2022 Midterms: Red Rallies & Blue Baggage
In The Ring - October 21st, 2022
“Republicans have been guilty of confusing our pro-market principles with pro-entrenched business policies.” -Former Speaker of the House, Paul Ryan
“The care of human life and happiness, and not their destruction, is the first and only object of good government.” -Thomas Jefferson
Image: Shutterstock
As a lead-in to this week’s Haymaker on the upcoming midterm elections, which was mostly written by my creative colleagues Mark Mongilutz and Adam Hay, let me state that when it comes to politics, I am an equal opportunity deployer. As I’ve written many times in the past, I believe – with copious amounts of supporting evidence – that both parties have failed the nation miserably over the last 20 years.
The Democrats and Republicans have each elevated the old saying “Good politics make bad policy” to an art form, albeit of a very dark nature. The willingness to do almost anything – no matter how irrational and harmful to America in the long run – to win a looming election is one of the few bipartisan features of our political landscape.
A consequence of this is that once these shortsighted policies have had enough time to play out, the payback can be brutal. A relevant case in point is the Biden Administration’s fervent embrace of Modern Monetary Theory (MMT), enabled, as usual, by the Fed. There is simply no question MMT has figured prominently in our current inflation fiasco. In fairness, as I’ve often noted, MMT actually started under Donald Trump, albeit inadvertently (the Fed resorted to it due to the repurchase market crisis in the fall of 2019). But, also to be equitable, that was because Mr. Trump’s policies allowed federal deficits to explode back then despite a decently healthy pre-Pandemic economy.
That first dalliance with MMT is now long forgotten… unfortunately for Mr. Biden. Accordingly, his administration will get the blame for its consequences. Democrats seem to be awakening to a “Red Wave” in early November. A piece published just yesterday by David Brooks convincingly looks at this phenomenon from a messaging or “narrative” context, though he does give the economic bit its due, just as we do here. Personally, I think they are underestimating the voter blowback they are about to encounter due to the “shy” conservative voter/poll-responder phenomenon described below. For example, only about 27% of Americans believe the U.S. is on the right track and I think that’s a monstrous problem for the incumbent party. Of course, I could be wrong – like so many polls have been in recent years. But I doubt it.
If I’m right, will this stop the bear market dead in its tracks? Frankly, and sadly, I doubt it; my belief is that the train is headed straight for a badly damaged trestle and a “Red Wave” won’t stop the impending disaster. However, there certainly could be a knee-jerk rally. This is despite the reality that the GOP has proven to be just as inept as the Democrats when it comes to fiscal sanity and geopolitical finesse.
Now, let’s get to the main section of this Haymaker written by two young men much younger than yours truly. Interestingly, they hail from opposite sides of the political divide though they both place great emphasis on rationality and what’s best for this country, unlike most of our elected officials.
-Dave
To learn more about Evergreen Gavekal, where the Haymaker himself serves as Co-CIO, click below.
Red Rallies & Blue Baggage - The Haymaker Team
Over the course of how many more election cycles will we need to be bombarded with the old political adage from the Clinton years: “It’s the economy, stupid!”? With all the fraughtness coursing through American cultural discourse this year, we might have been right to at least consider that economic concerns would be relegated to second- or third-tier importance this time — but we would have been wrong. Food is expensive, gas is expensive, everyday expenses are expensive, and it seems as though there’s insufficient compassion and competence in the upper ranks of society to fix (or even address) the problems at hand.
Looked at in a more abstract sense, there’s a prevailing mood in the country that nearly everything sucks or is on its way to sucking. DNC operatives have no incentive to acknowledge that mood, but, at the individual-campaign level, some party candidates are having to do just that, lest they appear either financially out of touch or legitimately oblivious to the pain of others.
So, what does that mean for the country in a couple of weeks’ time? And what will it mean for the economy?
At various points in recent UK political history, a so-called “Shy Tory” effect has come into play. It is a political/cultural phenomenon that sees conservative voters mislead or outright lie to pollsters out of… embarrassment, presumably, when sharing with them how they are likely to vote in approaching elections, referendums, et cetera.
As it happens, our boss, the Haymaker himself, just this week made the same point about American (North and South) politics. In his own words, “There is likely to be a shy GOP supporter effect in the polls, as there was in Brazil with regard to their right-of-center president who fared much better in the first round of the elections down there. We also saw that with Trump both in 2016 and 2020.”
Polling Tables: RealClearPolitics
Does this mean that the culture wars have been so successfully managed by the American Left that social conservatives feel they have to conceal their true feelings when speaking to pollsters? Maybe. It could also just be that voting for what you like about Trump has also meant being saddled with whatever you dislike about the guy on a personal level. There is, apparently, a “Shy Trumper” factor to be considered.
But Trump is not on the ballot next month, certainly not in any “check-the-box” capacity. So, is the Haymaker right? Is there still a “Shy GOP” effect in play? Probably, but even if so, the campaign issue that has stripped much political discourse down to its simplest terms is that of inflation. There’s more to follow on that scourge in short order…
When it comes to the midterm elections, there are a few burning issues at the forefront of the American public’s mind. Not surprisingly, they center around the increasing financial strain being felt from Main Street to Wall Street. Both the current administration and the previous one made policy decisions to pump astronomical amounts of money into the US financial system to combat a Covid economy. The repercussions of these actions - which for a period created vibrant, if not overheated, economic conditions - are now whipping back in the faces of US consumers and investors with gale-force strength. Here’s a few of the areas US ballot-casters will be ruminating on as they place their votes next month:
Inflation: Despite the Fed’s obsession with trying to curb higher prices via an intensive campaign of hyper-aggressive (and ongoing) interest rate hikes, inflation in the US continues to climb higher. From a political standpoint, this will be an issue you’ll undoubtedly hear Republicans harp on as a failure by the Biden Administration. Objectively, it will be a topic that Democrats will try to skirt, but the damage has been done - and felt - by too many Americans. Regardless of intent, the data doesn’t lie and as a politician, it will be virtually impossible to spin positively.
The latest figures from the US Bureau of Labor Statistics show prices in September hit another 40-year high. Worse yet, a lot of the biggest price gouges are hitting hard on the collective American homefront, with rent jumping by 7.2%, electricity up 15.5%, and groceries rising 13%. In general, we humans don’t like paying for things, and we really don’t like having to pay significantly more for the same things a few months later - especially when they’re essential to everyday living. Inflation is expected to continue to drag on US consumers for the foreseeable future, which means it also figures to be a significant political chess piece for Republicans to deploy and Democrats to try to dodge in the midterms and beyond.
Chart: BofA
Gas prices: It’s true, Americans love their cars. They also detest paying a premium for the fuel to make them go. When the numbers on a gas-station sign turn up or down, it tends to have a trickle-down effect on the rest of the US economy. After soaring earlier in the year, and then descending back to more normal levels over the summer, gas prices are back on the rise. They remain up 18% over last year. The cost for a gallon of gas hit a record-high of $5.02 last spring and was sitting at around $3.85 this week.
The Biden administration just announced that it will be releasing another 15 million barrels of oil from its Strategic Petroleum Reserves (SPR) – the final push of a year-long plan to release 180 million barrels. As a result, the SPR has fallen to 40-year lows, begging the question what would happen should there be a serious curtailment of oil supply. (Thus, far only about 600,000 barrels per day of Russian production has been lost, considerably less than the SPR releases.)
Chart Sourced via Greed & Fear (Christopher Wood)
This strategy, made back in March, was implemented to give Americans some “breathing room” amidst the Ukraine / Russia conflict, which has severely rattled the global oil market. It will be an interesting retrospective at some point to see how much relief the strategic reserves have provided for gas price heartburn in the US. But as of now, it appears this last-ditch attempt will have little effect on prices and pump prices are once again moving in the wrong direction. Republicans view this as a political Hail Mary to save face; Democrats say it’s a necessity. Both sides seem to have a decent case to present to the jury of public opinion. But as history has shown, when it comes to voting, all that matters is what’s fresh on Americans’ minds – and how it impacts their individual circumstances – when they cast their ballots.
The financial markets: Where do we begin? The last year has seen: crypto utterly collapse, meme stocks vanish, massive wealth destruction, brutally volatile market conditions, a meteoric rise in interest rates, and to top it all off, endless prognostication of a significant and looming US recession. On the latter, depending on who you ask, the fallout from such an event (that many are considering a foregone conclusion) range from apocalyptic to mild. So, what does all of this mean for the upcoming midterms?
Well, if you’re in Camp Blue, nothing good. Regardless of intent and actions, if the stock market is in the loo (as our British friends say) on your party’s watch, nobody really cares how or why it got there - just that it did. Considering the market is a harbinger for both wealth and economic confidence, the fact that the US is facing a potentially major downturn could not come at a worse time for Democrats. Especially when you consider that many projections are estimating that if / when it “hits”, a recession would likely run through 2024. Finding a way to spin a veritable economic meltdown in just two short years is a Herculean task that very few politicians have been able to conquer. When you consider the current administration inherited a humming US economy (again, doesn’t really matter what circumstances led to that point), attempting to lobby for another term amidst the backdrop of economic rubble seems almost preposterous, and should be easy fodder for opposing Republicans in the next election cycle.
Summarizing that, whereas the 2016, 2018, and 2020 elections were heavily determined by the politics of personality, even if pocketbook issues still influenced actual voting, this one is to be determined by the politics of gas pumps, food prices, and program spending, as well as perhaps other hot-button issues such as abortion rights, illegal immigration and urban lawlessness. It’s hard to get people outraged by the trivial when Thanksgiving is a month away and millions of families are thinking less about the joy of seeing family than about the costs of feeding guests. Leftovers used to be a joyful aspect of big-meal holidays; now, they’re likely to be a necessity.
And what if the GOP wins? What can one bloated political party do that the other can’t? It’s hard to know what specific policies will end up seeing the light of day. Should Americans then settle for a “conveyance of dissatisfaction” message and hope it gets through to the policymakers?
No.
Here are some actual recommendations:
Closely evaluate overseas spending - At a time when American citizens by the tens of millions are concerned about their medium- to long-term financial wellbeing, deploying so much domestic wealth with undefined end goals and without clear oversight comes across as a rather distorted policy. And yes, that might mean reconsidering our bottomless support of what could be a years-long war in Ukraine. Every recent war in which the U.S. has involved itself starts out with promised limitations and burgeons into something we can’t afford and whose objectives we can’t define. It’s hard enough with a strong domestic front. With a fragile one, well… ?
Energy - Does this one need elaboration? Okay. Stop draining the Strategic Petroleum Reserve. It’s there for, imagine this, strategic purposes, not to buttress the prospects of an unpopular political party. And try to create beltway cohesion on energy production. It can’t at once be “Fossil fuels are anathema to all that is good” and “We need to get more fossil fuels into the system”. What’s missing from the conversation is coherence. From there, practical policies might emerge. Might.
Follow Through On Infrastructure - By many accounts, it’s still in bad shape. Make sure the repairs actually come to fruition while creating high-paying and worthwhile jobs. We have enough (or too many) Instagram influencers – we need more builders. Start small. Pick one geographical region or one infrastructure category and give it plenty of attention. If things work out, expand. If a New Deal-like program makes sense economically, let’s see some legislation that promises real action, not Solyndra-style slush funds and nebulous wind-farming objectives. Any effort in this regard, especially regarding the vital electrical grid, needs to overcome the reality of NIMBYism run amok in this country (which even green energy adherents are beginning to confront, much to their dismay).
SMRs - We need more nuclear power. This is a main argument of the Haymaker’s, and one that deserves echoing because it makes sense. He is particularly fond of the small modular reactor concept. Let’s forge ahead with a policy of such small reactors in key locations with medium-sized investments and negligible land requirements. Any objections?
Free Speech Protections - More of them. Nothing less.
Let’s start with those and see what happens. Maybe we can busy ourselves enough to the point that we no longer have the time for or interest in maintaining a bitter partisan divide. It would certainly be a happy outcome for the Haymaker, given his affiliation with the bipartisan No Labels.
-The Haymaker Team
Great post, thank you for the report. In my opinion it is extreme views on the right and the left that precipitates most of the bipartisanship that prevents our law makers from doing their job. I believe that the re-industrialization of America (deglobalization) will actually create an environment where politicians will actually be required to do their job. Government will either have to grow to accomodate the increased business activity or greatly simplify beauracracy.
Perceptive, honest, realistic and well delivered. First class analysis.