First Republic Fall Forum Session 5: Washington, the Investment Landscape and the 2020 Election

First Republic Bank
October 27, 2020

Join us for the final session of our Fall Forum: a series of conversations designed to explore the geopolitical landscape, U.S. presidential election implications, and key tax and investment considerations.

A discussion with Daniel Clifton, Partner and Head of Policy Research for Strategas Research Partners and Christopher J. Wolfe, Chief Investment Officer of First Republic Private Wealth Management.

Read below for a full transcript of the conversation.

Christopher Wolfe - Well, good afternoon and welcome everybody, thanks for dialing in or zooming in today, we are lucky enough to be joined by Dan Clifton for what is a special add on to our Fall Forum Series and our Fall Forum Series has been all about taxes, the election, investment positioning and how clients might take advantage of what we think may develop and how to navigate the volatility. Now, why is it important somebody like Dan is on our show or on our Zoom podcast just eight days before the election? It's because he's a partner at Strategas, a well-known consulting firm and investment management firm that talks about these exact issues. He's the head of the firm's DC office and he directs all their legislative and public policy efforts. Now, before that, he was an executive director at American shareholders Association and had a number of other jobs, one of which I think was very interesting, it actually led him to be potentially considered to be on the President's, I think Council of Economic Advisors, if not mistaken but Dan, you can correct me. Dan's team regularly wins awards, they're well known amongst, I think a lot of the investment community for their political views, and most importantly, applying what they think about politics to the investment landscape because that's what matters, is putting those two pieces together. Dan's education's phenomenal as well, he has a Masters in economics and public finance from Rutgers and a Bachelors in urban planning from Rutgers as well, so hailing from the great state of New Jersey, Dan, thank you for joining us today.

Daniel Clifton - Thank you for having me. It's so exciting to be here today.

Chris - Okay, well, let's dive right in because I think there's a number of things that our clients would be interested in and I think for all listeners, the backdrop here is very different, 2016 was a big surprise in terms of the election, the polling was a lot different and we're in a place today where there's a lot of things going on, there's an election, there's COVID, there's kind of one is gasoline for the other or maybe they're both gasoline but how do you think about what's happening here with all these different elements? And how might you think about a framework for somebody to understand this? Because if you just receive the conventional wisdom, you kind of have one thing, which is blue sweet but that may not be all that's going on.

Dan - That's right. I mean, this is definitely an unusual year in many different respects and that also applies to politics and so, at Strategas, we don't have the luxury of rooting for a side or a policy, we're just trying to get the possible outcomes right so our clients can make the most informed decisions and this year has been a bit challenging, even before COVID showed up here, we had a pretty big scenario where economic volatility was translating into political volatility, we had a number of financial crisis in 2008 which lowered the expected GDP of the US from a 3% to a 2% growth rate. We've been there for 12 years, the US economy has never grown at such a slow rate, that has hurt the income of working Americans by about $40000 to $50,000 and the reason why we believe that that change in the economic growth rate has had a profound impact on our politics, is because we've had seven federal elections since the financial crisis and the voters of this country have removed the party in power in six of those last seven elections, we've tried all Republican, we tried all Democrat, we mixed it up a little bit with Republicans and Democrats, by 2016, we roll the dice with Trump and said, "let's see if he can change things" and none of these combinations have been able to get economic growth higher, so even pre-COVID, we were facing this kind of political volatility and then COVID hit and COVID was just like you mentioned, throwing gasoline on the fire because think about where we are today, we had a recession, we have a pandemic, we have mass protests and we have an election. Those are four super transformational events taking place at one time in 2020. We went back 100 years and said, "have these four events ever happened in one year?" And the answer is no, we can only find three instances where three of these four events happened at one time and the last time was 1968, so you're talking 52 years before we've seen anything like this and to me, that means the range of outcomes here are a little bit larger than you normally do, you've mentioned the polling has been very consistent, much different than 2016 which was like a big roller coaster. People forget that Trump pulled in the lead twice in 2016 before the actual election happened, here it's been a consistent lead, we often say there's little room for populism during a pandemic, people want government confidence to happen and I think that's hurt Trump a little bit but the key issue here is that the range of outcomes increase and I'm not talking about 2016 where we warned that Trump had a better chance of winning, you can have that but what can happen post-election, are we going to have a contested election, we're clearly voting in a very different way, our election administration are going to be tied and I just think that this is an important time for investors to be in touch with their financial advisors, given that we're in such unchartered territory here and you hope for the best but you plan for the worst and maybe we get a very simple result, we know by election night, but given all the issues that have arose in 2020, we're planning for a lot more complexity around this election and the election result.

Chris - So that's a really polite word, complexity, there's a lot more, I think we'll unpack in maybe the next 30 minutes or so but I think something at the outset that you highlighted is important and the idea that you might look at this election through a framework, I had mentioned in my comments based on the readings that we do of your work that your team publishes but getting through this, framework, some people would like to simplify it, sometimes Occam's razor works, it's just a blue sweep or is it something far more complex in terms of the interplay of policy changes and how COVID enclosures have changed some of the directions regardless of what happens?

Dan - Awesome question and so I sat down with my team in late March, early April and said, "we're in uncharted territory here, we got to have a framework to be able to analyses this election", there is a lot of complexity but I love simplicity, sometimes we tend to overthink a lot of stuff and I said, "okay, what are the three big issues here?" We have a president running for re-election, we know that re-elections are different than open elections, why is that? Because it is about that president's first four years in office and the question that we like to ask and I think it's the most important question of the election, "is this a referendum on Donald Trump or a choice between Donald Trump and Joe Biden?", I have worked on campaigns from the school board all the way up to the president of United States and I've learned that presidents get reelected when they govern well but they convince voters that switching parties midterm is a danger, a risk, let me give you an example, 2012, President Obama was running for re-election, he argued that this was a choice between him and Mitt Romney and if we give the keys to Mitt Romney to run the economy after four years of progress since the financial crisis, we'll threaten those gains, now, whether he was right or not, I'm not there to judge it but he officially made it a choice between him and Mitt Romney. George W. Bush did the same thing eight years earlier, running for re-election against John Kerry in 2004, he said in a post-9/11 environment it would be risky to change course here and put our national security at risk. I give you that history because you really haven't seen that in this race, you haven't seen Trump make it a choice between him and Joe Biden, now you're starting to see it because of the vice presidential debate and the last debate but clearly in the first debate, he didn't do that and he didn't do it all summer and so really, this has been a referendum on Trump and in particular, Trump's handling of COVID-19, why do we know that? Well, we're seeing Trump week with senior citizens, a demographic he did really well with in 2012 and the population that's most impacted by COVID-19. What we're watching over the course of the next week is the president's approval rating, that tells us whether this is a referendum or a choice and whether Trump will have momentum going into the final stage here and I would just mentioned before last week's debate, Trump moved two points in the polls and we're going to talk about the polls shortly, but he moved two points in the polls, if he moves another two points in the polls, he will be within the polling error in the swing states, so we're watching his approval rating because that tells us how he's doing in the voters mind better than the polling numbers do.

For most of the summer, he was hanging out with Jimmy Carter and George Herbert Walker Bush, those are not presidents you want to be hanging out with if you're running for re-election but he's moved above that but he's still way below where Barack Obama was or George W. Bush, so he's sort of in a no man's land, just in a space that we've never seen a president running for re-election before and the direction of that determines how big a blue wave you're going to get or whether you're going to get a blue wave, so that's framework number one, framework number two is the economy and COVID and let me just say this if this election was about the economy, Trump would win the popular vote, I know that's striking but we have an economic model that has been fairly accurate in predicting elections and it's within two tenths of a percent and so here's a guy who had a recession and has actually turned it into an asset here in the final weeks but it's not the only issue in this election and we found two other instances like that, I'm going to give you this year again that keep coming back to it, 1968 and 1976, 1968 was about wars and protests and the Democrats had a good economy and they lost the White House, 1976, Gerald Ford had a roaring economy into the election after recession and he lost because it was about Watergate. Here, we call this the COVID-19 election, why? there literally is a direct correlation between Biden's leading the poll and the number of voters worried about COVID-19 and as it went up over the summer, Biden's lead went up and as COVID concerned went down, Biden's lead went down. I think it's unbelievable story for 2020, that we're starting to see a surge of new cases in the final eight days of the election. Right now, it hasn't really impacted voters’ minds, partially because voters are starting to become used to living with COVID, at least to a certain extent and the positivity rate is somewhat restrained but this can be a really big story going into the election, it could really change the dynamics because all the local media coverage in Wisconsin or Montana, Montana, by the way is tightening up could be about this kind of flare up that those states are seeing on COVID-19 and so if I had a summary I would call it COVID-19 election and one of the few elections in US history where the economy is not the dominant factor but it has helped keep Trump, keep this race competitive and so that leads to the third part of the framework and let's face it, this is about swing states, not a national election and I often joke one day I'll live in the swing state but for right now, that's not it and it really comes down to six states, Florida, North Carolina, Arizona, Pennsylvania, Michigan, and Wisconsin. If Trump wins other states, like Minnesota, he's going to win one of those other Midwest states and if Trump loses Ohio, he's probably going to lose some of those Southern states as well, so to me, I think you focus on that core six and to me, Trump has to win Florida, Pennsylvania, I'm sorry, Florida, North Carolina, Arizona and then one of the three Midwest states, Michigan, Wisconsin or Pennsylvania, easier to do with Pennsylvania but it's starting to come a little bit out of reach, where the data is most promising for Joe Biden right now is in Michigan, he's up by nine, where the data is most promising for Donald Trump is in Florida, where you're seeing a pretty big momentum surge in Florida for the President. If the president loses Florida, it's over, it's going to be an early night, I may actually get sleep on election night, which is rare, if he loses or if he loses Ohio or North Carolina, we'll know pretty early, from my understanding North Carolina, 80% of the returns will be released right when the polls close. So I hope that's true, that's what I've been told, so we'll have a good read on those states. If Trump wins those states, then it becomes more complex as we go up to the Midwest, they've different counting procedures, different rules, if we can talk about it shortly but really Florida, North Carolina and Ohio are going to give you the early signals on whether this is a blue wave or a competitive race or if Trump is doing better than the poll suggests but let me just make this one point.

Chris - Yeah.

Dan - Trump is losing in the national average by 9% today, he is losing in the swing states by 4%, that's a 5% gap, that's telling you that Trump may lose the national popular vote by four or five percent and still win the Electoral College, that is a closer race than we would assume just looking at the national average and you just got to be mindful of that, that he had a lot of momentum in 2016 in the final two weeks and we're just going to be watching closely to see if that momentum is surge there, it may be unlikely because there's fewer undecided voters, there's fewer third party candidate that we're losing to Trump, the Gary Johnson voters went to Trump in the final week, you don't have a lot of that this time, so it may be unlikely but when I see a 70% probability of an event, we're constantly asking, "okay, how does the other 30% happen?" Just to be aware of everything around us.

Chris - Yeah, Dan, that's a good point and that bit of cognitive dissonance when the Electoral College lose the popular vote, even by large margins kind of gets to the idea that metrics may matter here, so you laid out an interesting framework, I think, a couple of parts there but other metrics, you said approval rating, I think that's one of them, the mail-in votes, the kind of voting in person, does that change anything? And we spent a lot of time on the presidency, so put that also in the context of some of the races, particularly in the Senate because I think that's where there's a lot of attention as well.

Dan - Yeah, so the most important, let me just touch on the senate very quickly because I think that's what investors are focused on this week. Do the Democrats win the senate? And if so, how many do they get? Do they get 52? Do they get 55? That change's why we're here and that's to talk about the policy implications, you get 55 Democrats, you do a lot more and so very quickly here on the Senate, is that the Republicans are likely going to gain the Alabama senate seat, so that's one, the Democrats are likely going to win Colorado, Arizona and Maine, North Carolina and Iowa are now on the bubble, if the Democrats win all five that I just referenced and lose Alabama, they will have 51 votes in the United States Senate and what you've seen over the last couple days, is that as the president's numbers have improved, it hasn't "oh, Trump's going to win", I don't think many people are saying that but what it's doing is it's helping the Republicans in North Carolina and Iowa and some of the other states, close the gap. So the market has been reducing the odds of a Democratic sweep and that is obviously impacting how the market views what the next stimulus package is going to look like, if the Democrats win, you're going to get a larger stimulus package and so there's been a little bit of a recalibration over the last couple days, I would argue it's short term, it's temporary but it's just kind of like taking a breather to see where we stand and watch some of the data fall itself out, I love the president's approval rating, I think it's a much better predictor than the polls, if you think Joe Biden is a bad candidate that gets reflected in the President's numbers, if you think Joe Biden's a great candidate, it still gets reflected in the president's numbers by dragging the president's numbers down, president's way below where he was on October 5 and so I think that's an important indicator, the other indicator that we'd love to watch is something called the generic ballot and it's exactly what it says, generically, do you want Republicans or Democrats to run Congress, that generic ballot is very predictive of what's going to happen in the congressional elections and let me just say this, it was 1% advantage for the Democrats on election day in 2016, it is a 6% advantage for the Democrats today and that tells me that the Democrats are doing much better than they were in 2016 but if I see that crash this week, like it did in the final week of 2016, that would be an important signal to us as it was in 2016 as you know, I got my head cut off, talking about "oh, well, the data is getting better for the Republicans there", people are like, "you don't really think they're going to win, do you?"

So we just need to be mindful of that, the data is much better this time around for the Democrats but we're watching it very closely, so those are two indicators and then from a stock market perspective, we love the S&P 500. The S&P has predicted every presidential election winner since 1984, 87% of the winners since 1928 and that is really being tested here, the formula is real simple, if stocks are higher in the three month period before the election, the incumbent party has won and if stocks are lower in the three month period, the opposition party has won, stocks were down 2% ahead of the 2016 election, assigned the opposition party, the Republicans would win the presidency. Today, stocks are up just doing the math trying to subtract today's losses, stocks are up maybe about 3% since August 3, usually a sign that the party in power would win that would be the Republicans but I think there's a lot more going on this time, you have a vaccine, you have stimulus, those are much greater than the presidential election and I would argue, "would you go to a 49ers game, if Trump wins, Biden wins or if we get a vaccine?" And it would be, "if we get a vaccine" and it kind of shows you that the reopening is less predicated on who's going to win and more on the medical progress that we're making. So those are really good questions but there's something else called the keys I think, related to who's going to win and if a checklist of 11 things goes on, somebody can find that in the internet, you made it real simple, I love the outcome approach but are there are other aspects of the data that are maybe worth watching as things develop, either during the night of, because a lot of people will be up and watching or even just a couple days before or are we starting to lock things in just eight days before?

Dan - Great question, we're very focused on a county in Florida called Sumter County, it's about an hour outside of Orlando, there is a very special place there called the Villages, there is about 80,000 senior citizens that live there, that county voted 67% for Donald Trump in 2016, if you see Trump underperforming in that county, it tells you he's struggling with seniors, we're calling it the Gray Revolt, the Senior Revolt and it will tell you that concerns about COVID-19 are reducing Trump's margins, that could be extrapolated to Arizona, Pennsylvania and other places where Trump is going to need seniors, so that's an early read for us on election night about an hour after we get that read, we'll get something called the Panhandle. The Panhandle is a more rural area of Florida that closes actually an hour after regular Florida because it's in a different time zone. It is the most unbelievable numbers in 2016 it changed my whole philosophy of elections. My whole philosophy was the corridor between Tampa and Orlando makes presidents and Hillary put up such huge numbers in that corridor. So you sit there and you say to yourself, "wow, she's going to be president", like all this other, Trump's making a good run, a better run than the people thought but wow, by the time we got down to the Panhandle, he blew her numbers away in the Orlando area because he was world but the most important thing was it wasn't about Florida, okay, Trump's going to win Florida but it started flipping our models in Minnesota and Wisconsin, places where we didn't think Trump was going to win, he ended up losing Minnesota by just 1% and so you're going to get a very good read on whether Trump is getting the world vote out, his base by looking at the Panhandle early in the night in Florida and third, Miami-Dade County which is a very Democratic County, it's where Miami is and you'll get a really good read on how African American and Latino turnout is for Biden, there's some questions about that after 2016 and those three areas are really going to tell us a lot that can actually be extrapolated to the rest of the country, the reason that's important is that we expect a lot of people to vote in the machines for the Republicans but vote by mail and early vote for the Democrats, in Florida, they start opening up those votes and counting them weeks ahead of time, in North Carolina they do the same but when you get to Pennsylvania, Wisconsin and Michigan, they can't open those ballots until after the polls close and so just by statistical nature of the rates as close, we're not going to know who won those states, we're going to be using the data that we're getting from some of those earlier states to try and fill in some gaps of how Trump is doing, how Biden is doing in those areas, so that we're not completely flying blind in the Midwest states. Again, this is all predicated on Trump winning, Florida, North Carolina and Ohio, if he loses them then we're going to go home but and I'll follow with the Senate races but my point is that there's going to be a lot of early clues about how the night is going for both parties.

Chris - So, if you open that door, I'm going to go through it, a contested Election Day, the idea that some odd million people have already cast votes, Democrats vote in the mail, Republicans vote in person and the accounting and the way that works, is the scene set for no matter what happens, it's going to be contested? And how does that work, the whole timeline involved between the first part of November and the state's certification with the electors then all the way to January 20? There's a lot of check in points but that could drag things on, create some policy implications and market implications but it starts with if there isn't a clear path, is it contested and what do you think it means?

Dan - Yeah, so number one, if all the undecided voters break away from the incumbent party in the final days here, it's unlikely that we're going to have a contested election, it means the blue wave scenario is starting to play out. If for some reason, Trump reassured his voters Thursday night in the debate that he's up for it, had a little fundraising and is able to close the gap here, then the odds of a contested election start to go up, I got a number of questions from clients today about that, I haven't heard about it in three weeks, so the whisper is just starting people are like, "should we plan accordingly?" And that's largely because Trump's numbers in Florida have improved so much, so it looks like he might win Florida, that makes sense to us but let's talk about why this would be occurring is that Trump and the Democrats both have issues around how this election is going to go in the Midwest, Trump's going to win big on election night, he's going to try and declare himself the winner and then over the course of the next week, you'll start to see his margins go down, this is what happened in Arizona in 2018, it was an extraordinarily cordial process for the US Senate rates, the Republican won on Election Day and she lost over the course of six days. There's nothing cordial about Donald Trump and he'll be on Twitter saying, "I won, the election's being stolen", and try and file lawsuits and stop the votes from happening. Pennsylvania, can now accept ballots days after the election as long as they're postmarked before, he's going to go to Supreme Court and try and take that on. By the way, we're going to have a new Supreme Court Judge today that means it's going to be five, four in that decision. So be mindful of that, by the way, everybody likes to say to me, "Trump's not going to declare the winner, Trump's going to fight this, he's not going to leave power", yeah, he's going to reserve his right to keep his options open, Democrats are doing the same thing, look this is for the presidency of the United States, the stakes are really high here and nobody is going to go and say, "hey, that's okay, yeah, you won", there's going to be chaos.

Chris - In 2000, some people would say, but...

Dan - Let me give you this example, in 2016, Trump won Wisconsin by 22,000 votes, very small margin, this year we're doing mail-in voting, mail-in voting has a much higher error rate than machine voting, in the primary, in April in Wisconsin, they threw out 23,000 ballots, that number is going to be so much higher this cycle, Democratic pollsters are telling us that they're shaving 1% or 2% of Biden's numbers, knowing that there's going to be this error rate of mail-in voting that happens. It is likely that if Trump wins one of these three states, he's going to win it by a margin that is smaller than the number of ballots that get thrown out, we fully anticipate the Democrats are going to go to court and try and get all of those ballots reinstated back in, so now I have a scenario where both parties have an incentive now to file lawsuits, if the race is within 1% or 2% and be able to challenge the election results and that can go on until December 14th, you mentioned state legislators getting involved if they don't like the result and putting the electors in, I saw it firsthand in Florida in 2000, where you had one room of Gore electors and one room of Bush electors and I'm saying to myself, "oh, my God, this is a constitutional crisis, if this thing doesn't get resolved in the next 36 hours". Okay, so this is a lot more real here because it can involve multiple states, multiple state legislators who really gets to certify the election results, I don't want to scare anybody but I do think it's different than 2000 in the fact that we were already headed into a recession in 2000, it was unexpected, here we're kind of expecting it, the Federal Reserve sat on their hands and cut interest rates 50 basis points after Bush versus Gore got settled. Well, you do that after the heat to consumers and businesses already happened, I don't believe that this Federal Reserve is going to sit on their hands if they see any of the progress from the Coronavirus shutdowns starting to be lost because of a contested election, I would expect that the Fed would get aggressive there. So in that respect it could be a big political event, maybe a little bit less financial event but we stand ready for it.

The other issue I would say is to watch Speaker Pelosi, I think is one of the great strategists and great speakers of our lives, she understands that there is a chance not a base case but a chance that the House of Representatives has to choose the next of president United States, this has not happened since 1876 and so what she's doing is she's making strategic investments in Alaska and South Dakota and other states that she may be able to flip because if the House of Representatives has to vote, it's not based on each member, it's based on each state and 26 states are run by Republicans right now, 22 states by Democrats, even though the vote will happen for the next Congress after this election, it's very likely the Republicans are still going to have a majority of states and would be able to choose Donald Trump to be the next president. Interestingly, if this does happen, the House gets to pick the president, the Senate gets to pick the vice president, and it may turn out that Senator Harris is vice president to Donald Trump or Mike Pence is vice president to Joe Biden. Again, not the base case but something I never thought would happen in my lifetime is no longer a zero percent probability in this type of world.

Chris - Got it. Okay, last question from me and these are good, I really appreciate the answers and then I want to get to some questions that have come in, there's just quite a few but just maybe to set the stage for the investment discussion, let's link all of this to kind of the policy, there's a lot of if then, if this, in kind of scenario planning, then that will happen, blue sweep equals higher taxes, et cetera. Trump winning and Republicans retaining equals just more of the same whatever that is, the received wisdom, so how do you think about the policy differences where are they starkest? And where is the most change that an investor should be thinking about? I can think energy, healthcare but what are you saying, Dan?

Dan - Excellent question and I'm here for the policy, I love the politics, this is fun but I'm here for the policy. The starkest difference between Biden and Trump is trade policy, international affairs and it gets lost because there's so much issues around taxes and healthcare and energy that we forget what's going on and that is that Biden is promising a better relationship with the European Union, he's promising a new strategy with China and I'm not here to say one strategy is better than the next, I'm just letting you know that it's different and it's starkly different and that's going to change the equation and so what is happening here is that the financial markets are basically saying that Biden is a weak dollar president, not in an negative term, when I say weak it sounds weak, not that Trump was a strong dollar President, Trump imposed tariffs on other countries, tariffs help no one but it hurts the US less than other countries that raises the dollar relative to other currencies. Biden is going to pull that back, he's going to make up with Europe, he's going to get rid of European tariffs, he's going to join the Paris Climate Change Agreement and then Biden is going to try and use that relationship to put diplomatic pressure on China and get China to change its rules through the World Trade Organization, so that means less economic warfare with China, more of a diplomatic pressure and you're starting to see that, US companies that have high foreign revenue exposure have been outperforming as Biden's lead has been growing, which is really interesting to us, technology, industrials, materials, industrials and materials usually don't go up when the Democrats are winning but they were the most impacted by the trade war that happened previously, on an international scale, you saw US stocks outperform non-US stocks by 50% since January of 2018, as the MAGA trade came in, the Make America Great trade game, so now you're starting to see non-US stocks doing better than US stocks, merging markets are moving perfectly with Biden's odds of winning, Europe moving perfectly with Biden's odds of winning and just to show you how incredible and special the United States is, is that you can literally watch the Chinese stock market and the Vietnam stock market trade relative to one another on this election, as Trump odds go up, Vietnam outperforms China, as Biden's odds go up, China outperforms Vietnam. Now, this is not investment advice, we use them as diagnostic tools but that's the market saying that the US decoupling from China happens faster under Trump than it does under Biden and the supply chains would go to Vietnam, same thing with India stock market, it really is an incredible event to watch this happening and I think where the starkest difference comes, the second starkest is really on fiscal policy which includes more government spending and tax increases.

The Biden advisors have been very proactive in going out to Wall Street and saying, "we are going to raise taxes, we know you're concerned about tax increases but we promise you, we will do more fiscal spending than we will do tax increases", so from a macroeconomic perspective, you'll get more fiscal stimulus and second, is that we may not have those tax increases go into effect until 2022, whether that's true or not remains to be seen, I'm skeptical but that's the message that they're sending to the market and because Congress did not do a fiscal policy bill before the election for COVID-19 and everything that happened, you're actually seeing that get pushed into the Biden administration now, so now the numbers like two, three trillion, you pull investors in July, oh, a Democratic sweep's worse for the market, taxes are going up. Now, people aren't so scared about the Democratic sweep, which is kind of interesting, so that's a pretty good thing.

Chris - put a lot of money in there, that's why.

Dan - Oh, yeah, these numbers are staggering. Like worst case scenario, Biden's proposing the largest tax increase, I'm going to say it again, since 1968, like that 1968 team just keeps coming back and we've never seen a tax increase like this, people are like, "oh yeah, Obama raised taxes", not like this, Clinton, George Herbert Walker Bush, these are four or five times the size of what they did and it doesn't even matter because if it's 400 billion and they're going to spend 2 trillion in the next 12 months, it just dwarfs the tax increases, now at an individual level, these tax increases are really a big deal, you're talking about an estate tax change that was released last week, that raises the rate, lowers the exemption in half and changes from a step-up in basis to a carryover basis and when the heir inherits that carryover basis, they are hit with an unrealized capital gains tax, it is just monstrous, what they've put and they just quietly put that out two weeks ago. So I think it's important just to be in touch with your financial advisors to fully understand the tax consequences of what is happening here and by the way, it's not all bad, we're seeing a pickup of merger activity ahead of the capital gains tax increase, we anticipate companies are going to pay a special dividend if the Democrats sweep ahead of the next year, so they'll pay it in the final six weeks of this year, so trade and taxes are the two starkest difference, and you'll say "well, Dan we're going to spend $2 trillion, what are we going to spend that money on?" Climate change, if you see a blue wave, this will be the first climate change election in the United States history, we talk a lot about it but the Democrats are putting real serious money into climate change if they sweep, if we have divided government it'd be hard to get that money allocated. Infrastructure, I know for years, we talk about infrastructure, Speaker Pelosi just passed the trillion dollar infrastructure package, I fully anticipate that to be part of the Democrats job creation program, money for state governments, I continue to worry about California raising its income tax rate again this year, even in light of their big needs, that would give them a 16% income tax rate. My clients are moving out of California into other states, I know people don't want to hear it but it's happening and it's happening everywhere and if the Democrats win, I think you'll see more aid to the states to prevent those tax increases from being able to happen, those are the starkest differences and we haven't even touched on healthcare yet.

Chris - So let's do some rifle shot questions, though because if I ask all the questions, that's going to go a little too far but I want to get you and you can just answer as quickly as possible on some of them. Blue sweep gets a suite, the state and local tax deduction back or no?

Dan - I never say something like this, 99.9% probability, yes, every bill that goes through Congress will have to get through the Speaker of the House from California and the Senate Majority Leader from New York and they're not going to let anything pass until that suite gets put back in.

Chris - Okay, infrastructure spending, there's not that many shovel ready projects, so regardless of who makes promises or what where are we going to spend a trillion dollars?

Dan - So I'm not a big fan of infrastructure as an economic stimulus, I know, that makes me very unpopular but I worked in government, I worked outside government and just to give you an example, we do about $50 billion a year in highway projects and they're telling me that we're going to be able to double that each year for the next 10 years and while we may have the need, we don't have the capacity, it takes years to ramp up but the great thing is that we know where those infrastructure investments are going to be targeted, highway, broadband which is critical now in a work from home environment, water, sewer, you see what's going on in Flint, Michigan, so I think you could see a pretty dramatic public works, the Grid, you're in San Francisco, California is having issues with electricity for various reasons, so I think you could see a broad upgrade, it's just a slow, it takes over a year to get 25% of the first money out and that doesn't make me popular at parties where I say this but that's kind of the fallback plan and that money is going to be distributed and it's going to be messy but it's going to happen and we know the companies are angling for it now.

Chris - You mean parties where you wear a mask and social distance, right?

Dan - That's right, yeah.

Chris - So a couple others that kind of come through when you think about the divided government is that there's a received wisdom out there? Hey, the split Congress that's really a good thing. Gridlock is that, what would you talk to someone about hey, split is a good idea as we're going to get stimulus one way or another, we have a split, and we’re not getting anything done, what do you think?

Dan - I am not bearish on any outcome of this election, like for me, I can find the silver lining in anything you give me, for the Democratic sweep, you get the kind of candy-sugar high from stimulus in 21 but then I got to worry about earnings estimates in 2020, in 2023 as this tax increases start to work through, think about the divided government in reverse, you're not going to get all that candy and that sugar high up front but you're going to get better long term benefits down the road. Number one, you're going to get better trade policy because it doesn't require an Act of Congress, so you get all the benefits of international relations from Biden and you get none of the tax increases which is, I like that, I'm not a big tax guy, and I like tax increases, but your stimulus bill is going to be smaller and the market will still be focused on whether we're going to get a vaccine, I have to be honest with you, I am so impressed with the work around the world, not just in the United States on a vaccine, a vaccine usually takes six years to develop, quickest has been four, we have three really good possible targets for one year, when I watched the governor of New York say "I don't trust this guy, Donald Trump on the vaccine stuff", makes me a little bit nervous given what we know, we don't want people to be scared of it, so if Biden wins, it may inject a little bit more confidence in the vaccine process and a little bit more confidence in just the COVID response, even though there's very little difference between a Biden plan and a Trump plan on COVID because they're all doing what scientists are telling them to do, regardless of what you hear politically and so my sense here is that even in divided government, we're going to get some stimulus, it may not be big but we're also going to get the vaccine and you're going to get a little bit better push of the confidence level in the vaccine, that makes me somewhat optimistic and if we were going into a recession, I'd be a little bit more worried about some of these scenarios but I'm actually optimistic that we're on the upswing here and I could figure out a way around any scenario you give me, there's just different timing effects to the different scenarios.

Chris - Okay, so maybe one more question on the investment side, one of the best strategies over the last four years has been "Stay at Home", meaning put more of your assets in the US, US markets outperform strongly, relatively speaking under President Trump and the non-US markets not so well, that started to reverse recently, you've talked a little bit about that. The Biden story looks a lot more like "Go-Global", the Trump story sounds a little bit like "Stay at Home" that seems to be one pathway but beyond that, does it matter how GDP growth is generated, does unemployment to other factors matter? It seems to me that either president regardless of the Congress still has to make big investments, not just in infrastructure but to your point around healthcare, some types of planning as well as how we think about our technology paradigm, so maybe last question, which is kind of big, does that strategy still make sense? And then if you had to think about, we're investing in healthcare, where would you go?

Dan - I love it all and like we're in the middle of a major innovation, we think we could take the vaccine stuff at the technology and apply it to Cancer Gene Therapy, like this could be the silver lining of a dark event in US history, which produces massive dividends down the road, so I'm not saying be bearish on the US, I'm just saying it might be time to actually make money in the non-US markets but there are risks to that, you see COVID flaring up in Europe, they're probably going to have to do some shutting down, that is a short term risk, another issue is that I think the US fiscal response is going to be bigger and that means that we're probably going to have better GDP growth, we're going to report rose domestic product for the third quarter on Thursday and that number could be 35% to 40%, now I don't know what the number is going to be, these are huge numbers after a major collapse, which speaks to the great innovation of the US, so I'll never bearish on the US per se, I'm just saying that after several years of underperformance in international markets, you could start to see a better turn and a chance to make money there, all else being equal. On healthcare, the market hates everything about health care right now, Trump wins, bad for health care, Biden wins, bad for health care, Supreme Court's taking up health care on November 10th as soon as the elections over and then they're not going to decide until June of 2021, why am I going to be there? Oh and by the way, a lot of this is domestic income, which are going to face higher tax rates, I just want to be clear that we're in the middle of a pandemic, so when we do stimulus, we are going to spend more money on the US healthcare system, more money for Medicaid, more money for testing, more money for providers, that has to be the first point of your analysis on health care, then you have to figure out if there is a blue sweep, what does Biden want to do?

This idea of a public option, which is very popular amongst the Democratic phase, actually has very significant consequences, it basically says, if you are in a private employer, you can leave that healthcare and go by subsidized government insurance, it has a cannibalizing effect, it affects the reimbursement rate that may be an optimal policy Democrats want to pursue, it would be very difficult to do that in a pandemic or right after we get through a pandemic, so I think they're going to put that off to the side, I've been calling it "Obama-Biden care", where you take Obamacare and you add Biden to it, you do more premium subsidies, more Medicaid expansion, that could actually be positive for the healthcare industry, a lot of ifs, a lot of guessing, not really, based on anything we know, like taxes, we kind of got a good bookend on taxes, kind of guessing here on health care, that being said, biotech and pharma, they're going to have to take their lumps in the Democrat blue sweep as much as innovation that they're doing, it's the last industry not to take a haircut from Obamacare and they seem to always win, so you get divided government, we're not going to restructure healthcare, we're not going to restructure financials, we're not going to restructure energy, there's some value there, you get in blue wave, you're going to have to deal with some of these issues in certain industries.

Chris - So that's probably a good place to leave it, considering we're a little bit over time.

Dan - Oh, I'm sorry.

Chris - Part of the messaging though, Dan, you're giving is there are opportunities regardless of what happens from an investment perspective, it can be as simple as "Stay at Home" and go abroad to something much more complex about industries, I very much appreciate that you've spent a little bit of time also talking about how things may develop, what to watch, I think our listeners will definitely be keyed into that and I think with that, I'll bring today's call to a close with a big thank you, Dan, so much for your time and your attention today and if we have questions that we didn't get to, we'll follow up and make sure that we get those out to our clients, with that we'll bring today's call to a close, Dan, thank you again and thank you to all of our listeners.

Dan - Thank you and stay safe.

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