by Ivan Marchev

October 13, 2020

The question keeps popping again and again in investor conversations, particularly with investors that have done well in the run up in the stock market under the Trump Presidency:

“What happens if the Democrats win the Triple Crown – a blue White House, Senate, and House?”

It is a tendency in American politics that when the pendulum swings too far in one direction, it tends to revert to the mean by swinging in the other direction. President Trump had both chambers of Congress for two years and then he lost the House. President Obama also had the House and the Senate for two years, and then he started losing them. Still, the stock market did pretty well in the first two years under Obama.

I don’t know if we will get an all-blue outcome this fall, but it is my opinion that no matter what the outcome is, higher inflation is coming. I am also sure that whoever wins in November will get blamed for this higher inflation in later elections. There seems to be no way to avoid it, since there seems to be a consensus in the powers that be that the only way out of the debt overhang is to inflate away the debts.

Inflation Rate Line Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The U.S. government faced this identical type of rapid increase in deficit spending during WWII. Federal debt-to-GDP quickly doubled, while interest rates were held at 2.5% or lower on the 10-year Treasury in the 1940s. While we don’t have a World War now, we had Iraq, Afghanistan, the 2008 Financial Crisis, and Covid. Those four together brought the federal debt pile up to levels commensurate with WWII.

Personally, I would have no problem with the tax cut President Trump and Congress engineered in December 2017, if they had combined it with a cut in federal spending, but that didn’t happen. Cutting taxes and not cutting spending creates larger deficits in a good economy, which have exploded in the Covid shutdowns, as the economy has deteriorated. Joe Biden has already said that he will reverse some of the Trump tax cuts if he wins, but I doubt that he will undo them all, as the economy needs to recover.

This is what happened to Russian debt when the Russians cut corporate tax rates:

Russian Tax Rate Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The debt-to-GDP ratio melted away faster than spring snow by closing many tax loopholes and going the way of the flat tax. Booming energy prices also helped, as oil income is the largest contributor to the Russian federal budget. Oil prices have declined a lot since 2008, raising debt slightly, but the Russian federal budget deficit has not spun out of control, as they actively consider how to deal with the situation.

I know the Russkies are often portrayed as evil, but they certainly aren’t stupid.

The Perfect Timing of Covid Amidst a Trade War

Love him or hate him, President Trump did the right thing to confront the Chinese on trade issues and their theft of intellectual property. I have been aware of these issues since the time George W. Bush was President. He did not do much to deal with them. Then Barack Obama had to deal with the Great Recession, so he chose not to confront the Chinese in that situation – so the problems got bigger…

The Chinese have large state-owned enterprises (SOEs) that act as intermediaries in global trade of goods and services. China creates trade deficits and surpluses intentionally, in order to expand their political influence. For instance, they buy more from South Korea to increase their political influence there. They apply this clever trade maneuver in many countries, all at the expense of the U.S. trade deficit.

BBC Us Trade With China Line Bar Chart Combo

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Trump trade war accomplished little, as it was stopped in its tracks by the coronavirus. I often wonder if he would have been able to get a working trade deal had the coronavirus not arrived from Wuhan with such perfect timing. The timing of the virus was so perfect that it naturally raises suspicions.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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