2020 Election Preview (It’s Not Too Soon)
- Like it or not, there’s a general election in another 579 days
- “The stakes for investors have never been higher,” Rickards says
- Jim called Trump’s victory in 2016. What about now?
- Can Trump outlast a weakening economy?
“The impact of this election cycle on markets will be profound. The stakes for investors have never been higher,” says Jim Rickards.
As we write this morning, there are…
- 83 days until the first debate among Democrats running for president (June 26, 2019)
- 305 days until the Iowa caucuses (Feb. 3, 2020)
- 579 days until the general election (Nov. 3, 2020).
Your editor is already tempted to gouge his eyes out.
But Jim’s right. The market impact could be, as former Vice President Biden once said in another context, a “big ****ing deal.”
In addition, one of the major unknowns of the election cycle is now resolved with the conclusion of the Mueller investigation. The president will not be indicted. Donald Jr. and Jared Kushner won’t be frog-marched into a federal courthouse.
Well, OK, a few #Resistance dead-enders are still out there…
… but as a practical matter, Russiagate won’t be an election issue. (Really, it never was. Last year during the midterms, we noted that Sen. Amy Klobuchar said her rural Minnesota constituents were far more concerned about soybean exports. Klobuchar, as it happens, is now among the 206 Democrats running for president, and the total will rise while you’re reading this.)
Beyond Russiagate, however, it feels as if anything can happen…
“The time for investors to prepare is today,” Jim Rickards continues. “The key to preparation is a clear understanding of the issues, actors and tactics that will be rolled out on a daily basis for the next 19 months leading up to Election Day.”
If you’re a newer reader, you should know Jim was among the few “public intellectuals” anywhere who stuck his neck out and forecast a Trump victory in November 2016.
Four days before that election, he said in this space, “The election will definitely be close, and we see strong evidence that Trump will win.” That was at a time when the establishment media were telling us a Trump victory was as implausible as a sunrise in the west.
What did Jim see that they didn’t?
He saw how traditional political lines have been getting scrambled for a generation… allowing an “outsider” like Trump to swoop in and seize the moment.
“The distinction between left and right and Democrat and Republican has lost all meaning,” Jim explains.
“The ‘Republican’ Bushes pushed through liberal projects like the Americans with Disabilities Act, expansion of Medicare drug plans and the No Child Left Behind educational reforms. The ‘Democratic’ Clinton pushed through conservative projects like welfare reform, NAFTA and a balanced budget.
“Political parties and labels no longer mattered. What mattered [to the elites] was the embrace of an ‘inside the Beltway’ mentality and loyalty to expanded government and the permanent administrative state. Trump rejected the Beltway and pledged to ‘drain the swamp.’ This made him an existential threat to the left and the right. The permanent establishment, left and right, united with their media allies to destroy Trump.
“This effort is ongoing. It will not change until the day Trump leaves office.”
But Jim’s anticipation of a Trump victory wasn’t a lucky guess or a gut feeling.
“My method is straightforward, although it involves many inputs and continual updating,” he explains. “I use an applied mathematical formula called Bayes’ rule. Basically, you begin by defining the outcome you are trying to estimate: ‘Who’s going to win the election?’ You then list the candidates. For 2020, this begins with a large group; today it’s about 15 Democrats and perhaps three Republicans. By Election Day, it narrows down to two or three. In 2016, it came down to Clinton and Trump. By 2020 it may involve, say, Trump, Howard Schultz and Bernie Sanders.
“Next you form an a priori hypothesis and assign odds. The odds are just a ‘smart guess’ at the beginning. You’re still a long way from a final prediction. But you have to start somewhere. The key is to recognize that it’s just a guess in the early going.
“Next comes the interesting part. It’s called ‘updating.’ You use subsequent information to ask a question: How likely is it that this subsequent event would happen if my initial hypothesis were correct? If the event correlates to one outcome or the other, you have to update the odds based on the conditional correlation of the subsequent event to the original probabilities.”
As Jim sees it, Trump’s chances for reelection ride on whether a recession sets in during the next 19 months.
Right now, everything looks OK — but only OK.
“While the economy is not booming by historical standards,” Jim says, “it is producing its best performance since the global financial crisis. The U.S. economy looks particularly strong when compared with major trading partners such as the U.K., France, Italy, Japan and Germany. Even China is slowing dramatically as the U.S. continues to perform as a reliable engine of world growth.”
But as we’ve seen in recent weeks, there’s no shortage of weakening economic indicators. “None is pointing to a recession in the short run,” Jim tells us, “but all should be worrisome to Trump. His supporters continually recite the claim that this is ‘the best economy ever.’ It’s not.”
GDP has been slowing appreciably since the big sugar jolt from the tax cuts a year ago. Last week we got our final read on the fourth quarter of 2018. At 2.2% annualized growth, it’s right on par with the average for the last decade, which has been the weakest economic expansion since World War II…
… and the outlook for the first-quarter 2019 number is about the same.
Little wonder the Trump administration is badgering the Federal Reserve to reverse the interest rate increases from September and December of last year.
As Jim is wont to remind us, monetary policy “acts with a lag of 12–18 months. The economy is slowing now, not because of the December 2018 rate hike, but because of rate hikes in December 2017 and March 2018. The Fed’s later rate hikes in 2018 have yet to take hold. They will soon and the economy will slow further.”
This week The Wall Street Journal cited an anonymous source describing a recent phone conversation between the president and his chosen Fed chairman, Jerome Powell. “I guess I’m stuck with you,” The Donald supposedly said.
As we point out from time to time, four of the six presidents elected since 1980 had the good fortune of entering office during a recession (Obama, Reagan)… going into a recession (Bush 43)… or coming out of a recession (Clinton). By the time those four were running for a second term, the economy was “good enough” relative to when they came in that they could win re-election.
But Trump came into office many years into the boom phase of the boom-bust cycle. Going back to 1980, the only other president dealt that hand was Bush 41. Wouldn’t you know it, Poppy was the only one-termer of the bunch… and he went to his grave blaming Fed Chairman Alan Greenspan for denying him a second term with too-high interest rates.
No guarantees of the same outcome this time but, “The difference between no recession and a recession over the next 18 months,” Jim says, “is also the difference between Trump’s re-election and the election of a Democrat in 2020.”
But which Democrat? Because that too is a crucial factor.
For the sake of proper analysis, Jim first evaluates the Republican field. “We assume Trump will be the Republican nominee (John Kasich and Jeff Flake are not serious threats).”
Then there’s a potential wild card: The Starbucks magnate Howard Schultz plans to run as an independent. He’s got the money to keep himself in the limelight.
“We don’t know the Democratic nominee,” Jim goes on, “but we’ll narrow it down for now to Kamala Harris, Joe Biden, Bernie Sanders, Elizabeth Warren and Beto O’Rourke (the rest are polling in the 1–3% range and probably won’t make it past the New Hampshire primary on Feb. 11, 2020.”
Let’s cut to the chase and then deliver Jim’s analysis behind his conclusion: “Using Bayes’ rule, our initial estimate is that Trump should win in 2020. We assign a 60% probability to this.
“Will that change before the election? Of course. Trump’s probability could go higher if the Democratic primary fight is particularly nasty and leads to one of the more extreme candidates such as Sanders, Harris or Warren. Trump’s probability could go lower if the Democrats settle on Biden or O’Rourke and if the U.S. economy goes into a recession.
“The estimate also assumes that Howard Schultz runs and offers a ‘safe choice’ to Never Trumpers who don’t like the Democrat either. This could be especially true for married, white, college-educated suburban women, who constitute the largest slice of undecideds. They detest Trump, but they don’t like socialism either. Schultz could be their answer. A vote for Schultz keeps these voters out of the Democratic column, which favors Trump.
“That said, the view that Trump will win relies heavily on the assumption that the Democrats have not learned the lessons of 2016,” Jim continues.
Jim says for Democrats to win, they’ll have to give people a reason to vote for them and not just against Trump.
“To have a chance at victory, the Democratic Party candidate with have to tone down the anti-Trump rhetoric and offer new policies. The former will be difficult because both the Democratic base and its media allies demand the Trump bashing. The base demand is Pavlovian at this point. If you bash Trump, they will salivate with or without food on the plate.
“There are new policy options available, including a community-focused message, not globalist and not socialist. The idea is to emphasize community as a way to engage more rural and Midwestern voters and to address the key underlying issue of income inequality. Inclusive policies, not based on race or gender, but based on income and class, will have broad appeal. O’Rourke may be best positioned to deliver this message.”
From here, O’Rourke looks increasingly like an animatronic blow-dried creation of a campaign consultant — regurgitating West Wing platitudes without really saying anything. (“We have the single greatest mechanism to call forth the genius of our fellow human beings. This democracy… can bring the ingenuity, the creativity, the resolve of an entire country.”)
Feels like that ship sailed, well, when West Wing was a thing. Which is why we’ve got our eye on South Bend, Indiana, Mayor Pete Buttigieg. He doesn’t dismiss Trump voters as “deplorables.” He understands, as the progressive writer Sam Smith points out, that “there are more whites in poverty than there are blacks in total.”
“Mayor Pete” might be catching on; for whatever it’s worth, the dead-tree version of his book is on backorder at Amazon.
Speaking of books, Jim tells us another dark horse is the author Marianne Williamson — who can spend down a sizeable fortune amassed from her career as a new-age guru.
But if Democrats veer toward full-on welfare-state socialism, Jim says it’s all over.
“The rest of the Democratic candidates are set on more socialist and redistributionist programs (higher taxes, Medicare for All, free tuition, free child care, guaranteed basic income and the Green New Deal). These policies will be rejected by the rich (including Democrats) and disbelieved by the poor (they’ve heard it all before). The Democratic base may be ready for socialism, but America is not.”
Summing up, Jim gives Trump a 60% probability of reelection, “with the expectation that the odds will shift further in Trump’s favor as we approach Election Day.”
Here are the variables…
“Most of these factors should remain in Trump’s favor. The Democrats seem determined to pursue the socialist path. Howard Schultz seems set to jump into the race. At least part of the wall will get built. The wall will solidify the base. Once on the campaign trail, Trump is a master of rallies and debate stages.
“The hardest to forecast and therefore the biggest wild card is a recession. Trump was elected in large part, despite his off-putting demeanor, because he promised a better economy. He has delivered in part but has to keep delivering. If the economy goes into a recession, that could translate into a voter search for a new economic solution and that could lead straight to the Democratic promise of ‘free everything.’”
How to play it?
If you’re of modest means, Jim says your best portfolio protection will lie in gold, silver and short- and intermediate-term Treasuries. If you’re more well-heeled, you can further diversify into fine art (as a wealth preserver) along with development-quality land and private equity vehicles (to profit big whenever the recovery comes).
Meanwhile, those 60% odds are bound to change. We’ll keep you looped in as the madness intensifies. And you know it will, right?
The 5 Min. Forecast
P.S. In the interest of beefing up our coverage of the campaign and its impact on the markets, we’re bringing another heavy hitter aboard very soon.
He’s super-connected. It’s a name you’ll recognize. And I think you’ll be as excited about having access to his insights as I am.
But that’s the most I can say right now. I’m still sworn to secrecy for the moment…