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November 6, 2018 | The Race

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

With the possible exceptions of whether to buy or lease a car or if Adele sucks, nothing gets the blog steerage section fussed more than Trump. The mere mention of his name propels our discussion to daycare levels. The insults, closed-mindedness and outrage, feigned or real, are legion. Let’s try to rise above it this time. (Not holding breath.)

As I write, Americans vote. At stake is every seat in the House of Representatives, a hunk of the Senate and three dozen state governorships. Polling suggests the red guys will hang onto the Senate while the blue guys take the House. But polls are often wrong and people surprise. Plus – as we have seen – it was possible for Trump to become president and Trudeau to grab the prime ministership even when a majority voted for other people. It’s a highly imperfect system in which first-past-the-post, voter suppression and gerrymandering can distort the will of the people.

Regardless, what does this midterm thingy mean for your portfolio? Will markets swoon or soar on Wednesday?

If history’s any guide, a nothingburger. After almost every similar event markets haven’t moved more than 1% in either direction. In general, equities gain ground in the weeks following a midterm. In fact, there’s almost always been a run-up during the third year of a presidential cycle, which bodes well for 2019.

But is it different this time? We’ve never had a character like Trump in the White House. And never in memory has a sitting president so made the midterms into a referendum on his personal performance, nor engaged in such fierce campaigning leading up to the vote. This also happens in a poisoned political environment, with Trump the poster guy for global populism. America, Italy, France, Germany, Britain, Venezuela all bear witness to the power of the disenfranchised. Wealth disparity, voters think, can be settled with ballots. How cute.

Most blog commentators this week have predicted a ‘red wave’ and unbridled Trumpism for the next two years. They see Republicans sweeping both chambers as the deplorables punt the Dems. It’s now more a religion than politics. Us-and-them at its most visceral, emotional level. Looks like 43% of the US population agrees.

So what happens if Trump emerges the victor, controlling both the White House and all of Congress?

Well, it’s what markets hope for. In that case investors expect more gas to be thrown on the US economy. More tax cuts (the big guy just promised a 10% middle-class hack – and the mother of all budget deficits), aimed at creating more growth. More spending, especially in the military, homeland security and infrastructure. More hardball with China and other trading partners. The ratification of the USMCA deal with Mexico and Canada. More inflation. Higher bond yields. More Fed tightening. Sustained corporate profits. Full employment. Wage gains. Robust consumer spending.

The worst outcome for markets would see the Democrats taking control of both the House and the Senate. That might lead to a repeal of the corporate tax cut, since more money would be required for social spending and the expansion of Obamacare (the blues campaigned massively on health care). The Dems might launch a new inquiry into the controversial appointment of Judge Brett Kavanaugh, or even start the impeachment process against Trump. In other words, political instability would flow from a war between the Oval Office and Congress, while stimulus was removed from the economy leading to reduced corporate profits and lower stock values. But this might also mean a smaller budget shortfall, cooling inflation and no rate hikes as the Fed backs off.

More likely (if you believe polls) is the split. A blue House. A red Senate. Trump is spanked, but stays unrepentant. (Nothing is ever his fault.) This outcome is generally seen as a good one for markets and investors. Over the sweep of history stocks have done well during times of government gridlock, since a more balanced approach emerges. In this case Trump would still do exactly what’s he’s done for the economy, but have a harder time with issues like immigration – which he just used to mercilessly fire up his base of supporters.

So, for Canada?

If you have a balanced, globally-diversified portfolio it’s all just amusing. Do nothing. The rest of 2018 should put a smile on your face.

But if most of your net worth is in real estate, no smiles. Trump firmly in control of the executive branch and the Senate means his nationalist agenda will continue. Maximum growth, more protectionism. America-first, more jobs, inflation and – yes – Fed tightening. An interest rate increase in December, three more in 2019 and pressure on our hawkish Bank of Canada to do the same. It would be prudent to prepare for five more quarter-point hikes before our guy lays down his tools, saying the job is done.

Of course, if the rabid blog dogs are correct, and it’s wall-to-wall red, you might wish you’d never heard of Brad Lamb.

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November 6th, 2018

Posted In: The Greater Fool

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