Morning After Lightning Round
The election is over. Trump won fair and square like Biden did in 2020. Time to start sorting out the moving parts.
Did anyone see my House vote?
We take a stab at our short list of the key items that the market will be wrestling with out of the chutes followed by the short list for 2025 when Trump relocates to his new home and the final House numbers slowly dribble out of California.
Trump has the Senate and when the final counts are in today, Trump is likely to have a bigger majority lock on the Senate and no threat from 1 or 2 rebels (Murkowski, Collins). GOP courage has gone out of style anyway, but the one-off moments are not going to make a difference. With the VP in GOP hands, that leaves an additional tiebreaker. That is a blank check on legislation in the Senate.
The short list in the “now” category is the Jan 2025 debt ceiling which will not be a big deal to extend since the radical wingnuts in the House will not blow up the UST markets with Trump ready to move in.
On the FOMC, there is no data-based reason in hand for the FOMC not to pull the trigger on -25 bps on some theory on what lies ahead with Trump policies. They know Trump loves lower rates for any Fed members secretly harboring political anxiety.
Then the big lists and questions kick in around tariffs, mass deportation, retaliation, tax legislation and how the House gets finalized. It is hard to see how the House works out for Democrats based on the major victory in the popular vote and wide-ranging victory Trump just put on the scoreboard on Election Day. So far, the GOP has picked up House seats.
Questions to ponder:
How will Trump tee up the tone of planning for his transition and set the table for the markets on mass deportation which he had made a “Day 1” priority? That includes logistical planning around the deportation stage and how many millions will be targeted in the first wave. How will the “destinations” and trade partners (notably Mexico) respond with tariffs as the bludgeon?
What new granular commentary will be released (or leaked) as tariff plans get drafted and notably around Mexico and China?
What details will come out around Ukraine plans and how that will influence the tone of US-EU relations ahead of what will be aggressive tariff plans for EU as the #1 trade partner? Will the GOP-led US be the party that causes the second Holodomor?
Will the Federal employee purge start early using an Elon Musk blank check as the buffer for accusations that Project 2025 is the handbook or “How to” guide for policy? Does the sensitivity around Project 2025 even matter now that Trump won the election and by such a wide margin?
The risk factor shortlist is the same today as yesterday…
Mass deportation: There has been a lot of morning-after hand wringing by Democrats on the border being the ultimate swing factor. Does that embolden Trump to push that one first? He had said “Day 1” priority and Day 1 is weeks away. That logistical and humanity nightmare will test the labor markets and JOLTS equilibrium in a way never seen before and will weigh heavily on some communities and urban economic ecosystems. At worst, it could be a chaotic clash between some blue states and blue cities with “the Feds” that harms economies, promotes conflict, and has adverse effects at the micro levels across industries (retail, travel, leisure, etc.).
Tariffs: Unlike mass deportation, the markets have experience with tariffs, and investors are among those that understand the buyer pays and not the selling country. We have covered that topic ad nauseum. The response of China, Mexico (#1 importing nation) and EU are a matter of speculation. Responses will be measured according to the tariffs. Given what Trump has advertised, a “proportionate” response will necessarily be on a large scale in kind or the trade partner’s leadership looks weak.
Mexico: The #1 trade partner nation (EU is #1 as a trade bloc) is in a class by itself since the overlap of tariffs, immigration, and mass deportation see a point of convergence in what looks like a high-speed policy car crash and risk factor pileup. The day before the election, Trump piled on the Mexico tariff topic by threatening an additional 25% tariff (possibly going to 100%) if Mexico does not head off the migrations across their territory to the US border. That is separate from the systemic “labor arb” relationships that have evolved since NAFTA/USMCA with the auto sector right at the top of the list. That should get a lot of focus from automotive sector investors in coming days (see Trump at Economic Club of Chicago: Thoughts on Autos 10-17-24).
The FOMC now: This one comes in two parts. The first is the immediate plan for easing. By the time Trump is back in the White House there will likely be two -25 bps cuts on the books, and there will be a wrestling match soon underway in framing policies actually implemented and what the measurable effects are. The data reactions to Trump policies will play out over time. Whether the FOMC is allowed to respond at that point is covered in the next bullet below. In the meantime, we expect the GOP crazies in the House will let the debt ceiling get another extension and hand the keys to Trump.
The Fed later: The much bigger issue is the planned subjugation of the Fed to the US Treasury and White House policy. We assume that Trump will wait on that one for a while since his other plans will be massive in scale and banner headline material. Whether it will require legislation is a question, but the indications are that he will have the votes barring a major surprise in the House tally. It is also possible that Trump simply issues an executive order. After all, he has friends on the Supreme Court in the area of executive power. Then again, we could see mass deportations and the military in the streets, so demoting the Fed will not resonate much in the public or sustained focus. It is a reporting line and organizational behavior change in the eyes of many, and voters likely will not care much or even understand the implications. Election Day showed that. Fed reporting lines do not get the placards out and cause screaming on the streets of Washington. The markets will care, but you are promising them lower taxes and less regulation, so which will carry the day?
The deficits, the UST curve, and stock markets: We saw the UST curve immediately steepen on the Trump fiscal plan as we saw back in Dec 2016. Inflation risk and supply and demand for UST is an easy defensive move for those pondering duration. Steepening is here already with the10Y UST immediately up by over 16 bps (now over 14 bps as we go to print). The equity markets are rocking (+3% Dow, +2% S&P 500, +2% NASDAQ, Russell 2000 almost 5%). The market will factor in tax cuts and deregulation and in some cases the knowledge in the markets (kept quiet at the political podium) that many companies and industries will simply raise prices on the shield of protectionism and/or to pass along tariff costs. The market will be sorting out the global supplier chain cost threats and retaliation risks and currency moving parts later.
Health care and household budgets: Even if we do not explicitly repeal ACA (many think they will, including us), Team Trump will make material legislative changes if the end of this process sends the House to GOP control. Trump has a cushion in the Senate, and we don’t know what the House math will be for such an action. The end of the ACA will be painful as household budgets will be stressed/distressed and millions will lose health care. Basically, households will face bankruptcy risk and people will die. That is the logical empirical reality of economics and health from past years and easy to foresee. That is not meant as drama.
The election postmortem…
Trump wins the popular vote: Trump finally won the popular vote and crossed the 50% line. He is now 1-2 in popular votes. The election of 2004 had erased the memory of 2000 for George Bush, and 2024 shows a major differential in favor of Trump. That takes the edge off the “tyranny of the minority” themes that comes with the electoral college imbalances. The electoral college may be an abomination to Democracy that ties into deals made long before minds closed and the remote rural isolationists became a political force, but that was not the issue this time. The concentration of Senate control dilutes the one person/one vote concept of fairness, but that was not the main event here. You would think Puerto Rico and Washington DC as states would grant some fairness, but that dilutes the White Nationalist game plan. But that will not happen.
The gender gap fell well short: The 10-point gap favoring Harris with women and the 10-point gap (give or take) favoring Trump with men was a hot topic but did not shift toward women into the 20-30 point range as speculated in recent days. That projection was a complete whiff as underscored by so many majority victories on abortion referendums in states with the Harris vote in the minority. As with the women gap, the youth gap did not go her way either as anticipated. If you are a black woman and you cannot deliver the vote from women in the face of Roe v. Wade, then you are destined for disappointment.
The “black woman” obstacle: Anyone who has been around a while and is willing to admit to a race and misogyny problem in the US had these risk factors in mind. Some will say the “black woman thing” is an easy way to duck the broader array of issues at work (inflation, culture war topics, blue collar bitterness on trade and jobs, etc.). However, I would argue that the combination of race and gender always lurks in the US.
I grew up in a racially diverse city (Brockton, MA) on what was then the racially diverse side of town (East Side). I was the only white guy in the starting 5 on the junior high basketball team. Before eventually moving to NYC, I got a scholarship to a pasty white private day school, and it was like landing on Mars. In the broader US suburbs, exurbs, and rural districts, the material reality of a race issue may go unacknowledged. Trump makes it worse. One can only speculate if Harris would have made it through a thorough primary process that was not possible in the circumstance of the Biden exit. The US has race issues. If Hillary had a gender issue, then Harris had the daily double in the face of a jaded US history. Obama got through, but Trump may have been the backlash.
Underperformance in the Hispanic vote: The demographic prize is the Hispanic vote just on size alone. Trump materially outperformed Harris vs. expectations with the Hispanic vote despite the “floating garbage” moments from the Madison Square Garden event and the heavy focus on what that reflected about the company Trump keeps. That is going to send the Democrats back to the drawing board the way the GOP did after two Obama terms. For those keeping score at home, the rebound to the right after Obama could translate into a more aggressive rebound to the left after Trump. History tends to work that way in US politics. Both hold risks of recurring bouts of extremism and the erosion of the center. The evaporation of the intelligent center right tells a story of cowardice and political reality.
Performance in key swing state districts: The electoral map jockeys (Steve Kornacki as gold medalist) broke out in excruciating fashion “the comps” in framing Hillary’s performance vs. the Biden performance vs. the Harris performance. In Pennsylvania, Biden’s Scranton voting numbers were unkind to Harris (not hard to guess why). The Pennsylvanian vote was everyone’s focal point with the phrase “Pennsylvania is Pittsburgh and Philadelphia with Alabama in-between” heard more than a few times. In that case, Trump carried Alabama twice last night, but Harris underperformed in Philly relative to expectations. You can’t blame PA, however, since Trump also carried Wisconsin and the replay of the Hillary defeat in the Blue Wall is still playing out.
See also:
Tariffs: The EU Meets the New World…Again…Maybe 10-29-24
Trump, Trade, and Tariffs: Northern Exposure, Canada Risk 10-25-24
Trump at Economic Club of Chicago: Thoughts on Autos 10-17-24