris Chips Act resulted in a surge in manufacturing construction... Below is a graph titled Real total manufacturing construction spending showing spending at about $50 billion in 2002 rising to $120 billion in 2009, dipping in 2011, then rising to $130 billion in 2016, then decreasing slowly until 2022 when it started rising then rapidly rising in 2022 when the CHIPS Act, IRA was signed to $225 billion in 2024. Text: Source:Bloomberg, J.P.M.A.M., October 2024
(SPEECH)
And the CHIPS Act resulted in a surge in manufacturing construction in places like Arizona, in places like Ohio and New Mexico.
(DESCRIPTION)
Text: Highest YTD returns in a election year since 1936. Below is a graph titled S&P 500 YTD returns in election years showing mostly positive returns in election years, but since 1984 had in the low single digit or low teens percents and 2024 being 20%. Text: Source:Bloomberg J.P.M.A.M., November 2024
(SPEECH)
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.
(DESCRIPTION)
Text: Contributing to best solvency measure for corporate defined benefit plans in 20 years. Below is a graph titled, Corporate pension funded ratios, Plan assets as a share of plan liabilities, based on 100 US firms with the largest pension plans, showing plans being mostly underfunded, mostly between 75% and 85% from 2008 to 2017, staying around 86% from 2017 to 2020 then rising to fully funded and above after that. Text: Source Millman 2023 Corporate Pension Funding Study, September 2023
(SPEECH)
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.
(DESCRIPTION)
Text: and while the food and inflation surge was painful, by most accounts it has subsided. Below is a graph titled US core and food inflation, showing food and core close to 14% in the 1970s and '80s, cooling to mostly under 4% from the '90s until 2023 when it was about 11.5%, then decreasing to under 4%. Text: Source: Bloomberg J.P.M.A.M. September 2024
(SPEECH)
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.
(DESCRIPTION)
Text: with wage growth outstripping rents. Below is a graph titled US asking rents adjusted for wage growth, showing rents between $1,450 and $1,500 from 2017 to 2020, dipping to $1,350 in 2021, then rising rapidly to $1,575 in 2022, then decreasing to about $1,400 in 2024.
(SPEECH)
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.
(DESCRIPTION)
Text: Steady growth so far. Below is a graph titled Dallas Fed US Weekly Economic Index, showing an index composed of 10 series including unemployment claims, retail sales, fuel sales, and electricity utility output for 2008 to 2024, with negative numbers in 2008 and 2009 then rising to about 2 from 2011 to 2020, then dipping sharply to negative numbers in 2020 before rising higher than 8 in 2021, then coming back down to about 2 by 2023. Text: Source: Bloomberg J.P.M.A.M. October 26, 2024
(SPEECH)
Growth is steady so far this year, and the reason that's important in this context is another thing the administration-- the Harris team-- had going for it was despite all the precedents 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.
(DESCRIPTION)
Text: No recession despite all the precedents... Below is a graph titled Yield curve inversion, showing basis points, 10Y to 3M yield spread, 30 day smoothing from 1967 to 2022, starting at 0 in 1967, and keeping a rising and falling pattern with arrows pointing to the negative troughs right before a shaded area which happens in 1970, 1980, 1990, 2002, 2007, and the last arrow in 2020 has a very narrow shaded area. Text: Source: Bloomberg J.P.M.A.M. November 5, 2024
(SPEECH)
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 there's this quote from the Hamilton musical. Who lives, who dies, who tells your story.
(DESCRIPTION)
Text: "Who lives, who dies, who tells your story". Below are photos of Donald Regan, James Baker, Bob Rubin, and Tim Geithner.
(SPEECH)
And I remember, 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 kind of a cornerstone of Obama's run for a 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 of Bidenomics, particularly since the president himself was incapable of doing so?
(DESCRIPTION)
Text: "Who Tells Your Story". Below is a graph titled: Google Trends: Secretary of the Treasury by month of Presidency, showing an Index from 0 to 50 months of a presidency for Mnuchin and Yellen, with both starting out with a relatively high index then dropping to below 40 from about the 5th month to 40th, then Mnuchin rises with peaks at 100 and above 80 while Yellen falls to 10 and below in the last 10 months.
(SPEECH)
And just as an exercise here-- and I know this isn't 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 Mnuchin before the 2020 election, and most people I couldn't identify Steve Mnuchin in a police lineup. Mnuchin was the former secretary of treasury under the Trump administration.
So 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 disagreeing with this line of thinking.
So anyway, let's get to the rest of what we have to talk about today, which is the Trump trade.
(DESCRIPTION)
Text: Trump trade. Below is a graph titled The Trump trade in 2024, showing indicative Trump trade index: energy, defense, bitcoin, financials, short treasuries, short renewables starting at 100 in January, steadily rising to about 126 in April, staying around 125 until the end of June when the Trump-Biden debate occurred, and it fell to below 120, then started rising again until Biden dropped out in mid-July, and it rose to 130 again before sharply falling to below 120. It rose again then fell sharply to 125 until the Trump-Harris debate in September, then rose to above 145 at the end of October.
(SPEECH)
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 Treasurys and renewables. As elections go, 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 first course of business of this new administration might be a focus on deregulation and tax cuts. Its inflationary consequences might come later. But let's take a look at that for a minute.
(DESCRIPTION)
He skips over a slide titled Trump odds with a graph titled Betting market odds of a Trump victory, showing Polymarket and Predictit odds starting around 50% in August of 2024, dipping to below 45% in mid-August, rising to 50% in September then steadily rising to 60% and above at the end of October.
Text: Fiscal policy: Trump deficit impact could be 3x to 4x worse with a graph below titled Trump: 10-year budget deficit effect of proposed policies showing a positive effect of $2 trillion for Universal 10% tariff, and under $1 trillion for Repeal clean energy sub and 60% China tariff, then negative effect of $3.5 trillion for Extended indiv tax cuts, over $1 trillion for Eliminating SS benefit taxes and Repealing SALT cap, and less then $1 trillion for Extended bus tax cuts and Lower corp inc tax. The net effect is almost negative $4 trillion. Text: Tariff revenue estimates are highly uncertain, as they rely on elasticities of imports to tariff levels and estimated shares of importer/exporter tariff burden. They also usually exclude retaliation impacts and subsidies for US firms harmed by them, trade diversion on China tariffs and some growth impacts. Wall Street Journal published an Op-Ed by Jason Furman with the tagline "Harris is the Safer Economic Choice: Both candidates have bad ideas but Trump's are worse and likelier to find support is Congress." Source: J.P.M.A.M September 2024
(SPEECH)
Here is the fiscal policies that the Trump people talked about and that Trump himself talked about during the campaign. 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 or whether he'll have the governing margins 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.
(DESCRIPTION)
Text: There's a clear economic consensus on tariffs. Tariffs hurt industries they were designed to protect and their supply-chain partners (Golaro). Chicago Booth survey of 43 economists: 0 believed tariff on steel & aluminum would increase American welfare. Tariffs did not lower before-duty import prices of Chinese goods (INDER). Near complete pass-through of the steel, aluminum and Chinese tariffs (US ITC). US tariffs had no affect on employment in newly-protected sectors: retaliatory tariffs reduced employment mainly in agriculture, the harm was only partially mitigated by agricultural subsidies (Autor). Removing 2018-2019 tariffs would increase US output by 4% over 3 years (IMF). Retaliatory tariff losses in 2018-2019 totaled $27 billion (USDA). A graph to the right titled, Survey of economists on the effect of Trump tariffs on manufacturing employment, 44 economists surveyed, shows 59% said it would decrease, 25% said would remain level, and 16% said it would increase. Text: Source: WSJ, J.P.M.A.M. October 2024
(SPEECH)
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 associations, wherever they are-- they may be wrong, but the universal perspective here is that these things are negative for inflation, growth, and employment in the long run, particularly a universal tariff. We'll see.
(DESCRIPTION)
Text: Markets saw this coming in advance. Below is a graph titled: Trump victory odds vs. 10 year treasury yield showing betting market odds of Trump victory and the 10 year treasury yield in percent from January 2024 to November. The odds and treasury yield start out similarly in January at about 50% then diverge in the spring with Trump's odds dipping while the treasury yields rises then mirror each other again by the summer, both dipping, and then both rising after September. Text: Source: Bloomberg, Polymarket, J.P.M.A.M. November 2024
(SPEECH)
But as I mentioned, the market saw some of this coming in advance. This next chart shows how, 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 10-year Treasury. So over the last three or four months, the 10-year has been trading kind of as a bellwether on a Trump presidency.
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Text: Long rates had already been behaving quite differently from other Fed cut periods. Below is a graph titled, 10-year note yield change after the first cut, showing changes in September 2024, January 2001, June 1989, September 2007, September 1998, July 1995 and July 1919, with every year but 2024 staying between negative 0.5% and 0.4%, while 2024 rises to over 0.6%. Text: Source: Bloomberg J.P.M.A.M November 2024
(SPEECH)
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'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 10-year has been rising kind of in a straight line almost ever since the first Fed cut.
(DESCRIPTION)
Text: in part since inflation expectations embedded in TIPS markets have risen again. Below is a graph titled US forward 5 year breakeven inflation rate, showing 1.75% in 2019, dipping to 1.25% after 2020, then rising to above 2.25% in 2021 and staying roughly around that until the present. Text: Source: Bloomberg J.P.M.A.M. October 2024
(SPEECH)
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 that's part of it. But when you take the rising inflation expectations and you combine them with the potential issues of deportations and tariffs, you kind of potentially put the Fed on their back feet.
(DESCRIPTION)
Text: New challenges ahead for the Fed. Below is a graph titled Fed funds target rate: current vs. prior market expectations, showing October 19, 2023 expecting a decrease from 5.25% to below 5% by October 2024, December 27, 2023 expecting a decrease from 5.25% to about 3.55% in January 2025, and November 1, 2024 expecting a decrease from 4.55% to 3.75% in the next year. Text: Source: Bloomberg J.P.M.A.M. November 1, 2024
(SPEECH)
The markets are currently pricing in a let's call it, 3 and 1/2% funds rate by the middle of next year. The economists at JPMorgan's investment bank still think that's plausible. I think we have to take a very deep look here at the market consequences of some of the Trump policies if they happen.
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Text: Wages, immigration, and deportation. Below is a graph titled Atlanta Fed Wage Growth Tracker, showing the percent of highest quartile and lowest quartile from 1998 to 2025, with the two basically mirroring each other with a dip in 2010 then increasing with a bump in 2023 and the lowest quartile being a couple percents above from 2019 onward. Text: Source: Bloomberg J.P.M.A.M. September 2024
(SPEECH)
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 get a U-turn in the lowest quartile of wages and wage growth starts picking up there because of the deportations shrinking the labor market, I think that puts the Fed in a tough spot.
(DESCRIPTION)
Text: Impact of immigration on labor force growth. Below is a graph titled US labor growth, showing index for foreign born and native born labor force from 2010 to 2024 with foreign born starting at 100 in 2010 and steadily rising to 120 in 2020, sharply dipping in 2020, then rising again to 135 in 2024, while the native born starts at 100 in 2010 and rises to 105 by 2020, where it dips to 100, then increases back up to 105 by 2024. Text: Source: Bloomberg J.P.M.A.M. October 2024
(SPEECH)
And the country needs immigrants. The problem 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 a way that causes huge financial distress for cities. One of the charts in the Eye on 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 his financials through the Office of Management and Budget, and then there's an independent comptroller that looks at those numbers.
Well, the independent comptroller last year, when they looked at the New York City figures, said you're underestimating the 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 similar-sized numbers show up at the state level too. So I think when I read a lot about these immigration issues, Democrats tend to focus on things immigrant contributions to growth but are ignoring some of the surge immigration implications on asylum expenditures in cities that are still trying to recover from COVID.
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Text: Harris vs. Trump projected US debt as share of GDP. Below is a graph titled Projected US deficit under Trump proposed policies showing debt as a percentage of GDP from 2024 to 2036 with the low cost going from 100% in 2025 to 130% in 2025, the high cost going from 100% in 2025 to 160% in 2035, and Trump central going from 100% in 2025 to over 140% in 2035. Text: Source: Committee for a Responsible Federal Budget October 28, 2024.
(SPEECH)
Anyway, so 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 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 get higher debt and higher deficits.
(DESCRIPTION)
Text: Governing margins. Below is a graph titled Partisan House leadership by majority party, showing the margin in percentage of democratic and republican control from 1910 to 2024 with a period of Republican control in the 1920s, then a long period of Democratic control until the mid 1990s then Republican control until 2008, a couple years of Democratic control then a red wave from 2010 to 2020. Text: Source: VoteView Roll Call Votes database J.P.M.A.M. 2024
(SPEECH)
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 yet. My guess is that they'll be single-digit governing margins in favor of either party.
The filibuster is 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 made a lot of legislative rulings over the summer that essentially constrain executive rule in favor of requiring clear congressional legislation, and 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 Trump himself did in 2016.
(DESCRIPTION)
Text: Partisanship vs Portfolios. During COVID, partisan mutual fund teams had lower returns and lower inflows thee non-partisan teams. The non-partisan teams were quicker to react to the highs and lows of a volatile stock market. Individuals become more optimistic and perceive markets to be less risky and more undervalued when their preferred party is in power Conversely, they tend to be structurally underweight when their preferred party is not in power, irrespective of market or economic conditions. To the right is a graph titled, Partisan vs. non-partisan mutual fund performance during COVID, showing cumulative performance vs. benchmarks of Democrat and Republican funds in the negative numbers from February 2020 to February 2021 while the non-partisan fund was always positive and generally increased over the same year. Text: Source: University of Chicago, Vorsatz J.P.M.A.M. 2022.
(SPEECH)
And just to wrap up, 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 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, 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 party is in power. So, of course, that means that sometimes they leave a lot of money on the table when their preferred party is not in power, irrespective of market economic conditions.
And investors aren't the only ones to do that. 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 make sure to keep some the "partisan-shins"-- "parti-sish"-- "parti-sin-shins"-- I'm going to give up on that word, but keep it away from your portfolio.
(DESCRIPTION)
Text: Partisanship vs Portfolios. After the 2016 election, a larger share of GOP-identified fund managers increased exposure to the markets than Democratic-identified fund managers. Similarly, retail investors in the most GOP-identified zip codes increased their equity allocations more than their Democratic counterparts. Political alignment contributes to a rosier lens through which stock analysis forecast growth. Politically aligned analysts upwardly revise earnings forecasts out to two years when their preferred party is in power. Bankers and credit analysis behave more optimistically when their party wins the presidency and more pessimistically when their party loses the presidency.
Text: Vaccines: among greatest achievements in biomedical science and public health. Below is a chart titled Vaccine preventable diseases in the US, showing different diseases, the annual cases, annual deaths, and time period pre-vaccine and post-vaccine cases and deaths and case decline rate for diphtheria, measles, polio, rubella, and small pox are 100%, mumps is 96%, pertussis is 92%, hepatitis A is 87%, and tetanus is 93%. In almost all cases, the death have dropped to 0. Text below: Source: Roush and Murphy JAMA 2007. Another chart to the right titled Vaccine preventable diseases: China shows measles, pertussis, diphtheria and polio declining by low 80% by the 1980s, and rubella, hepatitis A, meningitis, and encephalitis declining by high 60 to low 80% by 2010. Text below: Source: Fudan University 2020.
(SPEECH)
One last comment that I want to make, given the incoming administration. And we'll have a lot more to say about markets, investments, and 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 a cabinet position or he would simply be a 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 put a bibliography together, if you want to really learn more about Robert Kennedy Jr., what he's done and what his views are.
(DESCRIPTION)
Text: Excuse me while I retire to my undisclosed location. Trump at MSG will allow RFK Jr. to 'go wild' on health, food, and medicine. A link: "A Conversation with RFK Jr." A link: "How RFK Jr. Falsely Denied His Connection to Deadly Measles Outbreak in Samoa." A link: RFK Jr. spent years stoking fear and mistrust of vaccines. These people were hurt by his work." A link: "The Anti-Vaccine Propaganda of Robert F Kennedy Jr." A link: "Kennedy's error-ridden piece on a vaccine-autism link." Time capsule John Mitchell and Robert McNamara.
(SPEECH)
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 pretty clear 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.
(DESCRIPTION)
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