First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Bob Stein | Updated Odds and Scenarios for a Reset Presidential Race | August 12, 2024
Bob Stein joins the podcast to discusses how the nomination of Kamala Harris will impact the upcoming presidential election, his thoughts on each candidate’s choice of running mate, and how elections results may impact the economy in the years ahead.
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Hi, welcome to this episode of the First Trust ROI podcast. I'm Ryan Isakainen, etf strategist at First Trust. In today's episode I'm joined by Bob Stein, deputy Chief Economist at First Trust. I always enjoy Bob's perspective on what's going on in politics as well as the economy. Bob has a background working in government as a government official. He once worked as Chief Economist for the Senate Budget Committee. He was also the Assistant Secretary for Economic Policy at the US Treasury, so he has this deep understanding of what happens in government in Washington.
Ryan:Bob and I are going to discuss what's going on in the election, what's happened with the candidates on the Republican and Democratic side, their vice presidential nominees. We'll talk a bit about what some of the linkages are with government policy. We're also going to talk about where we are in the economy today and what we expect over the next well, year and a half or so. So thank you. Hope you enjoy this episode. I'm very much looking forward to talking to Bob always a very interesting guy to talk to. Thanks for joining us on the First Trust ROI podcast. Very interesting guy to talk to. Thanks for joining us on the First Trust ROI podcast, bob. Thanks again for joining the podcast on this year.
Ryan:I believe it's your third appearance on the podcast. I think so. Man time flies, so we just started the second year of podcast episodes. I think you will be the first episode of the second year of podcast episodes.
Bob:As I should be, as you should be.
Ryan:We've got a lot to talk about Politics, the economy, the intersection of the two. I always love getting your perspective on these things because you are a former deep state operative, having worked in government at the Treasury, and so I always appreciate your perspective. And also you were at the Senate Budget Committee. Chief Economist for the Senate Budget Committee.
Bob:Many years ago. Many years ago Also, ryan, I'm a traitor to the deep state, so let's not go too far.
Ryan:That is a good point. To make up front. You are a free market kind of guy. You're not one of these. I'm an apostate, a renegade from the deep state.
Bob:I'm trying to destroy them because they didn't let me run it.
Ryan:Love it All right. So I think the best place to start is current events. There's two things that I want to talk about on the Democrat side of the ticket for the presidential election. Obviously, the Democrat side of the ticket for the presidential election. Obviously, since last time you were on, we suspected that maybe there could be a switch in the candidates. Ultimately, it ended up being a Kamala Harris candidacy. Although the convention hasn't happened yet, Is it 100% sure that she's the candidate?
Bob:It's pretty much 100% sure. I think they've had some sort of official roll call vote prior to August 7th so that they could make sure they're on the Ohio ballot and so she will be the nominee, unless there's some sort of tragic health event of some sort.
Ryan:And then there's the other recent news, and that's the announcement that Tim Walz will be her running mate. So I want to talk about both of those, but I think, before we do, is there any historical precedent for what has happened with the Democratic nomination, where this late in the cycle, after the Democratic primary, there's been one candidate that has sort of been, you know, stepped back and another candidate took took his place? Has that ever happened before?
Bob:Not for either party at the presidential level in the modern era, which I would define, as some people would say. The modern era started in 1980. I'm willing to go back to World War II, so I would say 1948 and beyond, and that has never happened. This late we have had sitting presidents of the United States who pursued the presidency, pursued an additional term both Harry Truman and Lyndon Johnson in 1948 and 1968, both performed very poorly very early in the nomination process and decided to withdraw. On the vice presidential level for the Democrats in 1972, thomas Eagleton was chosen by George McGovern to be his running mate and then they later found out that he had had shock therapy treatments, I believe for depression. So this is 50 years ago and he withdrew. And at that late date George McGovern, after the convention, decided to replace him with Sergeant Shriver, who was related to the Kennedy family and I think had been a cabinet member or an official in the Johnson administration as well.
Ryan:So were you surprised that this is the way it played out this time.
Bob:For the presidency or the vice president.
Ryan:For the nomination of Kamala Harris For the presidency or the vice president For the nomination of Kamala Harris.
Bob:I'm surprised in the sense that at the very beginning of this year I thought Joe Biden had an 80 percent chance of being the nominee. I did reserve at the very beginning of this year about a 20 percent shot that there'd be some sort of Mitch McConnell style moment where he would end up having to withdraw. Now, as it turned out, his Mitch McConnell moment was the one-and-a-half-hour debate he had against Donald Trump at the end of June. Yeah, it was a little—well, it wasn't as stark as a Mitch McConnell moment, but the fact that it was on air for an hour-and-a-half live where a large part of the voting public was watching was disastrous for his campaign. Now, I have to say, before the debate I still thought there was a chance he'd have a Mitch McConnell moment, but I only thought it'd be about a 10% chance. In retrospect I probably should have reserved that a lot higher than it was.
Bob:Even after the debate I thought there was a solid shot that Joe Biden would hold on, but I think in the end his own party turned against him, especially key leaders in his party, realizing that Joe Biden could plausibly do so poorly that the Republicans might hit the high watermark for senators in the Senate elections this year might get up to 55 or 56 seats. They saw a looming disaster for the party and decided he needed to go. I think, in the end, nancy Pelosi was the key person behind the scenes who orchestrated it. There's some other theories out there, but I think Nancy Pelosi was the key.
Ryan:So do you think it was a wise move on the part of the Democrats to make the change and, if so, why didn't they try to do that earlier? Was it really because of the debate? Or I think the call it a conspiracy theory. Maybe it is, maybe it isn't. Was this something that was in the works for a longer period of time?
Bob:I don't think so. I think the Democratic Party was fully on board with Joe Biden being their nominee, publicly, privately, many of them had misgivings, for obvious reasons. At this point in time. However, for this to have been orchestrated from the very beginning, it would have required the involvement in Donald Trump, which is absurd Because if Donald Trump were in on it, for this to have happened required that the debate occurred in June. This is the earliest general election presidential level debate we've ever had, and so Donald Trump, in retrospect, probably regrets that he debated Joe Biden in June. He probably wishes he waited until mid-September or early September at least, well after the convention, where Joe Biden could not easily be replaced on many state ballots around the country, in which case the Democrats would have been stuck. So if there was a conspiracy to get Joe Biden off the ballot, it would have involved Donald Trump agreeing to that early debate.
Ryan:Because it wouldn't have happened the way that it did unless they had that debate as early as they did.
Bob:Correct. So I don't think it was contrived or plotted from the very beginning for this to happen this way. I think Joe Biden had a very bad night. I don't think he was at that point very capable of having good nights, but he could have had a better night than he actually did on debate night, and so it ended up that he had to withdraw. But I don't think it was a conspiracy from the beginning or plotted from the beginning, or there's some sort of puppet master behind the scenes orchestrating this over several months, dating back several months.
Ryan:Yeah, Is there any ideological problem with having this as what could be a precedent going forward? I don't know that you can make the exact same switch late in the game, but it seems like you don't want to set this sort of precedent. You want to have the candidates from both parties actually having received votes from their constituents, right yeah?
Bob:it's kind of interesting that the Democrats are running all year at least Joe Biden was running all year on this issue of Donald Trump undermining democracy, when now the Democrats will have a nominee who didn't participate in any of the primaries as the key candidate and their primary and caucus system was basically thrown out this year. So here's the deal. Some people are saying this is a one-off. This is Joe Biden's health. However, I believe the way he was pushed out was because he was so behind in the polls. The Democrats saw a looming disaster up-and-down ballot, senate, house of Representatives, maybe either state races as well, state legislatures, et cetera and decided to push him out because he was going to perform poorly. And the way they did it was to orchestrate a drying up of the major donor base in both Silicon Valley and Hollywood for the Democratic Party.
Bob:The financial world in New York City didn't dry up as much as those other two.
Bob:The financial world in New York City didn't dry up as much as those other two, so why can't they do this again?
Bob:They could have somebody who wins the nomination process, maybe a Bernie Sanders in the future, and then they could say well, actually Bernie Sanders would be less vulnerable to this because he would say well, I don't care about Hollywood and Silicon Valley or finance or anything else, I want small donors and that's it. I'll do free media, not that he'll run again, but somebody of that wing of the party. But I could see some sort of relatively moderate or traditional liberal getting the nomination in 16 years or 12 years to the Democratic side and then something coming out about them later and donations drying up once again and that person who had been nominated through their process but before the convention, having to depart. It's essentially replacing the primary and caucus system really the primary system on the Democratic side, with the smoke-filled room. But it's not really the smoke-filled room, it's a plutocracy. It's a smoke-filled room without the smoke, but the biggest donors to the Democratic Party deciding if the person who is nominated by the voters in the Democratic Party can remain on the ticket.
Ryan:Yeah, yeah, that doesn't quite feel right.
Bob:Why wouldn't they do it again, some future date? They've already proven it works.
Ryan:Yeah, that's I think, and we'll see actually how it plays out in the elections come November. But the other news that was recently announced was the nomination, actually, since we last spoke, of both vice presidential running mates. So, on the one hand, with Donald Trump, there's JD Vance. On the other hand, with Kamala Harris, there's Tim Walz. Curious on your opinion of both of those choices Start off maybe with JD Vance and then Tim Walls?
Bob:I think they're both mediocre. That's my summary. I don't think they'll help either side or hurt either side. Relative to other people who could have been chosen, I think Donald Trump made a mistake. I think he should have chosen Marco Rubio, who is clearly more thoroughly vetted by both the press and voters, than JD Vance. Marco Rubio has won multiple times in a very competitive state, or what was originally a competitive state. Florida is a little more right of center now. He's run for president himself and so he was more thoroughly vetted and he had, I think, the opportunity to add to the Trump base by taking Hispanic voters and putting them perhaps even solidly into the Republican fold.
Bob:I think there's that opportunity there for Republicans and Trump, I think, after the debate and then right you know, leading up to the convention decided you know, I'm going to win this thing. I'm going to pick the guy I want. I don't have to reach out to anybody. I don't have to reach out by selecting Glenn Youngkin or Nikki Haley from the more moderate wing of the Republican Party. I'm going to go. I'm going to double down on Mago World. So he picked JD Vance. Jd Vance might turn out to be a good candidate, but he's from the state of Ohio. He's really not going to have much pull on the Midwest outside of the state of Ohio. He might be able to get Bernie Moreno, the Senate candidate in Ohio, who I think is an inferior candidate compared to other people the Republicans could have nominated in that state, over the line in his race against Sherrod Brown. So that might be an assistance in the US Senate. But I think JD Vance is really not going to add to your vote totals in Pennsylvania or Michigan or the other or Wisconsin. He may help a little bit in Ohio, but Ohio is already going to be a Republican state. The other thing he's in his 30s, so it's. It remains to be seen whether he has appeal over and above what a normal Republican does. When he ran for the Senate in Ohio two years ago, he did worse than other Republicans in the state. Now some people, some Republicans, say well, wait a second. He was running against a guy named Tim Ryan from the state of Ohio, who's probably the most popular Democrat in the state okay, other than Sherrod Brown. So Tim Ryan was a really good pick by the Democrats for that cycle and so maybe it really wasn't Vance's fault. That's possible, but he's never shown that he's above a replacement Republican, even in his home state. So he could be the Elizabeth Warren of Massachusetts for the Democrats, in the sense that Elizabeth Warren is always going to win her Senate seat when she runs but she does worse than other Democrats in the state of Massachusetts. She's a below replacement rate. If you will performer for the Democrats, vance may be that for the Republicans Now for Walls in Minnesota.
Bob:He's an interesting character. What I'd like to say and this might be a dated reference to the early 1970s sitcom TV Okay, I love it. The guy looks like Archie Bunker but he has the opinions of Meathead. Okay, it's really strange the dichotomy there. So you know he used to represent a relatively conservative district in the state of Minnesota. No other Democrat was going to win that seat. He really played it very well. No other Democrat was going to win that seat. He really played it very well. His military service, which appears that in retrospect that he exaggerated, but he played it very well. And if you compare his voting record to what that district and the demographics in that district would normally generate in a representative, he was probably to the left of what that district would normally generate, but he was still to the right of most Democratic House members because he was representing a relatively conservative district. Then he became the governor of the state of Minnesota and has gone hard, hard left in that state. He's basically abandoned his rural constituents and is representing Minneapolis-St Paul and so he's gone very hard left.
Bob:I think the Republicans are going to focus on that. He's from Minnesota. Minnesota is not a critical state. Minnesota is like for the Democrats what Ohio is for the Republicans. At this point it's not a swing state whatsoever. So I mean, if the Republicans are going to win Minnesota, the election is over. Kind of like if the Democrats are going to win Ohio, the election is over. So neither of these are swing states. I think in the end they are mediocre picks. I think in the end they are mediocre picks. I think Vice President Harris, if you were really focused only on winning, should have picked Joshua Shapiro governor of the state of Pennsylvania. Pennsylvania is probably the most important swing state in this election cycle, like it has often been in recent election cycles. His problem is that he's Jewish and he's pro-Israel, and that ticks off the activist base of the Democratic Party. They hate Israel and, frankly, I think many of them are anti-Semitic, and so that would have ticked them off, and so she, I think, felt like she couldn't pick up.
Ryan:Is that kind of maybe you pick up Pennsylvania but you lose Michigan.
Bob:That's exactly right, ryan, so I think she was worried about that. Plus, you need these young activists to go from house to house for get out the vote efforts, and I think she might have been a little concerned about doing that. It also shows to some extent she could be bullied by the left of her party because she's doubled down picking somebody like Walz. By the left of her party because she's doubled down picking somebody like Walls. She is already on the left side of her party and she picked somebody who is from that side of the party as well.
Ryan:Yeah, I was a little surprised that she didn't pick somebody who could be at least said to have a little bit more experience on the international stage. He doesn't strike me as somebody who can make that claim.
Bob:I think that's exactly right. It's interesting when President Obama was first nominated in 2008, he picked Joe Biden. I'm not sure if that was a great pick. I could criticize that, but that's 16 years ago.
Ryan:Yeah, he won, so it worked out okay.
Bob:Exactly, exactly so. Joe Biden was head of Foreign Relations Committee for many years, so he was familiar with the issues. They really don't have. Anybody neither Harris nor Walz, I think has significant international experience.
Ryan:Yeah.
Bob:Now that said, I mean, did Trump Pence in 2016?
Ryan:Yeah.
Bob:I mean, pence was a governor, he was a member of the House of Representatives. I don't remember him as a standout in terms of international affairs, and Donald Trump had never been in politics before. I mean, I guess he negotiated hotel deals internationally. That might be a little bit different from facing down the Iranians or Vladimir Putin or whomever else he wants to face down, sure. So it's not unprecedented that you would have a ticket like this, unprecedented that you would have a ticket like this. But it is interesting that you mentioned, or what you mentioned, that she didn't go for somebody with a little more international experience.
Ryan:Yeah, it seems like all the conversation you hear about vice presidential picks and I guess it's because it's in the run-up to the election has to do with what we've been talking about the ability to get the president elected. Is that the most important role of the vice president? Yes, I mean is that why? You pick a vice president.
Bob:Yeah, I mean, not everybody has chosen a vice president on that basis. And, by the way, getting back to the Harris choice, I believe Walz is the first vice presidential nominee on the Democratic side. Who's a governor? Okay, since World War II? Okay, I think everybody else like, even back like Alvin Barkley for 1948, for Truman, he was a senator. Yeah, estes Kiefauer senator. Thomas Eagleton 1972 senator. Lyndon Johnson senator, I think. Ed Muskie was a senator. You just go back in the history of the Democratic choices Mondale was a senator, alkie was a senator. You just go back in the history of the Democratic choices Mondale was a senator, al Gore was a senator, joe Biden was a senator, tim Kaine was a senator. It's always been senators Interesting. And she reached out to a governor instead, which I find kind of interesting. It really tells me she's going to be a. She would like her like, would like her administration to be domestically focused, maybe she's just unfamiliar that sometimes the international world intrudes on the domestic.
Ryan:Yeah, so the odds makers, the betting markets, the polling has shifted a bit since they made a swap the Democratic Party from from Biden to Harris. They made a swap, the Democratic Party from Biden to Harris. It seems like when those sorts of announcements are made, often you have this bump in polling or you have sort of a honeymoon period and then things normalize after that. At least that's what's happened in the past when I've observed it. Is that actually what's happening now? Have your odds for the likely outcome of the election. I know before you were suggesting that I think Trump had a 60 percent chance or something like that. Has that changed in your mind?
Bob:Yes, Okay, it has. So at the very beginning of this year I made Trump a very narrow favorite to win. I gave him a 55 percent chance I'm talking like early January January before all the caucuses and everything else started or the Republicans a 55% chance, because we didn't even know that Trump got it. And then, after Trump became the nominee and it was apparent that the public wasn't really giving Joe Biden credit for an unemployment rate below 4% because inflation had been generally high and even though inflation was coming down, prices themselves weren't coming down and that's how the American public tends to think about the inflation issue I kind of ratcheted that up to 60%. So I was kind of early and I was a little bit more on the optimistic side for Trump than most people. Then the debate happened and I moved them up to 80 percent Very high likelihood because I thought he's almost certainly going to beat Joe Biden.
Bob:And even if they replace him with Harris and I always thought it would be Harris, not Michelle Obama or Gavin Newsom or anything like that Even if they replace him with Harris, I didn't think Harris would do particularly well. Well, Harris, after getting the nod or becoming the heir apparent, she has done better. She's had a really nice honeymoon for the past few weeks or past couple weeks at this point, and so I've moved my odds for Trump from 80 down to 65 percent, 65. Ok, Now I have to tell you, if you look at the prediction markets, you look at the betting markets, it's essentially 50-50. I don't know, it depends on what hour you look at it, but it's essentially 50-50. So that begs the question why am I thinking Like, why do I think Trump is still somewhat of a favorite? I would not describe 65% as a definite favorite, not a slam dunk, it's two out of three?
Bob:Yeah, exactly, and if you play poker a lot, you bet on sports. Oftentimes a 35% chance wins about 35% of the time. It's like you're often going to lose. So what am I thinking here? How do I get this? Can I explain? Can I elaborate?
Ryan:on this, please do.
Bob:Okay.
Bob:So if you look at the average of the polls, depending upon which average? If you look at a real clear politics average, vice President Harris is ahead of Trump by about half a point in the polling average, at least as of an hour ago, and we're talking on Friday, august 9th. And if you look at the Nate Silver, he does a weighted average based on the quality of the poll, based on their prior accuracy. It's about two percentage points. Well, let's go back to 2016. On election day itself, that morning, before voters were going to the polls, at least to vote in person, trump was behind Hillary Clinton by a little more than three percentage points and he lost the popular vote by two percentage points. So on Election Day, he did a point better, one point better than the polls said he should have done in the popular vote, one point better. Well, now let's go to 2020. Well, now let's go to 2020. The morning of the election, he was down in the polls by about 7.5 percentage points and he lost the popular vote by 4.5 percentage points, which means he did three percentage points better in the actual vote total than the polls were saying he should. So one point better in 2016,. Three points better in 2020.
Bob:I'm going to assume my base assumption. I have to make some assumption about the error that the polls are going to have. My base assumption is that the polls are going to be off by one point and Trump's going to do one point better than the polls say. He will Not as well as 2020, but right about 2016. And it's possible it could go the other way, but you have to make some assumption.
Bob:Sure, then the question is how much better in the electoral college will Trump do than the popular vote? Back in 2016, he did almost three percentage points better in the electoral college than the popular vote. Percentage points better in the electoral college than the popular vote, and by that I mean Hillary Clinton would have had to win the popular vote by three percentage points in order to win the election. She won by two. She was a point up. So Trump was three points better in the electoral college than the popular vote. You do the SAM analysis for 2020, and it was four points. In other words, if Trump had lost the last election by three and a half rather than four and a half, he would have been elected president. Okay, so three points better in 2016, four points better in 2020.
Bob:My assumption is that Trump has an electoral college edge of two percentage points this time An edge, but less than the previous two elections. I think that's entirely reasonable. You have to make some guess. So if you total those up, how much better is he going to do on election day than he actually does in the polls, and what is his electoral college advantage? You total those up three percentage points.
Bob:So if you were to ask me on election morning let's say, harris is ahead in the polls by two percentage points, Bob, who's going to win the election? And I had to bet, you held a gun to my head, I had to get it right I would say probably Trump. Not definitely, but probably. I think he has about a three percentage point advantage relative to the polls.
Bob:And here we are with Harris in the midst of a honeymoon, up either a half a point in the RealClearPolitics average or two points according to Nate Silver. So I actually think he still has an edge, not an enormous one I could definitely see Harris winning this election but enough so that I give Trump about a 65 percent chance of winning. Now the only thing I could tell you for sure, ryan, is that that number is going to change between now and Election Day. It may change multiple times. It may change multiple times by lunch today OK, that's an exaggeration. By lunch today Okay, that's an exaggeration, but it is going to change as the race deepens and we get more polling information and watch just as observers just as voters, how the election campaigns are going.
Ryan:Yeah, what about the follow through then? To Congress, both houses of Congress, I think? In the past you've made the argument that the Senate the Republicans were heavily favored to take more seats in the Senate. The House is a little bit, maybe a little bit more even, but probably favoring the Republicans as well. Has that changed at all? Can you break that down for us?
Bob:Sure, with the Senate it really hasn't changed. I still give the Republicans about a 95 percent chance of controlling the Senate, and the reason is because today the Republicans have 49 seats in the US Senate. They're almost certainly going to win West Virginia because Joe Manchin, the incumbent Democrat, decided not to run. He's pretty much the only human in only Democrat in the state of West Virginia who could have won. He decided not to run, not for president, not for Senate, not for anything. And the Republicans actually showed good sense, which is not always on their part, by nominating the sitting very popular Republican governor, jim Justice, and he's almost certainly going to win. So that's 50. So are the Republicans going to lose any seats they currently have? Very unlikely. Some people are talking about Ted Cruz. They're just trying to raise more money. Ok, ted Cruz is not going to lose in this cycle. And then you have the one Republican running in a purple state and it's not really that purple, it's Florida. They have to defend the seat.
Ryan:Are they a purple state?
Bob:Well, I describe them as purple because they're within 10 points. At least, in the prior presidential election in 2020, they were within 10 percentage points of the national average popular vote, and that's why I define a purple state, maybe a maroon Like is that a more red purple?
Ryan:Yeah?
Bob:They're on the reddish side of purple. They absolutely are. They're on the edge and after this election I might have to take them out of the purple category because I do it every four years. So they are the only state that's plausibly purple. He is not going to lose. The Republicans are not going to lose any of the seats, but they also have pickup opportunities Already. The Republican is ahead in the state of Montana. He's favored Bernie Moreno, as I said earlier, not the best candidate for the Republicans if your only goal is winning in the state of Ohio, but with Vance on the ticket, that will probably pull him across. Probably, not definitely. And then they have pickup opportunities elsewhere. They're going to be.
Bob:They're underdogs in each of the races I'm going to talk about. They're underdogs in, but they could win one or more maybe. So Arizona, michigan, nevada, pennsylvania and even Maryland, possibly even Wisconsin. Now, they're underdogs in each of those states. If they come out of Election Day and they haven't won any of them, I would not be shocked. But they have a fighting chance in each of those states. So the Republicans have an opportunity, if they do well this cycle, to run up the score in the Senate. My best guess is you end up with somewhere in the vicinity of 53 Republican seats, at very worst 50. But the Democrats would have to get very lucky to get 50. And so I only put about a 5% chance of a Democratic sweep. Okay, if you look at the prediction markets, they're saying about 25%.
Ryan:Yeah.
Bob:So whenever I see those prediction markets, I'm like what am I missing? Ok, what am I missing? It's possible.
Ryan:Have you looked into who is actually making the bets in those prediction markets?
Bob:Well, I know that PolyMarket I'm pretty sure PolyMarket is only abroad, that Americans at least, unless you VPN, unless you arrange the VPN in from abroad or something, can't bet on that market and predict it. It's a little less liquid, I believe, than polymarket, okay, but it does have more domestic voters, okay.
Ryan:Yeah, my impression was that a lot of it was international participants that were kind of laying their money in and I just wonder sometimes if they have a perspective that's maybe informed more by the news as opposed to boots on the ground living here as a US citizen. So maybe their biases reflect what they're seeing in the news.
Bob:Yeah, I think what they're thinking, especially on polymarket, where it's 25% Democratic sweep and again it's possible they would have to get very lucky this cycle. I think they're thinking that, oh, Harris has a better shot than Biden and historically, if the party wins, they take over the Senate. So I think they're working on historical data rather than looking in a more textured way, race after race. So they're trying to figure out what's really possible.
Ryan:Yeah, okay, what about the House?
Bob:House. I think that is going to be the toughest of all for the Republicans to win. Okay, I think they have a better chance, a slightly better chance with the presidency and a much better chance with the Senate. I think it's almost a flip. Who's going to win? Maybe I'd give the Republicans a 55 percent chance, but it would not. I think it's really a flip. The one thing a lot of people are not talking about even political analysts are really missing this is that it's entirely possible that the Republicans win the White House, donald Trump wins and let's say he wins, but he doesn't win the popular vote. That the Republicans take the Senate narrowly, but they lose the House. And that the Speaker of the House of Representatives is Hakeem Jeffries for the next two years at least, and probably four years, in which case he is by far the most powerful Democrat in Washington DC. And do you think he's just going to roll over for Trump and the Republicans and allow for the extension of those tax cuts?
Ryan:that were originally enacted seven years ago.
Bob:Yeah, Like, absolutely not Now. I think eventually those tax cuts, or most of them, would get extended. But he will fight Donald Trump tooth and nail for everything Trump and the Republicans want out of Congress, and so I think the top tax rate would definitely go back up to 39.6 percent. Democratic votes from California or Massachusetts or Connecticut or New York or New Jersey or Illinois to get that tax cut extension across the goal line.
Ryan:Is that salt deduction? Is that a provision that was part of what will expire in 2025 or whatever it is?
Bob:I believe that's right, it's on the personal side, and so if it fully expires and it goes way back up, as do the tax rates, yeah right. But remember you will have some of these New Jersey Democrats there might be a couple of New Jersey Democrats or New York Democrats who represent upscale districts, upscale suburban districts, whose constituents are interested in the extension of the lower marginal rates that occurred. So the question will be what do the Republicans have to do to get their votes? And what I think it would include is raising the top rate. That's not as easily politically defended, but also expanding the salt deduction for itemizers from what is now a 10,000 cap to something like 20 or,000 or $25,000 instead.
Ryan:Okay, yeah, that is interesting. So the corporate taxes are not expiring, right? The corporate tax rate, that is a permanent tax rate.
Bob:Yeah.
Ryan:So, unless it's changed, it would have to be changed in order for it to go up.
Bob:That's correct. Now, if the Democrats win, if there's a Democratic sweep again low probability event, but let's discuss it, just in case it happens I think the corporate rate goes up to 28 percent. I think there'll be some Democrats calling for higher, maybe even higher than 35, where it was prior to Donald Trump's tax cut in 2017. But I think in the end, that wouldn't happen because, even if the Democrats have control of the US Senate, it's likely to be with 50 votes and the latest president breaking ties. Now, if that happens, that empowers the most moderate Democrat on each issue to control where policy goes, and I think the most moderate Democrat would be OK with a 28% corporate rate, but not going all the way back to 35%.
Ryan:Yeah, what about on the spending side? One of the things that we've talked about in previous times you've been on the podcast is the budget. I think last time you were on you called it one of the most irresponsible budgets that you'd ever seen in Washington responsible budgets that you'd ever seen in Washington. What's your thinking on the outcome of the elections related to what will happen from a spending standpoint going forward?
Bob:Okay. So I actually think that this is contrary to the conventional wisdom. We are definitely going to see big budget deficits for the next several years. To see big budget deficits for the next several years, but I think the most worrisome combination for the bond market should be a Harris victory paired with a Republican Senate, and the House wouldn't matter at this point. And here's why. What kind of tax policy do you get out of that combination? My best guess is it would be the tax agreement or negotiation or compromise that occurred in 2012.
Bob:After the election in 2012, president Obama beats back a challenge from Mitt Romney. He criticizes the tax cuts originally enacted by Bush in 2001 and 2003,. He turns almost immediately around after winning in 2012 and cuts a budget deal with the Republicans. And the reason is because, if he didn't agree to an extension of almost all the tax cuts enacted back in 2001 and 2003, the Republicans were going to jam him and say well, we're not going to extend any of them and you'll preside over a horrible economy for the next year and a half. I'm not saying it would have been a horrible economy, but maybe it would have been and then we're going to wipe you out in 2014 in the midterm elections. So you're going to be a lame duck from day one unless you sign on. And he was willing to agree to an extension of almost all those tax cuts, except at the very top, where the top rate went to 39.6%, where it had been under Bill Clinton, and it stayed there for four years. So I think that happens this time around.
Bob:If there's a Harris administration paired with the Republican Senate, then the Republican Senate leader will say listen, unless you extend almost all the tax cuts originally enacted under President Trump, we're not going to extend any of them and we are going to wipe you out in the 2026 midterm elections and your presidency will be pretty much dead. So it's your choice. Make the same negotiation tactic they used with President Obama. It worked on Obama. I think it'll probably work on Harris as well. And, by the way, those tax cuts would otherwise expire at the end of 2025. So it'll be January 1st 2026, when everybody starts seeing their withholding going up right in an election year. So they won't have a year and a half to adapt to it the way they would have under President Obama. So I think that would be a very strong bargaining position for the Republicans. So that's an environment in which almost all the tax cut gets extended. So that's an environment in which almost all the tax cuts gets extended.
Bob:But let's ask ourselves is Vice President Harris, as president, going to sign any cuts to Social Security or Medicare or Obamacare or Medicaid or green energy subsidies? I don't see her cutting any of that stuff. And so we are going to have a big spending regime paired with a continuation of the tax cuts, and that is a recipe for close to $2.5 trillion deficits for the entire Harris administration. She's not going to raise tariffs either, not the way President Trump would. So I think in the end that would be. The bond market doesn't realize it yet, but that would end up being the worst scenario for the deficit and the bond market in the years ahead.
Bob:A Harris presidency with a Republican Senate because at least if there's a Republican sweep yeah, they'll extend the tax cuts, maybe even deepen them, but they would probably reform Medicaid. Long term, the actuarial problem would shrink enormously in Medicaid and in parts of Obamacare. They'd probably raise tariffs. They'd curtail green energy subsidies. So I think their cutting would, in the end, probably more than fully offset the extra tax cuts that they would do. Over and above what a Harris administration would do.
Ryan:You know. Another thing I wanted to ask you about because it's something that you've been talking about, for I think you're the first person that I heard talk about what was coming down the road with the Chevron deference and the impact on regulations, and maybe, before we ask you about that, talk about what that actually is, because that was struck down by the Supreme Court recently. So what is the Chevron deference?
Bob:So Chevron deference named after a court case, supreme Court ruling that comes from the mid-1980s was basically this idea that the courts would look the other way when agencies interpreted their congressional mandate.
Bob:That an agency like the Environmental Protection Agency or the Labor Department could basically look at a law passed by Congress on a certain topic that granted that agency authority on that topic and the agency can decide basically on its own, without the court intervening or any level of courts intervening, what kind of authority it gave that agency intervening, what kind of authority it gave that agency and how wide ranging they could be on that topic area.
Bob:Well, the Supreme Court finally got a case this year and decided mid-year no, chevron deference is not the appropriate standard, that agencies may have some technical expertise but they don't have special legal expertise and that the courts get to review the issuance of rules and regulations coming from the agency and they get to decide they, the courts, get to decide whether the agency has overstepped their bound, whether the agency was really given the authority to issue that specific regulation by Congress. And I think what's going to happen is it's really going to jam up the deep state regulatory process, if you will. I say that partially tongue in cheek, but only partially For the next generation. So I'll give you an example Net neutrality.
Bob:That ain't going to happen again. That's going to get shut down by the courts.
Ryan:Fiduciary rule, and these are because the agency wasn't granted authority to actually do these things right Correct Wasn't explicitly granted that authority to do it, there may be a law with a vague statute, but it doesn't say, yes, you can do this specifically.
Bob:Yeah, exactly. And so a lot of the regulatory measures and tactics that the Democratic Party in particular wants to use, have the Department of Labor do, have the EPA do. They'll realize that the statute doesn't really grant them explicitly that authority. And so I think you're going to have, given the current composition of the court, a lot of these attempted rules and regulations struck down. In fact, I think it's going to be so aggressive on the court side striking them down that at a certain point the regulatory agencies will kind of give up trying to issue new rules and regulations unless they really are reinterpretations of things they clearly do have a statutory or legal mandate to do from Congress. Here's the interesting part, though In 1950, I think four or five when Brown versus Board came out from the Supreme Court, the Supreme Court did not say all new schools have to be desegregated, they applied it to all schools, new and old.
Bob:Well, what the court basically did and I was a little disappointed by this, frankly, it was my own personal viewpoint they basically said that new regulations, the regulation in 1998 or 2006, and the courts gave the agency Chevron deference at that point in time. Well, we're going to allow that to go. I mean, imagine if the Supreme Court had said in the mid 1950s, with Brown versus Board, only new schools have to be desegregated, the old schools are fine. Yeah, yeah, yeah. That would have been kind of weird. Well, that's kind of what they said, though some aggressive litigators for conservative think tanks taking an old rule and seeing if they can test it, and seeing if they could get, because it was basically 6-3. So they would be willing to lose one conservative Supreme Court member and testing an old rule and seeing if they can get the old rule overturned and testing an old rule and seeing if they can get the old rule overturned.
Ryan:So, even though the old rule based on this current decision is still in place, they use that as a basis to go after the old rule, but that's it.
Bob:The court left it somewhat ambiguous about whether they would go and revisit the old rules, but they could have, in theory, just struck down all the old rules and said you know what All these rules are out? Here's a laundry list of all. Did they?
Ryan:not do that because it would be too disruptive. Is that kind of I?
Bob:think a combination of disruption, and they like to kind of husband their political clout and I think many people would have seen it as overstepping their bound because they didn't need to come to that ruling. They were only faced with litigation on a particular rule and that particular rule was a new rule. So they're going to need a whole new case challenging an old rule under this new interpretation and maybe at that point, several years from now, they'll say you know what A lot of these old rules need to be thrown out too.
Ryan:So the industries that are probably impacted most financial industry, materials and mining energy probably.
Bob:Fishing industry I mean this runs the gamut Tech industry, Again, net neutrality.
Ryan:Net neutrality Ain't going to happen again.
Bob:The Democrats may try, but I think it's very unlikely to happen. They will not be able to deliver outside of the legislative process for that industry.
Ryan:It seems like that would have a really difficult to measure but potentially profound impact on actually the ability to do business and therefore economic growth. Is that, I mean? Is there a way to quantify that?
Bob:Well, the level of certainty there is not. Yeah, it's qualitative only. The level of certainty for businesses should be much higher because they're not going to get hit, like you know, out of nowhere with a new regulation that they can't see coming. Yeah, because they could basically look at the statute and say, well, these are the areas that the regulatory agency has jurisdiction over. We're not going to get hit with something that we couldn't have thought of beforehand.
Ryan:Regulatory clarity seems like it would be a good thing A good thing for sure. Okay, I want to talk more about your views on the economy, because that's another thing that we've discussed in the past, and how your outlook on potential for a recession has evolved over time. Maybe that's a good place to start. What do you think is what's your outlook now? Are we heading into a recession? I've even heard people recently say that we're in a recession. We just don't recognize it. Thinking about the SOM rule and some other things like that. What's your-?
Bob:I don't think we're in a recession today. For us to be in a recession, we need to see most likely negative payrolls, not just the rising unemployment rate, because the rise in the unemployment rate over the past year has largely been related to an increase in the labor force, the increase in the number of people looking for work. It hasn't been a decline in the number of people looking for work Right. It hasn't been a decline in the number of people working.
Ryan:So people haven't lost their jobs. There's just more people looking for work. Therefore, your rate of unemployed goes up.
Bob:Industrial production is still OK. But you do see some of the signs you would normally see if a recession were going to happen so we're not in an economic boom by any stretch of the imagination were going to happen. So we're not in an economic boom by any stretch of the imagination. I think that over the next 12 to 18 months, next 18 months, but so by, let's say, late next year, the end of next year, I think the odds are north of 50% that we're going to hit a recession. A little bit north, not a lot. I think they're significantly higher than the markets are.
Bob:Pricing in Monetary policy right now, in my opinion, is tight. It takes about a year or so for monetary policy to really hit the economy, both real economic growth and inflation, with any significant force. So if we're tight today and we're going to remain tight for at least the near future because even if they start cutting, it's just less tight, not actually loose that means the deceleration in economic growth we've seen over the past year or so and the deceleration in inflation over the past year or so are going to continue for at least another year, least another year. And if we're growing at a soft rate of economic growth and inflation is already hurtling downward, then I think over the next year I would not be surprised if inflation ends up, at least temporarily, at or below the Fed's target and economic growth lurches towards zero and maybe even temporarily slightly below, probably by early next year.
Ryan:So is there a risk of deflation?
Bob:I don't think there's a risk of deflation. I don't think they've been tight enough to generate deflation. So right now, if you look at the CPI and that's not the measure that the Fed uses, but it's the measure most Americans are familiar with, including investors so the CPI peaked at like 9% a couple of years ago it's now down to 3%. I think we finished this year in the vicinity of 2.5% on the CPI. Okay, at the very end of the year that data will come out in mid-January. For December, I think it will be roughly 2.5%. So we're continuing to decelerate.
Bob:January for December I think it'll be roughly 2.5%. So we're continuing to decelerate. I think it'll probably go down to 2% at some point on a year-ago comparison basis 12-month trailing average, whatever. So 2%, which would indicate that the Fed's preferred measure, pce inflation and I won't get into the details why they're different will be a little bit below 2% sometime by early next year. I don't think it's going to lurch to zero though, either of those inflation measures. Maybe for a month, like just for that month, yeah, like month over month inflation might be negative. We saw a negative CP the previous 12 months.
Ryan:Okay. So if that's the case and if monetary policy is a bit tight, the market is pricing in that the Fed will cut in September, maybe even a couple times.
Bob:My best guess is one in September, one in November, one in December Okay, at meetings only. And then I think they're going to cut throughout next year, throughout next year, throughout next year, Every meeting. So I believe that every meeting, starting with the next meeting in September, through December of next year. This is my base case and I'm almost certain to be wrong, but I'm not sure on what side I'm going to be. It's like an over-under.
Bob:Okay, for those of you who gamble I'm sure there's nobody out there who gambles my over-under is that we're going to have cuts one each at the remaining meetings of this year and one each next year at all the eight meetings, and we end up in the vicinity of 2.5% to 2.75% on the federal funds target rate by the end of next year. Will we go lower than that? If the recession that I think is more likely than not is more severe than I think it will be, we could go lower than that temporarily, but we're going to come back up because I think eventually the Fed's going to end up too loose and I think internally the Fed is OK with a somewhat higher rate of inflation than 2%. So I think inflation will eventually come back up. They'll overcut and the target rate will eventually have to go up as well.
Ryan:Interesting, so they're going to overshoot on all sides basically.
Bob:Which they normally do. Yeah, yeah.
Ryan:I don't think I've heard many other people make that far of a forecast that you're going to see that many cuts between now and the end of next year. Really interesting. One of the things that I've just noticed within the last couple of days is mortgage rates have come down quite a bit, and I guess that's you know. As rates come down in general, that's likely to. Well, let me ask you, what is that going to do for the real estate market? This is something that you follow closely real estate so it seems like that would potentially add some liquidity to the market. If nothing else, more people would be willing to get a new mortgage if rates are more reasonable.
Bob:Yeah, I think the pace of sales will be higher a year from now than it is right now, for both new homes and existing homes, and I think mortgage rates will come down. And even if we hit a recession, housing is not going to bear the major brunt of that recession. I think it'll be other sectors of the economy, including commercial construction, business, investment. I don't think the consumer will go negative in terms of real economic growth, but they'll be close to zero, maybe slightly positive. We've had recessions before where real consumer spending continues to grind higher, maybe not every quarter, but continues to grind higher. So I think sales for homes would go up in the year ahead. I think in terms of home prices because there's just been a lack of supply for so long, and I mean that in terms of the pace of construction we're underbuilt in the US, especially considering how many people have come across the border over the last few years that I think prices will continue to rise, maybe not every place around the country, but prices are likely to be, say, 3% higher a year from now. Whether you look at the Case-Shiller Index or the FHA, fhfa Index, a year from now likely to be a little higher, and I think the pace of construction will have to go higher Because I think, even like the biggest problem in the United States, one of our biggest long-term problems and it's a self-inflicted wound is the regulatory regime, basically state by state across the country, not every state, not Florida, not Texas, not a lot of the red states around the country Indiana, fine, okay but there are a lot of states around the country, especially the blue states, that have put limits on construction.
Bob:And then the same states turn around and say, oh, home prices are too high, we've got to impose rent control. Well, you just need to build more. You need more units. More supply will put a damper on the price increases. That's just the way it works. It's just basic economic 101. Yeah, economics 101. So we're going to need more or fewer restrictions on construction. We're going to really have to lift the pace of construction in the decades ahead.
Ryan:Okay, the time has flown by. Once again, bob, I will ask you. My final question is what I've asked you the last couple of times, and that is the Bob Stein reading list. What books are you reading now? Anything you'd recommend to the audience?
Bob:I'm reading a book right now by a guy named John Gray G-R-A-Y. It's nonfiction. He's a former professor at Oxford and the book is called I think it's the New Leviathan or the New Leviathans, and he's a philosophy guy and he basically is looking at Thomas Hobbes his book from 400 years ago or so Leviathan his book from 400 years ago or so, leviathan and looking at the development of the governments around the world and what he shows is that okay, the original Leviathan that Thomas Hobbes imagined, this early Enlightenment philosopher, was that you needed a strong central government of some sort to protect people from devolving into anarchy. Ok, and you know, being hit from abroad by incomers or newcomers or by or invaders or crime and things like that. Or invaders or crime and things like that. What he says is that it's kind of interesting. We're developing new Leviathans, whether it's China, russia, even in the United States.
Bob:The difference is that and Hobbes probably could never imagine this would be that the new Leviathans are being asked by the people and offered by the leaders to give meaning to people's lives. I mean, think about the Soviet Union. We're going to give meaning to your lives because we're going to create this heaven on earth, this utopia through communism or Bolshevism or whatever. So that's a real difference between the original concept of Leviathan, which was just protect people. We're going just protect people. We're going to protect people and let them go about their business. Now it's we're going to protect you, or claim to protect you. We're going to give you meaning and to some extent it's not unresponsive to what people want from the central government. They want meaning, or many people want meaning. So I'm about a third of the way through, so we'll see what else he says, but I'd highly recommend it If you like, like deep political theory, but not too deep it's a very good book.
Ryan:Yeah, that's an interesting perspective, I think. Well, it doesn't seem to me that meaning can be found in what the government offers the central government.
Bob:Well, it gives you like if you were a Soviet man in 1925, they told you you were bringing about a new form of civilization, yeah, and that people would look back at that generation fondly. So you know, if you're not religious and I don't claim to be super religious myself if you're not religious, it's hard to not pursue meaning in other ways. People are always going to pursue meaning and connection and transcendence in their lives, and how they go about it is up to them, but they're almost certainly going to go about it, yeah. And then the only question is whether they're aware that they're going about it, or they claim to not be pursuing transcendence or any religious thought, but they're religious anyhow. Yeah, I mean, some of the most religious people I know are just atheists Interesting.
Ryan:Interesting. Well, I'll have to check that out, Bob. Once again, thanks for coming on the podcast. I think we need to have you on before the election in November again, so we'll mark it down on your calendar if we can work it out. But again, thanks for coming joining us on the podcast. Once again, thank you for all joining us on this episode of the First Trust ROI podcast. We'll see you next time.
