First Trust ROI Podcast

Ep 32 - Bob Stein - Election Countdown: Assessing the Odds and Outcomes - ROI Podcast

• First Trust Portfolios • Season 1 • Episode 32

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Bob Stein — As Election Day looms, Bob analyzes the probabilities of different election scenarios. Additionally, we explore how tariffs and other tax policies might affect the economy, discuss the implications of government spending, and consider if advancements in AI might pave the way for universal basic income initiatives.

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Ryan:

Hi, welcome to this episode of the First Trust ROI podcast. I'm Ryan Issakainen, ETF strategist at First Trust, here. We are less than two weeks away from the election and I've got Bob Stein joining me once again on the podcast. Bob is going to break down what he thinks is going to happen in the election and I've got Bob Stein joining me once again on the podcast. Bob is going to break down what he thinks is going to happen in the election in less than two weeks from now. He's going to give us his odds as well as implications for what could happen in the wake of the election. We're also going to talk a bit about the economy. We're going to talk about the Fed. We're going to talk about interest rates.

Ryan:

Lots to cover in this episode of the First Trust ROI podcast. Bob, thank you for coming on the podcast again. I want to get your views on what's happening in the election next week. So we're recording this episode on October 24th, which is Thursday, and I recognize a lot can change between now and then. So this episode is set to air on Monday. So keep that in mind with your prognostications At this point. Would you share with us and the listeners of the ROI podcast how you would handicap the presidential election.

Bob:

So, as we tape this which, as you mentioned Ryan, is 12 days away from the actual election, so everybody's going to watch it eight days away. A lot can happen in four days, especially over a weekend with the news cycle. My anticipation is that Trump, who has now pulled a little bit closer in the polls, will probably win, but not definitely not by a long shot. So between August and I think a week ago, I basically gave Donald Trump about a 60% chance of winning and the Republican sweep scenario a 45% chance of happening, and I recently took that up a few days ago to a 65% chance of Trump winning and a 50% chance of a Republican sweep. So flip a coin, see what happens. Now. Just to let our viewers know what we're translating that into a way that many of our viewers will understand more easily.

Bob:

It's that if you have a 65% chance of winning a game in the NFL, a regular season game, you're probably a four-and-a-half point favorite.

Bob:

Now think about your home team or your favorite team and how often they lose when they're favorites. Okay, if you're a Kansas City Chiefs fan, it probably doesn't happen very often, but if you're a Chicago Bears fan, it happens all the time. So I'm not saying that Trump can't lose. He has about a 35% chance of losing, but I think he's in a somewhat better position than I thought he was the last time we spoke, ryan, one of the reasons for that is simply that Harris' lead in the polls is diminished compared to where it used to be and she only has 12 days left.

Bob:

What I've been saying all along is basically that if I wake up on Election Day and Vice President Harris is ahead in the polling averages by about three points, then I think it's a toss-up, because I think Trump has a two-point advantage in the Electoral College relative to the popular vote, because I think Trump has a two-point advantage in the electoral college relative to the popular vote. And I'm guessing, and nobody should have a high degree of confidence in this, but my best guess is that the polls will probably underestimate the margin for Trump by about one percentage point, which is a lot smaller than the error, or what some people call bias four years ago, when it was two and a half to three percentage points against Trump, and more in line with what happened in 2016, when the polls were off by only roughly one percentage point.

Ryan:

So I've often wondered, when we're thinking about polling and just kind of watching how it plays out, sometimes it feels like polls are intended to influence rather than measure. Does that happen, or am I just paranoid?

Bob:

No, I think it does, but I'm not sure they have the intended effect. I mean, let's say you're a Democrat and you see a bunch of polls that are secretly or not so secretly funded by Republicans, with Trump narrowly behind, which you would assume means he could win in the electoral college, or maybe even Trump ahead, like some recent polls have shown. Would that make you more or less likely to vote? I actually think that would make you a little more likely to vote and turn out and to try to make sure your side wins, because more assistance is needed by your side to win. So the whole idea that polls are just trying to mess with people's head, I don't necessarily think that's a big issue because I don't know if there's if the intended effect demoralizing the other side would actually work in a close election.

Ryan:

It feels like maybe they're just trying to create momentum. Like you know, some people don't pay that close attention to what's actually happening. They're kind of a bandwagon effect. So that's that's. I thought maybe there would be some bandwagoners that would jump on because they think they it's almost like they want to vote for the winner and so maybe that has an influence.

Bob:

I think that's the theory, Ryan.

Bob:

I don't know if there's any data to to buy to back that up, because, yes, you might affect the bandwagoners, but you might might also intensify the turnout rate of the people who are now worried that they're going to lose. So you know, if you had a bunch of polls showing Trump up five OK, we don't have polls like that, but let's imagine you did Wouldn't that scare the daylights out of Democrats and get them to turn out to higher numbers? And couldn't it actually reduce turnout among Republicans who, frankly, now that Republicans get more votes from lower education voters than they used to, might be more of the marginal voters than the Democrats? So I don't necessarily think the theory works.

Ryan:

Nevertheless, I'm guessing there are polls out there that try to accomplish that, whether the theory works or not, yeah, okay, so I live in New York State, and one of the things that I've noticed in New York State is that there doesn't seem to be a lot of polling for the presidential candidates. There's maybe three or four polls that have been done that I can find on Real Clear Politics for New York, and it's kind of surprising. I think I understand why, because it seems like it's a lock for the blue team, right. But one of the things that I've noticed, as I compared those polls this time to the polls in 2020 and 2016, is that it seems like the margin in favor of the Democrats is pretty significantly less than it was the last couple, and so I want your take on that. I think the swing is depending on the poll. You're looking at something like eight to 10 points in favor of Trump. Compared to the margin, kamala is still way ahead in New York, but the margin is less. So what are the implications of that?

Bob:

So I actually have a very counterintuitive interpretation of that data. I have little doubt that what you've observed is true and I think the Democrats will still win in a close election easily at the state of New York and say New Jersey and several others. But I also agree that the margins in those states will be smaller than they have been in previous presidential election cycles. So the counterintuitive part of my opinion is that that is, or that phenomenon is, actually good for Democrats. Okay, and here's why In previous cycles they would win New York and say New Jersey, overwhelmingly, and what that would mean is that they had a lot of wasted votes relative to the national popular vote, because they're already going to get the electoral college votes for those particular states, like just focusing on the state of New York. But if, for example, their margin is lower because perhaps Jewish voters are more Republican than they were in previous cycles or because some Hispanic, especially Dominican, voters are more Republican than in previous cycles, then the Democrats, relative to the popular vote nationwide, are going to waste fewer votes in New York.

Bob:

Meanwhile, the Republicans, who used to have a narrow edge in close elections in the state of Florida, will now probably win Florida more comfortably. Maybe. Not a landslide, possibly, but I define a landslide as winning by 10 percentage points, but more likely just a large victory, which means they're wasting votes in Florida and that the Republican electorate is not quite as efficiently laid out across the country or distributed across the country relative to the Democrats, compared to the way it was in 2016 and 2020. So, if you look back to 2016, donald Trump's advantage in the Electoral College was almost three percentage points, I think. To be exact, I think it was 2.8 percentage points. His advantage in the Electoral College in 2020, even though he lost was even larger relative to the popular vote, it was almost four percentage points. I'm assuming it's something in the vicinity of two percentage points this time around, and what I mentioned about Florida and the phenomenon you correctly observed about New York is a big part of that. Republicans are still more efficiently distributed by Democrats, but their advantage is diminishing.

Ryan:

I think that is really counterintuitive. And so what I'm hearing you say and just make sure I'm hearing you say it properly is that basically the amount that say New York is contributing to the overall popular vote advantage is much less. Therefore, that actually means that there's maybe a margin working in the favor of maybe some of the more close states towards the Democrat.

Bob:

That's right. Let's compare two elections just so you see a snapshot 2016, trump versus Hillary Clinton. 2024, trump versus Kamala Harris. So let's say the polling margin in the same poll by the same pollster, both times showed the Democrat up three percentage points national average. Well, if we know that Hillary Clinton was up by and I'm just making up numbers here to give you an example was up by 20 in the state of New York, that means Harris's three-point edge is less reliant on New York's popular vote and therefore she has a better chance of winning some of the battleground states that will determine the outcome of the election. I'm not saying a better chance of winning than Trump, but a better chance relative to the popular vote than Hillary Clinton had, but a better chance relative to the popular vote than Hillary Clinton had.

Ryan:

And that's assuming that you know some of the polling is consistent between those states and the national polling and you know it's a fairly small sample with New York, as I mentioned. There's only been a few polls that have been actually conducted this fall that I've seen anyway.

Bob:

Why would you waste your money and poll a whole state of New York? Now it is worthwhile to poll individual congressional districts in the state of New York because we have some newly carved out ones that might favor the Democrats relative to the Republicans compared to their previous cycle. That's definitely worthwhile and it would be to the country's benefit to see more polls of those particular congressional districts. But the whole state it's really not worth it. There's no statewide contested election this year.

Ryan:

All right, I want to shift a little bit to kind of a linkage between what's being talked about in the election and economics, which you're an economist. That makes sense. A lot of talk about tariffs lately. You know, president, former President Trump seems to be the candidate that argues more favorably about tariffs, although I will observe that the Biden administration hasn't really rolled back much of the tariffs that the first Trump administration put on. But I guess, more generally speaking, can you give us your view on the overall impact of tariffs? Are they a good policy tool? Are they a bad policy tool? Do you think Trump is actually going to implement the tariffs that he's talked about in the campaign this year?

Bob:

So I think he will raise tariffs on the rest of the world and he will raise tariffs on China. There's very little Congress can do to prevent him from raising tariffs on a particular country like China, and I think he'll go heavily after China, because it's not just an economic issue. It's really a geopolitical issue, and this is a country that has aspirations in the Pacific to be a regional power. That might include seizing the country of Taiwan, and so if there's a possibility that Americans and Chinese military forces will be shooting at each other sometime in the next decade I'm not saying it's guaranteed or even above 50%, but there's more of a possibility we will be shooting at each other than say we'll be shooting at Frenchmen, okay or many other countries. So in that scenario, the tariff really has more of a geopolitical aspect or a justification, rather than an economic justification. Now what's going to happen if we raise tariffs and there's a legal issue about whether he could do a blanket increase in tariffs across the board for all countries? There is a lot of legal ambiguity. I'm not saying he can't. I'm not saying he can't, but there are a lot of people who have looked at this issue and it's ambiguous and it might go to a very high level of the federal courts to decide, so I think, in the end, he'll probably be able to get those into law. I think they're passed through to consumers, and US consumers will pay the vast majority of the cost. That doesn't necessarily, though, mean it's bad policy. I mean the federal government is going to need more revenue in the future, so this might not be a horrible way of doing it.

Bob:

I don't think it's going to bring back Youngstown, ohio, to be an industrial power like it was 50 years ago, but it might have some impact collectively. The tariff regime on moving certain industries to be more heavily concentrated in the US than they would otherwise be. The tariffs on China I don't think that's going to move much, if at all, back to the US. I do think it'll have a potentially positive effect on other countries like India, who would benefit, because if American investors or consumers want to access low skilled labor, that's a better country. Lots of people there in the process of industrializing, so it'll be a shift.

Bob:

I don't think it would end up actually in reducing our trade deficit much, if at all. The US runs a trade deficit because we're a great place to invest, and so American companies and American consumers because foreign capital continues to move into the US, can afford to purchase more than we produce. It's kind of a high-class problem, if you will. Now, in terms of inflation, I expect the Trump tariff regime would probably lift inflation in the US by about a percentage point for about a year. But once prices have adjusted to the tariffs, that doesn't mean inflation remains high. Inflation can then go back down to whatever the Fed is targeting.

Ryan:

So now that so it's kind of a one-time effect.

Bob:

It's a one-time effect, maybe one percentage point of additional inflation. For a year, that doesn't mean inflation has to go much higher than it is today. Inflation for a year that doesn't mean inflation has to go much higher than it is today. And the reason is because I think, given the tightness of monetary policy and the lags between monetary policy shifts and inflation, we may actually for a time next year go below the Fed's 2% target on PCE inflation. We may end up in the vicinity of 1. A half percent. So if the introduction of those tariffs coincides with where we would otherwise be temporarily low inflation, we might just not get that temporarily below two percent inflation.

Ryan:

The other thing I wanted to ask you about was the implications from a tax policy standpoint of the elections. I think it's the individual tax rate that is set to go up once the Trump tax cuts expire. Corporate tax rates were permanent. What's your view on? I guess, the different scenarios are you know a sweep one way or sweep the other way, or a sort of a mixed election in either direction. You know a sweep one way or a sweep the other way, or a sort of a mixed election in either direction. You know, I guess, if you could break that down, what's likely to happen in your view with the tax code in the Next year or two.

Bob:

Let's go through the four scenarios that I think are possible and I'll give you the percentages for each. So I give a 50% chance to a Republican sweep. Where they control the House, the Senate and the White House, we get a Republican sweep and if that happens, they will almost certainly extend not permanently but temporarily the Trump tax cuts originally enacted seven years ago and they'll probably try to go a little deeper. Trump has talked about cutting the corporate rate, which he already cut from 35 to 21, down to 15. I think 15 is probably a bridge too far because of our deficit issues in the years ahead, but I think he could bring it down to something like 18 percent. I also expect some sort of tax relief for tips, given how much he's talked about that. And, by the way, that's really a play for Nevada's electoral votes. No state, I would imagine, has tip income relative to regular income more than the state of Nevada, with all those blackjack and other dealers at all the casinos. So it's basically a play for Nevada's electoral votes, which is why Harris copied the policy. So I think that would be likely.

Bob:

I think it's gonna be hard to implement, so they might have to keep it narrow and say only for casino employees or something like that, or only for restaurants. You know firms that sell more than a certain percentage, where they get a percentage of the gross from serving food or something like that, but it's going to be tougher to define in the tax code than you think. Otherwise, you know, if they're sloppy with it, then I'm going to go to my employers at First Trust Advisors and ask to be tipped. I want to be tipped, you know, rather than paid. We'll see how that works, how that goes over. Have you ever waited tables? Very briefly, when I was younger. You might not believe this, ryan, but I'm not actually the best in the consumer service enterprise situation. Yeah, I know you are. I know you are. You're probably going to lose sleep imagining like how that could have happened. So I think with Trump, they would basically extend the tax cuts and do a little more.

Bob:

Trump has also talked about eliminating or reducing the income tax on Social Security benefits. I think that falls by the wayside because it would only expedite the point in time at which the Social Security trust fund would go bust, and I don't think he wants to be perceived as responsible for that. So he's going to forget about that promise after the election. That's my best guess. Now let's imagine Trump wins and the Republicans get control of the US Senate, but somehow the Democrats narrowly control the US House of Representatives. In that instance, hakeem Jeffries probably becomes Speaker of the House. He would be by far the most powerful Democrat in Washington DC. I don't think he'll be in. He'll have any inclination to just roll over for Donald Trump. I think he would fight Donald Trump with a Republican's tooth and nail for everything they want out of Congress.

Bob:

And Republicans would really want to extend those tax cuts, right? I think in the end the Republicans will have to negotiate and compromise to get some Democrats to sign on to that extension. So what would that look like? I think the top rate would probably have to go back up to 39.6%, where it had been in the 90s for eight years under Bill Clinton and the last four years under President Obama. And in addition, in order to get some Democrats to vote for that. And Democrats generally come from high-tax states, right, you know Massachusetts, maryland, new York, new Jersey, connecticut, california, illinois. So I think it will cost them some expansion of the state and local tax deduction. Right now it's capped at 10,000. I think it would have to go to 20, 25,000 instead. It's not gonna become unlimited, essentially like it used to be, but I think they'll raise it a little bit, which you're probably happy to hear because you hail from the state of New.

Ryan:

York. It wouldn't be a disappointment for me personally.

Bob:

Personally, you'd love it. Yeah, and it would be a temporary extension. Now let's look at two more scenarios. One scenario would be Harris wins but she faces off against the Republican Senate, and if she does win, that's likely to be the scenario Maybe a Republican House, but definitely a Republican Senate or almost certainly a Republican Senate. Now, if that happens, this is is gonna surprise a lot of the viewers, because the Harris campaign has all these tremendous tax increase proposals taxing unrealized capital gains, raising the capital gains tax to, like you know, maybe 40% or 38% or 32% or something like a lot from where it currently is. Well, I actually think she would end up largely extending the Trump tax cuts originally enacted seven years ago. Now how can I possibly say that, given the tone of her, of her proposals coming from her campaign? Because we saw this happen in 2012.

Bob:

I mean, president Obama spent his first term in office complaining about the Bush tax cuts originally enacted in 2001 and 2003. He wins reelection versus Mitt Romney and literally a month later, in December of 2012, he cuts a deal with the Republicans who were in charge of the US House of Representatives at the time, fully and permanently. Permanently extending the Bush tax cuts into the future. With one exception At the tippy top, the top bracket was moved back from 35 to 39.6, where it had been for eight years at that point in time under Bill Clinton. Now why would he do that? Because the Republicans jammed him. The Republicans heard his rhetoric, but after the election they went to him and said congratulations, mr President, you're going to be in the Oval Office four more years. But about those tax cuts? If you want to extend them for anyone and President Obama did campaign on extending them for people in the lower brackets then you're going to have to extend them for almost everyone. Otherwise, we don't pass a bill and you're going to preside over a massive across-the-board income tax hike going into the 2014 election cycle. And President Obama blanked and I expect a President Harris would blank for very similar reasons. These tax changes will be made at the very beginning, january 1st 2026. Everybody would see their withholding tables change. It would be a political disaster for the Harris administration. So I think if she wins but there's a Republican Senate you're not going to get any of those big tax increases she's been talking about, except at the tippy top, highest bracket goes back up.

Bob:

One more scenario, and I'm only giving it a 10% possibility at this point, as we sit here 12 days away from the election, and that's the Democrat sweep. I believe that even in that scenario, you're not going to see the major tax increases that the Harris campaign has proposed. You're not going to see a tax on unrealized capital gains. You're not going to see a tax on unrealized capital gains. You're not going to see a massive increase in the capital gains tax, because even in that sweep scenario, it's possibly a 50-50 Senate. John Tester from Montana, with all those big wealthy landowners and ranchers, is still in the US Senate in that scenario, and Mark Kelly, representing the state of Arizona, with all those wealthy investors in Scottsdale, is still in the US Senate. Mark Kelly is not elected by Arizona because he's a firebrand leftist. He's elected because they perceive him as an economic, moderate and social liberal. That's how he ran, and so I think that's how he would probably vote to maintain that image, whether it's true or not, personally, that's the image he cultivates, and so I think he and Tester, or maybe a couple of others, would be a firewall against massive tax increases coming from the Harris administration. So what would she actually do?

Bob:

I think the top rate goes back to 39.6%. You might see you might see some upper income brackets also paying the 37% that are currently at a lower rate. Right now, I think the capital gains tax and dividend rate goes from 20% to 24%. So you throw in the Medicare tax and it essentially makes it a 28% tax rate. Guess what? That's where it was when Reagan left office in 1989. It's hard for the Republicans to argue against Reagan's tax rate regime on capital gains and dividends. I think the estate tax rates would probably stay the same, but the exemptions might go to something like halfway down to where they were in 2017, okay, halfway back. I think the corporate rate, which Trump cut from 35 to 21, probably goes halfway back to 28%.

Bob:

And there is some possibility I have not read this elsewhere, this is just my reading of the political situation Some possibility of introducing a carbon tax into the USA, not on individuals, not on households. You wouldn't get it when you got your energy bill or anything like that. Be on corporate side only, and I think they'd start the rate really, really low, because the heavy lifting is just getting that tax system into the corporate code in the first place and then, once it's there, some future generation of Democrats can raise that rate further, and I'm not arguing for or against it, I'm just saying it's possible Now. Why is that possible now, when it wasn't like 30-some-odd years ago?

Bob:

A lot of people don't recognize this or remember this, but Bill Clinton flirted with the idea of a carbon tax but then abandoned it because he realized there were two Democratic senators from West Virginia and another two from Nebraska and another two from Louisiana at the time. But next year, if the Democrats sweep, there ain't going to be any Democrats from any of those states, at least in the US Senate, and so the composition of what states are representing by Democrats has changed, and so their ability to pass legislation with a carbon tax, I think, has increased. Now the two holdouts would be Fetterman and Casey from the state of Pennsylvania. With all that natural gas, I think they cut a sweetheart deal in that scenario with Pennsylvania and get their votes for that legislation in that way.

Ryan:

So, even though I mean, this is only a 10% chance based on your odds, so I don't want to spend a ton of time on it, but even in that case you introduce a carbon tax on corporations. Ultimately, that does get passed along to consumers, unless they're going to have their margins compressed or something like that.

Bob:

Yes, absolutely. It's a sales tax on carbon-related goods and services.

Ryan:

Yeah, for better or worse. I mean, maybe that's, but that's what happens. Okay, so those scenarios there's a different mix of taxation and spending. I think in the last time you came on the podcast you called the federal budget the most reckless budget that you have seen in your lifetime. Maybe in American history it's been a lot of spending. In which of those scenarios do you think the federal budget gets better or worse? It seems like this is my guess, and I want to get your reaction that some sort of a mixed scenario where you know the Trump administration, if Trump were to win, would want to cut taxes but they would have to cut some deals that would keep spending high and that would kind of you know, be a problem on both sides, but what's your?

Ryan:

I have a weird interpretation.

Bob:

Now, remember, you might not read this in the press. You might read something that's completely, 100% against what I'm saying. The problem is, when the press analyzes what each major candidate would do in office, they take their campaign promises at face value oh, that's what they're going to enact. I don't do that at all. I look and try to figure out what they'll actually enact, what they've promised to enact and so I think that the best solution for the federal budget and the budget deficit in the years ahead would probably be a sweep for either side and total responsibility for the federal budget. Now, on the Democratic side, they might reduce the deficit because they're going to raise taxes. Okay, it's very straightforward. On the Republican side, they would extend current law in terms of the tax regime we currently have probably temporarily, they won't have the votes to make it permanent but they're going to do other things on entitlements. I mean, they're going to raise tariffs. That'll raise a little bit of revenue. I think they reduce green energy subsidies not end them completely, not eliminate them, but reduce green energy subsidies so that it helps with the federal budget and I think they would do significant reforms to the Medicaid system for low-income Americans. I think they basically block grants to the states and let the states experiment with reform and squeeze that program over time for budget savings. I have to tell you Medicaid is a very inefficient program in terms of delivering value to its recipients. There have been several studies on this. So I think improvements can be made and they don't necessarily have to cost more money. They can save the taxpayer money instead.

Bob:

Now, the mixed government scenarios might lead to much higher deficits. Let's say I'm right about what happens if Harris wins, but she faces off against a GOP Senate. Okay, what I argued was that she would end up, contrary to her campaign promises, at least temporarily extending the tax cuts originally enacted in 2017. Well, a Harris administration is not going to cut Social Security or Medicare or Obamacare or Medicaid, and she doesn't want to cut green energy subsidies. So if you get a mix of no spending cuts, we're not going to see tariff increases like you would under a Trump administration.

Bob:

I think everybody agrees on that. So if I'm right about what would happen to the income tax code on individuals in a Harris administration basically extend status quo, just kind of similar to what Trump would do in the end, that is the most dangerous budget scenario Harris, with a Republican Senate and then maybe or not a Republican House. That's where you have. We end up with two and a half trillion dollar deficits. As far as I can see Because I think again the tax system stays similar to what it is today, with only cosmetic changes, and there are no spending or entitlement reforms.

Ryan:

What about military spending between the eventual? Whoever the winner is? Is one administration more likely to spend more on military spending?

Bob:

I think a Republican administration would probably spend more, but it really depends on events. So in the end, I think there might be we might be below the sustainable level of military expenditures that the US can continue with, in the sense that if our ability to project power to key places around the world diminishes more, we might be enticing a conflict that costs us more money in the long run, rather than spending a little bit more today to prevent that future conflict. So I think in the end, regardless of whether it's a Harris administration or a Trump administration, spending on the military relative to GDP is going to be higher in the decades to come. We live in a multipolar world it's not just the US versus Soviet Union or, after the fall of the Berlin Wall, where the US rules the Rus' and in a multipolar world, I think conflicts may require more US spending in the decades to come.

Ryan:

You know, the last time we got together we were just after the Supreme Court had made a decision regarding Chevron deference and I had asked you about that and some of the implications from a regulatory standpoint. Has there been anything that any sort of follow on test cases after that that you've noticed?

Bob:

You know I haven't followed it closely enough. Cases after that that you've noticed. You know I haven't followed it closely enough. Now I have to say that at the time I thought it would be. My one disappointment in the ruling was that they didn't really go after older regulations that had been kind of grandfathered in under that Chevron deference. But it now looks to be a debatable issue, like they might not have really touched on that, and so I think so they didn't knock everything down.

Bob:

They didn't knock everything down, that wasn't written into law code.

Ryan:

essentially Correct.

Bob:

They did not knock down previous regulations that had been in place. However, that doesn't mean those can't be challenged. So there may be more of an opening than I previously thought to challenge old regulations to say those regulations did exceed the statute as it existed at the time and so we have to nullify those. I don't know what the status is off the top of my head.

Ryan:

Well, it's been a short amount of time, but it is something that is kind of interesting thinking about the impact of regulations on the economy and economic growth and how funds are spent to pay for to be on the right regulatory footing. It seems like if you can deploy those funds elsewhere and still have a well-functioning economy, that might contribute to economic growth. Is that what you economists would say?

Bob:

It would and frankly I think Trump would be much more agreeable to the energy sector in terms of the regulatory you know.

Ryan:

The other thing I wanted to ask you about is are we? Early in the year? The forecasts from our team was that we were probably I don't know 60% likely to have a recession. Something like that 60, 65%. It was better than even odds.

Bob:

At the very beginning of 2024.

Ryan:

So here we are, october 24th, not in a recession, yet how has your thinking changed or evolved since then? Are we still likely to have a recession that just got pushed off, or has the Fed, as they like to say, maybe created the soft?

Bob:

landing.

Bob:

So, as you know, ryan, I'm an economist, so I'm going to exercise professional privilege and talk out of both sides of my mouth.

Bob:

I think the odds of a recession at this point happening sometime in the next 12 to 18 months are below 50%. However, I also think they're significantly higher than the markets are currently pricing in. I also think they're significantly higher than the markets are currently pricing in. So I still think we're in a position where, over the last couple of years, with the enormous budget deficits we've run, even though the unemployment rate has been less than 4 percent and even though we're not in a World War situation which is really unprecedented in US history, I think those enormous budget deficits have masked or hidden some of the pain we'll eventually feel from the tightening of monetary policy over the past couple of years. I don't think we're completely out of the woods on a recession, but I think the odds have fallen because they simply haven't hit yet. And so, just like from a practical standpoint, from a basic forecasting standpoint, if what you thought was going to happen with more probability earlier rather than later, hasn't happened yet, you have to reduce your odds of it happening at all.

Ryan:

Sure. So the unemployment rate is still really low from like a historical standpoint, but it has begun to shift a little bit higher from the lows about a year ago or so.

Bob:

Yeah, it's off the bottom. I think it bottomed in the vicinity of 3.5%. I think the most recent month was 4.1%. I wouldn't be surprised if the report that comes out, I guess next Friday, a few days after this tape is released has a tick up again from 4.1 to 4.2,. Looking at the unemployment claims data recently the share of people, size of the workforce so that hints at a potential increase in unemployment from here Doesn't say it has to be some massive increase, but a tick up is more likely than a tick down. Next.

Ryan:

Friday. So how does the Fed think about what full employment is? I know we were in the threes with the three handle, but I— it seems like not that long ago that full employment was something like you know they thought of like 5% or something like that. It depends when you went to school. Seriously, Right.

Bob:

So I got to school back in 1983. Okay, that makes me an old man, obviously. So I got to college in 1983. And at the time my first principles of economics class was a macro class and I remember learning that full employment was 7%, that if we went below 7% it was only due to an overly stimulative monetary and fiscal policy that could not be sustained and which would cause higher inflation. So you didn't want to do it.

Bob:

And then by the end of the decade we had unemployment, like in 1989, at roughly 5%, and we really didn't have any significant inflation problem.

Bob:

We had a little bit of one, but not much. And then inflation went lower for the bottom in the late 1990s and into 2000, before the bursting of the internet bubble, and we had pretty low inflation under George W Bush, like going into the housing bubble situation, the bust. And then we had very low unemployment under President Obama, president Trump, pre-covid and we have so far under President Biden. So my personal view is that we could probably sustain somewhere in the vicinity of 4%. But that will change over time, given demographics, given the age profile of the workforce, and it will also change based on other government policies if, for example, they become more generous to the able-bodied unemployed, like if some jurisdictions and end up moving towards some sort of like basic income plan for everybody in that state, then that might raise unemployment a little bit. If you incentivize people not to moving towards some sort of like basic income plan for everybody in that state, then that might raise unemployment a little bit.

Ryan:

If you incentivize people not to work because you're going to pay them, they might work a little less.

Bob:

They might work a little less, but everybody in the Antifa encampments in Portland can riot and protest all they want, and they know that a check would be coming in from either the state or the federal government in that situation. So why not? It's like you could make, like anybody who had a low amount of financial ambition in their life could basically sit in a hammock all day for the rest of their life and know the government's taking care of yeah, do you think that that's a possibility, that there's a universal basic income at some point?

Ryan:

I know a lot of times, as I hear people talk about that concept, it's like oh, ai is going to basically do everyone's job, so you'll have nothing to do, so you know, we're going to have to pay you to do nothing.

Bob:

There is a school of thought on that. I don't believe that.

Ryan:

I think it's basically a Luddite view that's been around for hundreds of years, it seems like you could apply that to any technology in the past Like no people aren't going to be farming anymore, so I guess we're going to have to pay a basic income, Exactly Now that said, if you look at federal policy, we have a very haphazard version of a universal basic income, but it's just called a bunch of different things.

Bob:

So the health portion of it is Medicaid and we have Section 8 housing vouchers and we have food stamps and we have other forms of welfare benefits. So we're not that far from it, but it's a little harder to do it than just if you've got a check in your account every month.

Ryan:

So would a universal basic income be a more efficient way to administer all those different programs that you just mentioned? I mean because there's a lot of bureaucracy attached to all those different programs.

Bob:

Here's what happens, ryan. So the person receiving the universal basic income yeah, they will totally take advantage of it in a way If you just get a check sent directly to your account. In a way, it might be logistically more difficult to go after Medicaid and then food stamps separately and then a Section 8. I think there's a little more level of shame involved in pursuing those benefits from a myriad of different programs than what you would have to exercise in signing up once and getting the money sent your account every two weeks or something like that.

Ryan:

Yeah, interesting. Well, the time has flown by again here, bob. I look forward to seeing if your forecasts on what's happening with the election next week actually play out. My final question for you is one that I've asked you in the last few times you've been on the podcast, and that is what is on the Bob Stein book list. What are you reading lately, or something that you've recently read, or something that you just recommend that the viewers of the ROI podcast should check out?

Bob:

So right now I'm reading a book. It's called the Rise and Fall and Rise of Communism. It's basically a history of the idea of communism as well as how it existed. It's basically a history of the idea of communism as well as how it existed, how it kind of metastasized out of an odd interpretation of Soviet Russia with the Bolsheviks and has moved around from there, and the idea behind it is that there's always going to be this desire for equality to some point, and it might be based on resentment and jealousy, but it's always going to be there, and that now that people on the far left don't have to answer, don't feel responsible for what's going on in the Soviet Union, and now that they can basically say well, china might have a leadership called the Communist Party, but they're really capitalist, it frees the left globally to support policies that might have been just proven in the past, but the current generation is unfamiliar with those events, and so it makes it easier to spread communism and the ideas behind it once again.

Ryan:

Interesting. Well, we will check out that book. Thank you for the book recommendation, thanks for all your comments and insights on this episode, and thank you to all of you who have joined us on this episode of the First Trust ROI podcast. We'll see you next time.

People on this episode

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Ryan O. Issakainen, CFA | Senior Vice President | ETF Strategist

Host
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Robert Stein, CFA | Deputy Chief Economist

Guest