Why the 2020 Election Matters for the Economy

Hello and welcome back to Breaking the Dollar. I'm your host Everett Milman and this week's episode will continue the theme of stepping outside of kind of the normal realm of finance topics to discuss the 2020 presidential campaign. Similar to the coronavirus that we spoke about last time, this election is something that is taking place outside of markets but will certainly have some impact on market activity.

Now it's worth pointing out that there is a difference between being impartial or objective about your political bias in your investing strategy and completely ignoring politics altogether. Yes, it is true that you should put your bias aside no matter which end of the political spectrum you fall on and not let that influence your investing decisions. On the other hand, you do need to know what's going on in politics because it could affect your portfolio. So we are still about 9 months away from November when the election will take place so a lot can change between now and then. But the Democratic primary is already heating up. I think in July or August is when they hold their convention and they will decide who is going to be the party's nominee.

In terms of market reactions or the impact on the economy, this election does loom large mainly because the incumbent will be running for re-election. So it is a bit of a referendum on their policies. And secondly, it does look like the front runner right now for the Democratic nomination is Bernie Sanders, who basically everyone in the media has labeled a socialist. Granted, Bernie himself calls his policies Democratic socialism which may be a bit of a distinction without a difference but nonetheless it does represent more radical economic platform than basically any serious presidential candidate ever.

I have seen quite a bit of buzz and discussions out there about how a Sanders nomination or certainly a Sanders victory if he became president, that would crash the markets, that Wall Street would basically collapse under the pressure of a Sanders agenda. I'm going to explain why I do not think that is going to happen and why I think it's highly improbable to happen in either scenario no matter who wins the presidency. But before I get to that I will just quickly lay out how I see the Democratic primary shaping up right now as an outsider looking in. Like I said, it looks like Bernie is the leader right now which is definitely causing a mild amount of panic among pundits on TV because even within the Democratic Party there are many pundits and commentators and policymakers who are probably more fearful of Bernie's policies than they are of the current president's. As hard as that is to believe it definitely seems to be the case.

Nonetheless the Democratic primary is still pretty wide open. There are five or six contenders who are still in the race and the best way to simplify it is to see that there are really two lanes to the Democratic party right now. There is an establishment lane and that includes former vice president Joe Biden, Senator Amy Klobuchar and former mayor Pete Buttigieg. On the other lane you have the leftists or progressives. That wing of the party is represented by Bernie Sanders and Senator Elizabeth Warren. Even though they are all members of the same political party the differences between them are pretty striking.

But I think it is worth emphasizing that elections really are not about policy. Very rarely does a voter's choice come down to what type of platform the candidate is proposing. There have been a number of sociological studies that show voter preference is based much more upon personalities of the candidates and narrative surrounding the race. That's why understanding that there are two different lanes or wings within the Democratic Party is really the more accurate version of understanding what's going on in the race.

It has much more to do with how voters feel about those two sides of the party than it does with all the complex nitty gritty of their policy proposals. I'm not saying that the policies mean nothing and I will look at those briefly. But recognizing the divide between on one side establishment politics and on the other side populist politics is a much more useful way of understanding what's going on and what is likely to happen. If there is one thing that the media should have learned from the 2016 election, it would be not to underestimate the power of populist candidates. Right now that is still going on.

As I said, there is a great deal of resistance against Bernie from within the Democratic Party. And so what this race really is going to come down to, similarly to the last presidential election, is this perception of insiders versus outsiders, the establishment versus populism. Obviously this is a generalization. Not every single voter falls into one of those two categories. For instance, I remember in 2016, there were plenty of Bernie supporters working on Wall Street. As surprising as that sounds, it certainly goes on.

What makes that even more intriguing is that right now it seems like the biggest contender against Bernie, the candidate who has the most positive momentum right now, is sort of another outsider. And that is the former mayor of New York, Mike Bloomberg. It is more than a bit ironic that Bernie Sanders, who is very anti-corporations, anti- big banks, would be running against someone who is a multi- multi-billionaire. Mike Bloomberg is one of the richest people in the country and he runs a very successful business media empire. So let me get to what I expect.

If indeed this Sanders versus Bloomberg matchup continues to gain momentum, the likely result is what is known as a brokered convention. What that means is that when the Democrats go to decide who their nominee is going to be, that they cannot agree, that would be a very uncommon scenario, but we live in very interesting times where unprecedented things continue to happen. So it is not outside the realm of possibility that we reach that type of breaking point and end up with a brokered convention. That situation greatly increases the likelihood that one of those two candidates, either Bloomberg or Sanders, ends up running as an Independent as a third party challenger to the current president and whoever the Democrats nominate. If that sounds ridiculous to you, you should keep in mind that Bernie Sanders has always been a registered Independent. He is not a Democrat. He has never been a member of the Democratic Party. He simply caucuses with them and is running for their nomination.

Similarly, Mayor Bloomberg has long been a Republican. I believe he has switched parties on at least one occasion and four years ago before the current president really solidified their appeal, Bloomberg was considering jumping into the Republican primary. So the notion of either of those candidates challenging or rejecting the consensus of the Democratic Party is really not that crazy given their past. In the medium term as we approach the end of the primary, that tension and the odds of a brokered convention, I think will cause a little bit of volatility in the financial markets. The unpredictable nature of what's going on in our political system right now sort of makes that consequence unavoidable. But you may be wondering what about policy, even though I pointed out that policy really isn't what the election itself usually hinges upon, it does matter for markets once that person gets into office. Depending on which side of the political spectrum you fall on, people are either very fearful or hopeful that the current president will have their agenda reversed by whoever their successor is.

And this brings me to my overarching point about how I think the presidential election will impact the markets and the economy. Change in Washington happens very slow in America. That process is partly by design. The checks and balances between the branches of government and the two-party system somewhat ensure that the US government's policies never move too far in one direction without kind of pulling back. If you don't believe me about that, the evidence has come up in each of the last four presidencies with each of those presidents. And that means Bill Clinton, George W. Bush, Barack Obama, and the current president. They came into office with what is known as a unified government. That means that Congress was controlled by the same party as the president. So they had two of those branches of government.

In all four cases, during the middle of their terms, the Congress flipped to the other political party. So it is very common that there is a divided government in Washington, where at least one of the houses of Congress, either the House of Representatives or the Senate, is of a different party than the president. I know that we are focusing on the presidency, but that does matter. Congress gets to decide things that the president does not, such as the power to declare war, the power to control spending, among other things. For that reason, I don't expect some massive change in government policy, regardless of who wins the election. And I know that that is probably not a popular view. Certainly there are policy differences between Bernie Sanders and the current president and between the current president and the other Democrats. However, you might be surprised to find how much they actually agree upon.

So one big example is in trade policy. The Washington establishment was certainly upset that the current president took a stronger stance on trade and imposed tariffs and started ripping up trade deals. The funny thing is that's essentially the same position that Bernie Sanders holds. It's another instance where the populism versus establishment dichotomy is actually a better predictor of what a candidate is going to do. So that's the most important thing to know, is that really there won't be a major shakeup in markets or in the government, regardless of who wins. That lack of a major shift in itself is a tradable consequence. I can guarantee you that a lot of investors and traders are going to panic one way or the other before there is an inevitable correction back to the average. I think that presents a lot of opportunities for you to be ahead of the game. If you understand that Washington does resist change.

The second big conclusion you can draw from that is that although we will ultimately end up in a very similar place to where we are right now, regardless of the outcome, there will certainly be some major volatility in between. Again, that volatility and uncertainty is something that you can position yourself against in your portfolio when the rest of the crowd is migrating to their two extreme corners. It really does bear repeating that being agnostic about your political bias and investing is not the same as just not paying attention to what's going on. So that's my rundown for what to expect with the 2020 campaign. I'm surprised that I managed to get through it without revealing any of my own biases or who I'm going to vote for. That is definitely not important here.

And with that, let's move on to our question from the listeners this week. This one comes from San Antonio, Texas, no name given. And the question is, if platinum is rarer than gold, then why is gold more expensive? There are a couple of factors that play into this. First, it's not necessarily true that platinum is rarer than gold. It is less available than gold. So in the Earth's crust, gold is actually slightly rarer than platinum, but it is much more accessible. It is easier for us to mine and find that gold, whereas a lot of platinum is inaccessible and the platinum that is there is expensive and difficult to extract. That's why you hear that platinum is rarer or there's less of it.

But ultimately, that's a bit of a misconception. The reason gold is more expensive has to do with demand. Platinum is used in very specific industries, mostly automobiles. So its price fluctuates based on what's going with the automobile market. Gold on the other hand has some very diverse uses. It has lots of areas of demand, whether that's jewelry, electronics, or investment products like coins and bars. Given that gold has so many different uses, that is what increases its demand and makes it more valuable than platinum. But that is an excellent question.

I want to say thanks to everybody for listening. I really appreciate you tuning in. Be sure to join me on next week's episode where I will be discussing one of the stranger gold coins that you have never heard of. Don't miss it.