With the Republicans set to take the Senate and the Democrats already having the House, Matt Gertken, vice president of Geopolitical Strategy of BCA Research anticipates a divided government that is likely to result in no tax increases but potentially smaller, and delayed fiscal stimulus.
We're back with more election coverage. Updates is 10:11 AM. Eastern time. Now I'm here with Matt Gert, Cannes vice president of geopolitical strategy at BCA research. We're going to be talking about the latest updates, his outlook and investment implications. Before we speak to our political expert, let's get your thoughts.
What do you think is going on? Where would you placing your investments and allocating your capital given what's happening right now in the political arena. Matt, welcome back to the show. It's a pleasure to speak with you today. Hey, thanks a lot. David, always a pleasure. It's a roller coaster. Why last night, first bite him was taking the lead.
Then it seemed like a trauma had it in the bag. And now the sh now the tides have shifted back in Biden's favor as he took the lead in both Michigan and Wisconsin. Just earlier this morning, I'm looking at the latest, like total count is two 24 for bud in two 13 for Trump. And, uh, it looks like the Senate is still unconfirmed as to who is going to take that now, how are you reading all of this?
When can we finally see, you know, a resolution of a definitive results? Can you give us a ballpark? Well, the first, the first thing is that the Senate for the most part is, has gone to the Republicans. And that's a big takeaway because remember that means that you aren't going to see a tax increase in the U S over the next two years.
So that's a major investment implication. But it also could have a downside, which is more near term. And that's simply because if Biden does end up capturing the presidency, then you have that antagonism between democratic president and Republican Senate. And so you could have a longer delay in a smaller size of fiscal stimulus package over the next three to six months, that would generate some uncertainty, fiscal cliff type risk.
And that would be negative near term, even though, you know, over the two year period. It's great to have a situation where you're not seeing tariffs wildly thrown around like under Biden, but you're not seeing taxes go up like under a Republican Senate. So I would emphasize that to start off. Okay. So if you're, if you're saying that the SN is going to the Republicans, but the Democrats already have the house, it means we're going to get a divided government, right?
Yeah. That's true. So does that mean, or gridlocks in terms of passing a bill, such as a fiscal stimulus. Exactly. And that's my point it's that you could see the market reacting positively because there's a clear signal that taxes won't go up. Um, and, and that is positive, but you also have this near term issue, which is that the.
Congress and the Trump administration never figured out how they were going to pass a new fiscal relief plan. And now that's unlikely to be done in the lame duck session if Biden wins. And so you get into January, February, and that's, Biden's inaugural kind of battle is to see if he can get the senators to do this.
In the meantime, if the market loses faith, you could get a pretty substantial sell-off. Because of the need for fiscal stimulus, uh, with the market, trying to pressure essentially, uh, Senate Republicans to, to just, uh, capitulate in and provide what the economy needs. The S and P 500 is up 2.4, 5% as of a 10:15 AM.
Now that's not pricing in a definitive Trump. Re-election what you're saying is it's pricing in no tax increase. Well, it's leaning toward Trump because if Trump wins in the Senate is Republican, then they'll get a fiscal plan, lickety split, you know, and maybe November. Um, and, and generally you'd have a big fiscal push under that kind of configuration you, you definitely, I wouldn't see the fiscal thrust contract by 7% of GDP, which is what's.
Expected in the CBS baseline projection for next year. So that's, if anything, maybe the way the market's leaning and maybe even with Biden presidency, the market is seeing that point, which is that you don't really get tariff increases. But then with this Republican Senate, you don't get tax increases, which is both positive, but still.
I think that, that the market could be in for a loop. First of all, we haven't settled these lunch-ins yet. So we still don't know who the president is. So we still don't know what the global trade war risk really is over the next four years. And the other thing is that we could have a contested election.
These are razor thin margins. There will be disputes. There certainly will be disputes in Pennsylvania. If it's as close as Michigan and Wisconsin, I don't know why it wouldn't be. Um, and in that case, you do get a lot of uncertainty, uh, that could be disruptive. I mean, there's, we're not that far off from an electoral college tie.
Uh, that would be if Trump only loses Arizona, Michigan, and Wisconsin. You know, so it's, it's, it could be very dicey still, even though the market is happy right now. Okay. Yeah. We're gonna talk about geopolitical risks and, uh, sort of, uh, the global outlook and trade Wars and just a bit, but let's go back to the electoral colleges here.
What do each candidate, what do they need to win at this point? Well, if you, if you take those, the latest numbers Biden is winning in both Wisconsin and Michigan. And so that means he's winning the election. Uh, the only exception to that would be if we get some kind of a monkey ranch type stuff going on in the electoral college, remember that you can have faithless electors in the electoral college who do not vote according to their state's popular outcome.
So you could also have the Supreme court intervene. Uh, or simply respond to cases brought forward by one of the parties in this case, the Republicans, uh, because of the hi-jinks that have gone on and by hi-jinks what I mean is, uh, let's take Pennsylvania. Uh, there's a legitimate question about whether the deadline was November 3rd or not.
And so there both parties are trying to get the advantage of that. And so. Point being, you can have a, a very tight election here if Trump wins Pennsylvania, but otherwise, uh, he's definitely finished. And even then he should be finished based on what we know. Okay. Well, Trump came out with an announcement at around 2:30 AM our earlier or earlier this morning, basically declaring victory prematurely.
And, uh, so I, I think some analysts would, uh, would point to that as indication that that the election might be contested. He won't, he won't accept a defeat, even if that were to happen. Is there any legal weight in rejecting the results? Well, that that's the right question because it doesn't matter what Trump says or what he tweets, but it does matter if there's legal weight to his disputes that are brought forward that go to state courts.
And that may be eventually go to the Supreme court. So it really depends. It depends on whether, whether his team brings forward legitimate quarrels with the way that the votes were counted. Uh, in then, like I said, in Pennsylvania, you do have a legitimate question about the deadline for ballots. Whether it's three days after or whether it's November 3rd.
So that's the key point, because if it's just Trump with sour, grapes tweeting, then eventually the constitutional system will simply overpower him. Uh, you see this, isn't like a third world country, as much as it looks like one these days, uh, where the president can just kinda. Hang around and stay in on at noon on January 20th.
If he hasn't won through the constitutional mechanisms, he will be removed. He will be a squatter in the oval office and he'll be taken out. Okay. So let's set up your thesis now, map based on what's currently happening. Who do you think has higher chances right now? I know you mentioned that the markets may be pricing in.
Higher a higher Trump victory, but, uh, we're looking at the college counts. Uh, maybe Biden's taking the lead. What do you think? Well, you did see the probabilities flip again, kind of in Biden's favor this morning and that's because of Wisconsin and Michigan. And so the market must be celebrating either way.
You know, it's a relief just to know that they're, that we're nearing the end of this process. Um, and of course there are other factors at play, but. You know, I would, I would say that the, again, it's, it's too close to call right now because a contested process gives Trump cert it gives him a lifeline. You know, if president Trump is losing, if he's losing the popular vote in these States, then it's over.
We all know the answer. Uh, but if it enters into the Supreme court, If it enters into the house of representatives due to an electoral college tie or hung electoral college, well, then he's got a lifeline. It is likely that the Republicans will still control most of the States within the house of representatives.
So the state delegations to the house of representatives, that's what would decide a tie outcome or a hung electoral college. And also, as we know, there's a two seat conservative leaning on the Supreme court now, which means the court will interpret the law strictly. Um, and that could end up favoring the president.
So, you know, I, I don't think we can simply say that because Biden is up by, you know, 20 or 30 bips and one of these States that we have an answer yet. Okay. Regardless of what happens from now on, uh, Matt, can you, can you safely say that Trump thus far has beat most analysts expectations on us performance?
I mean, has it, has it fallen in line with your expectations, for example, Well, yeah, it is in line with mine. I gave him a 45% chance of winning and I, uh, and then last week I ultimately said the Senate would stay Republican. So this is in line with my forecast. I do think I was very out of consensus. Uh, the, you know, the backdrop here, you had the economists at 5% chance of Trump winning.
Uh, there were some very low probabilities thrown around and those were adjusted over the course of last night. Primarily because Trump won Florida, which shook things up, but that was to be expected. I mean, the Republicans did a great job in 2018 in Florida. So, um, there were some, and remember also in the polls, he rallied very aggressively in the final weeks and, uh, that's.
In the polling. So it's not as if the polls were wrong. The polls were showing that he was rallying, but some of the punditry did not really catch on to that late development. Uh, so I, I think it was a surprise. And in particular, in a year with a recession, a pandemic and widespread social unrest, the Democrats should have had a democratic sweep.
And they didn't, in fact, they kind of flopped in the Senate. So I think they'll have to go back to bread and butter issues, uh, which is how they win seats in the house. And they're going to have to think about that. And then meanwhile, Trump may not pull through, uh, he of course, made the election about a whole bunch of controversial things rather than hammering the economy, which the exit polls show, the economy is the only reason he's still hanging in there.
Right. Yeah. I think that, that was my next question, which is, uh, uh, why you think he's still hanging in there? By the poor economy, because a lot of people were saying that, you know, a lot of people, unemployment is through the roof. This, this year people want change, but that's not really, what's a, the latest, uh, vote counts are showing.
We, yeah, you would normally think they want change, but the crisis happened early in the year. Uh, and so there was time for, uh, an, uh, a major rebound, you know, with that third quarter GDP growth, 30% number that Trump was celebrating, you know, there, there was a V-shaped recovery. You had a massive stimulus that fueled that.
And so consumers households were. Insulated from the full brunt of the shock. And, uh, and then meanwhile, you also had a clear dichotomy that the Democrats didn't really do much to dispel, which was that, you know, like Trump said, he's for closing the economy, I'm for opening the economy. And the exit polls show that the coronavirus was the third, most important issue.
Not the second. It was the economy, racial inequality, and then the Corona virus. So basically voters were not psyched about doing another lockdown. And Trump benefited from that. He benefited from a V shape recovery, but it still probably isn't enough for him to win the election. Given those adverse circumstances in his.
Generally low level of approval, you know, throughout the four year period, let's talk political risks going forward. Let's let's assume Trump wins. Do you think you'll continue the trade Wars with China? And if we assume that Biden wins, do you think he'll, um, you know, sort of ameliorate relationships with the Chinese.
You know, I think Biden would start with a diplomatic reset or new engagement with China, a new dialogue. Um, I do think that's the case. That's different probably than Trump. Although really Trump would of course start phase two trade negotiations. Trump is much more inclined to use sweeping unilateral tariffs, Biden, not so much, but I don't think Biden would repeal Trump's existing tariffs right away.
Cause that would just be. Giving away leverage, that'd be kind of an early surrender. So, you know, what's going on is that the U S is confronting China. It's been happening since 2008. It began under a democratic administration. It's rooted in U S grand strategy. Doesn't really have much to do with, uh, Trump's tariffs.
Uh, it can be executed differently. Um, but it will continue as a policy under either of those. And so I would encourage investors to think about it, not so much as a pro China anti China issue. I think the Taiwan risk is extremely elevated under either of these presidencies, but what you would be looking at favorably as Europe Biden is much more beneficial for Europe in the, in the Euro.
And Euro investments then, um, then Trump is because Trump could do a two front trade war, ultimately that would involve Europe as well. And so that's very negative for Europe. Whereas on China, you probably are going to see both administrations be pretty tough in the end. Okay. So putting all this together, Matt, uh, what are the implications for investors?
Are you changing your stance on investments at all? Following today's news? No, not really. I mean, we still would favor stocks over bonds, uh, on a more tactical timeframe. I've been long, the Japanese yen, uh, I had remained short the Chinese Yuan, uh, given that I had upgraded Trump to a 45% chance of winning.
Uh, but if Biden does clinch it, I think there's a short-term period where, you know, the, the, the, the Yuan will rally, um, later that'll be disappointed, but you know, the initial move is going to be, Hey, Biden's going for a diplomatic reset. So. Those are some thoughts, but I think the main takeaway here is that if Biden is in charge with a Republican Senate, we have a three to six month period of a fiscal cliff.
That's ongoing brinkmanship and that's, that's going to be negative, even though we know taxes, won't go up. And so, uh, I think there's still plenty of political uncertainty and risk to weigh on the market. Uh, and we're going to have a lot of volatility near term. And as I mentioned, you can still have a contested election.
And Trump is still the president until January 20th. And he could do some things on the way out to try to lock in Biden, uh, on his key policy. So I think there's a lot of geopolitical risks. It'll take time to subside, even once we know that. What about, uh, safe havens, like treasuries and gold. Well, they, they would benefit now treasuries, of course I would emphasize stocks over bonds just because we're in this new relationship or where the fed is going to be ultra easy for many years.
And when you do have the prospect of massive fiscal spending, almost no matter who is in power. Um, and so I'm not, you know, really, uh, wildly, you know, I guess my thinking is very near term. Uh, again, if any of those risks materialize, you could have, uh, you could have the treasuries kind of be, you could be kind of neutral, but it's, it's not a very favorable or bullish view for treasuries, but gold and other safe havens.
Uh, again, uh, I do think those are, uh, looking attractive. Okay. All right, Matt. Thank you very much for your time today. I know it's a busy day for you. I appreciate you coming on. No, my pleasure. Thank you. Thank you for watching. We'll have much more for you to stay tuned. .