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The macroeconomic roadmap given a Trump or Harris victory, according to Eric Basmajian, Michael Gayed and Chaim Siegel (1:00). Sector opportunities and historical behavior during Democratic and Republican administrations (9:30). How investors should be thinking about geopolitical angles (15:30). Cumulative inflation vs the inflation rate (21:10). If Trump wins and puts in extensive tariffs, which companies could be hurt the most? (25:30) Watch the video here. Transcript Jason Capul: Hello everyone. I’m Jason Capul. Joining me today, we have Eric, Michael and Chaim. My first question is a little more macro related. So perhaps Eric, you may be the best for this, and others feel free to join in with some input as well. But my question is, how do you envision the macroeconomic roadmap changing for the investment community in response to a Trump or Harris victory, particularly regarding inflation, national debt levels, interest rate trends? Would you anticipate a similar approach to whoever wins? Or is there kind of separate strategies for navigating these issues depending on which candidate ends up on top? Eric Basmajian: To give an overall context of the way that I believe that politics plays into the economy and markets, and while this may dissatisfy both sides of the political aisle, the business cycle or the overall economy is larger than any single political candidate, or any political party. The economy has gone through periods of expansion and periods of contraction with both parties in power, so the overall business cycle dynamics are unlikely to be significantly altered regardless of who’s elected. Now each party or each candidate could put forward various policies that impact the business cycle on the margin, particularly if one party holds power across all three branches of government, but unless those policies are very similar to the things that we saw during the COVID pandemic, where we directly mailed people checks and government spending rose to the order of magnitude of 50% or 60% of GDP. Anything outside of the realm of that type of a policy response is unlikely to alter the dynamics of the business cycle that are already in place. And those dynamics heading into the election are an economy that is absolutely growing, but it’s decelerating, and it’s decelerating mostly through –the cyclically oriented sectors of construction and manufacturing. So whoever gets into power in the next couple of weeks, their first few quarters in office, will likely be under the situation of an economy that is decelerating. Now. It’s still growing. By some measures, it’s growing about trend, but it is decelerating. And in my personal opinion, unless we see something really out of the box with power controlled by one party across all three branches, it’s unlikely to materially shift the dynamics of the overall business cycle. JC: A kind of a follow-up to that end is, how might that outcome of this election kind of influence long-term economic growth, consumer confidence? Is there any specific data points or policies or trends that you’re maybe monitoring that can lead investors to the correct directions? EB: Yeah, absolutely. So again, I’ll probably give an answer that upsets both parties. But over the long term, over the last 20, 30, 40 years, the economy has been experiencing a decline in the rate of economic growth. Again, growth is still positive, but the rate of economic growth has fallen from three and a half to three to two and a half to the last 20 years, it’s been slightly under 2% growth. It’s been a 30, 40 year trend, which of course, encompasses both political parties, and the primary reason, while there are multiple reasons, but the primary reason for that degradation in economic growth is that the government size is growing larger. The government size growing larger means that the private sector is growing smaller as a percentage of overall GDP. The private sector is of course, more efficient than the government sector. So as the government sector grows larger and the private sector shrinks, that will reduce overall economic growth, because it’ll reduce overall productivity in the US economy. Both political parties are going to oversee a continued increase in the size of government. No party, no candidate, has put forward any credible policy to reduce the size of government. And by that measure, I’m talking about government spending as a percentage of GDP, a purely objective measure. It’s not an opinion. Government’s ties was about 28% of GDP back in the 1960s and 1970s. It’s about 36% today. So a little bit less than a 10 percentage point increase in the size of government, which means that the private sector has shrunk by that amount as a percentage of the economy. Both candidates, whoever’s elected, is going to oversee a continued increase in that long term trend, which means that the overall growth rate in the economy is going to continue to decline. What that means is that’s going to put pressure on interest rates to continue declining. It’s also going to put pressure on smaller companies, the average American, the average business, to the advantage of the larger, more monopolistic companies that mostly represent the large cap indexes. Policy, or something to think about for investors is that under these long term economic trends, the largest, most monopolistic companies will continue to dominate and increase their relative outperformance over the rest of the market and certainly over the smaller cap companies. Chaim Siegel: If I can react to that, I think we do have a wildcard with Trump, because as soon as Elon Musk got into the campaign, Trump talked about him being a cost cutting czar and maybe cutting a couple of trillion dollars out of the government spending. And if that happens, that’s a major change. I don’t know if Trump will follow through on that, because he’s planning on spending a lot, and raising tariffs. The Democrats don’t really believe that’s a reality. But Trump’s been an out of the box thinker, and it’s something on the table. Even though Eric’s been right, what he said up until now, this is really a relatively new development, and really can shake trees for the market. I mean, if it happens that, you know, Musk is in there cutting expenses and third rail stuff like Medicare and social security, which I doubt he will, but that’s where a huge chunk of the spending is. You probably have an economic slowdown just based on a one time fix of this government budget. I mean, I think a lot of market participants may not like it, but they might respect it, because the overspending and huge deficits has been just unstoppable. So somebody like Musk, or Trump bringing in Musk to do something like this could actually change that trend in a meaningful way. Again, can they get away with it? I mean, Trump would be in, I guess, a final term, and so maybe it could, but he’d have to make a major sale to get that across to the US voters. EB: Well, you bring up a good point. And just to piggyback on that. You brought up two good points. One is the possibility of Trump being able to shrink the size of government, and number two is the entitlement programs. The dominant share of this increase in government size by vast, vast, vast majority. It’s almost irrelevant talking about anything else is the three line items of Social Security, Medicare and Medicaid. Those are all what we would call mandatory government spending. It’s all built into law, so it requires a massive upheaval to attempt to change any of those programs, which the Trump campaign has also said that they’re not going to touch. So we have this contradictory situation here where they say that they’re going to cut $2 trillion of spending. CS: Where’s it going to come from? EB: You can always have that from a discretionary bucket, which is really, really small. If he’s going to make those changes, it has to be from the mandatory bucket, which requires a really, really significant upheaval of law changes and things of that nature. So I appreciate the sentiment. I think that you’re probably right that market participants may respect it, but not like it. I sort of agree with that statement, but I would assess the probabilities of that as probably pretty low. JC: Michael, I wanted to get you involved a little bit. Are there any sectors or opportunities within the market that may provide potential opportunities or potential threats with either a Trump or Harris victory? Michael Gayed: Typically, when you look at sector behavior during Republican administrations, Democrat administrations, the only sector that really has the biggest differential, depending on who’s in office, is tech, right. Typically, tech really outperforms when you have Democrat as president. Typically tech does not really outperform when you have Republican as president. And for whatever it’s worth, when did tech leadership end and when did Trump started getting more and more likely to win, July? So the market itself has, I think, been betting on a Trump victory through sector rotation to some extent. It’s interesting. I would argue that – let’s go with Eric’s point of deceleration, slow down. I think the most interesting sectors are the most boring, and what I mean by that are, in particular, consumer staples, dividend play more on the need side of the economy. Utilities probably continue to outperform. They’ve had the benefit of the AI momentum this year, but also some defensive posturing consistent with the behavior of gold by the way. I’d argue the two are very much risk off assets. And healthcare, it’s funny because we’re chatting today, and there have been some pretty big moves in Eli Lilly (LLY) and some other mega-pharma type companies. I think the small cap healthcare side, the biotech end of things, the things which have not participated probably are going to be where there’s going to be some newfound momentum as this GLP-1 trend maybe starts to decelerate or break conceivably causing attention to focus on the laggards, as opposed to the prior leaders. So bottom line is, I would agree with the sentiment that was echoed earlier. Typically, this is more about cycles, not about who’s president. The exception there being about tech as the number one sector. It’s probably not going to matter much. I think you just look at the biggest laggards in the last couple of years and say now maybe actually is the time to consider them. JC: Markets are with the S&P 500 hovering near all-time highs. How would you — and this could be open ended for anyone out there. How would the current market sentiment regarding liquidity and maybe sideline capital be put into perspective? Do you think there’s any sort of significant pent up demand or supply for that matter, that is waiting for the conclusion of this election? Are investors really looking maybe for, possibly more clarity? Or do you think that’s kind of just something that’s kind of gone by the wayside, and we are where we are? MG: Sideline capital never goes into equities. How many times have we seen these charts? Oh, look at how many trillions are in money markets. And then that’s going to push equities higher. And somehow that number keeps on going up, right? It never finds its way to markets. If anything, what finds its way to markets is leverage, is borrowing, is options on options, is degenerative gambling. I don’t think any of that has to do with clarity around who’s president. I think that’s just the reality of FOMO. EB: Whenever we discuss the word “market” we have to — we always assume S&P 500. And I’ll go with that assumption, because I think that’s what most people refer to. But given the first comment that I made about the large cap companies having secular dominance over the smaller companies because of this long term trend in the reduction of GDP is on full display with something like the Russell 2000. Lower today than it was in 2021. So we have three, going on four, years where 2000 stocks, almost 70% of the investable universe, has not made a new high in almost four years. That’s worth pointing out as far as a trend. However, most people and their 401Ks are not invested in the Russell 2000. So that’s why the word the market always refers to the S&P 500. So we’ll go with S&P 500. The S&P 500 has a relatively binary model. If the economy is in recession or going into recession, the S&P 500 tends to vacuum lower really quickly, really violently and really abruptly. When the market, excuse me, when the economy is not in recession, the market being the large cap, S&P 500 tends to go up and to the right at generally a 45 degree angle. We’ve had several recession scares over the past couple of years, all of which have correlated to the hiccups in the market. But as we have avoided recession after each of those scares, the market simply just returns back to all-time highs. So the market being near all-time highs today is purely a symptom of the fact that the economy is not in recession right now, and market participants don’t fear the recession will be here in the very proximate future. Should the economy go into recession, or fears of recession resurface, the market will quickly dip in probably a abrupt and chaotic fashion. If we do ultimately conclude in recession, then the market will have the long awaited bear market that really hasn’t been around with any type of duration in in quite some time. So when we talk about large cap, S&P 500 stock market, it’s pretty binary. Recession, no recession, if no recession, you pretty much go to all-time highs. If recession, you go down pretty quickly. And since we’re not in recession right now, being near all-time highs is pretty fitting for that back of the envelope binary model, JC: Maybe switching gears up in a little bit of a different avenue, with the election coming up around the topic of geopolitics. And Chaim, maybe this question could be related over to you. How do you believe a potential change in US leadership could reshape the geopolitical structure and landscape in the world? Obviously, right now we have the Russia, Ukraine war, escalating war and tensions with Israel and the Iranian-backed Hamas, spats in the Red Sea, tension relationships with China and US. How may a new leadership change, or a continued change under the Biden-Harris style impact the markets? And from more of a geopolitical standpoint, is there any sort of new strategic investment opportunities or things to keep an eye on as that kind of unfolds? CS: Yeah, that’s a good question. Me and my customers are talking about this a lot, especially I live in Israel, so I don’t know that helps my viewpoint, but yesterday you did see on the tape that the Prime Minister of Israel, he said he’s going to wait for the elections before he decides what diplomacy he’s going to push forward. And that means that whoever wins adjusts his strategy, or adjust Israel’s strategy, which is a little bit central to whatever’s going on in the Middle East, which obviously has repercussions for oil. And you know, how aggressive Israel is going to be with Iran and then there’s more tit for tat, and how much that expands. When the US pulled out of Iraq a few years ago, I said to customers that there’s going to be a crescendo of geopolitical events now, because the US showed weakness. Former President Donald Trump, he’s shown a strong hand with geopolitical affairs. He’s tougher but President Joe Biden, if Vice President Harris follows in his trend, even though he’s called ironclad support for Israel, he’s threatened to pull that support based on things going on in Gaza. And so I’m not sure how ironclad that is. And if it is not so ironclad, if Harris wins, then that could really be a big pickup in geopolitical tit-for-tat. I don’t think that’s the main driver, unless you have a spike in oil, and then consumers are already starting to slow down if you get a spike in oil. Obviously, that limits their spending they can do each month. They have a limited budget every month, a basket of goods that they buy every month. If oil and gas spikes, that’s going to really crimp the economy. That’s a risk. As far as other geopolitics, obviously, Trump has talked about a blanket tariff. I think it was 60% on China. He’s also talked aggressively against Taiwan, even though his Vice President candidate Vance has actually talked nicely about all within a matter of days, nicely about Taiwan. But if Trump ends up putting tariffs on Taiwan Semi (TSM), I mean that’s, 80% of production of all the fabless, you know, all the US fabless companies that depend on them to produce their chips, if spent — if costs need to go up on that, you know that, obviously that hurts those companies and hurts earnings. And then you have, again, with that category of geopolitics, you have more tit for tat risk with China being aggressive in moving their pawn pieces against whatever the US does. I think with Trump, you have more risk of tariff, tit for tat, and with Harris, I think you have more risk of potential build up in Middle East geopolitical risk. JC: Michael, maybe this could be geared towards you a little bit. Another asset class that a lot of people are always watching is the crypto space. Crypto has obviously received much more adoption, as seen through exchange traded funds, starts of participation with institutions. I guess my question to you would be, do you believe the crypto landscape can be shaped any differently with policies and regulations and any sort of changes in that nature, regardless of who the winner of the election is? MG: I mean, tell me what liquidity is, and I’ll tell you what crypto does. I mean, that’s all it is. I mean, the mechanism is ultimately around how much money is flowing around. And as we know, there’s still a lot of money that’s flowing around. Everyone’s I’ve obviously hyped up about where Bitcoin is at as we speak. You’re not seeing the same kind of fervor in the altcoins, so to speak, right now. But I’m not so convinced, again, that it’s going to ultimately matter that much. I’d argue what happens with monetary policy will drive what happens next when it comes to Bitcoin, cryptocurrencies, more broadly. I will say, typically, when you have a lot of excitement, that’s where trends go to die. Typically when you have skepticism, that’s where trends go to keep on persisting. Trends live on skepticism. They die on conviction. I don’t think you have the same degree of fervor right now, at least not anecdotally, that I’m seeing on social media, around cryptocurrencies, around Bitcoin, and yes, I do separate out the two as many people in the space will correctly say they are different. So there might be some room to run short term. I don’t know if it has anything to do with Trump being more pro-friendly crypto or not. I think that’s just a function of, it’s still liquidity. Credit spreads are tight, and animal spirits live on. JC: I know we kind of hinted at inflation a little bit in the beginning, but it really does seem to be at the forefront of every conversation, basically back since 2020 and the start of COVID, and I was curious to get some of your takes on what inflationary environments might be shaped up and might look under either candidate. Or are we kind of looking at the same situation, regardless? EB: I’ll make a caveat so I don’t get beat up on the inflation topic, which is that we obviously have to separate the cumulative inflation that we’ve experienced from 2020 till now, with the inflation rate. The cumulative inflation that we’ve experienced since 2020 has been devastating for a lot of people. We’re never going to get that reduction in the standard of living back. We’ll just put that out there. As far as the prevailing inflation rate, which is what determines the next marginal move in monetary policy, that part of the discussion, in my opinion, is largely done. The inflation rate has cooled quite substantially. The inflation rate, excuse me, has cooled quite substantially. Most of the residual inflation is lingering in two categories, shelter and motor vehicle insurance, which are really methodology issues, or, with the way that the CPI incorporates those two factors. So if you exclude shelter and motor vehicles, which, of course, are real life items, then the inflation rate right now is actually 1.2%. So the inflation rate has reverted back to basically where it was, specifically once some of that more lagging shelter continues to roll through. All of the discussion around monetary policy, in my opinion, is predicated on the labor market, since the Federal Reserve most likely believes that inflation is done for the most part, market participants pretty much feel that the inflation discussion is also over as it pertains to monetary policy. It’s not over as it pertains to the reduction in standard of living that all Americans have experienced, but it’s over for the discussions of monetary policy, I think the focus has entirely shifted to the labor market and the unemployment rate. And I guess the question was on the candidates. So I’ll briefly touch on that. Again, back to what I echoed is that the business cycle and business cycle developments are really going to be the most instrumental factor impacting the short term moves in the unemployment rate. And by short term, I mean 2, 3, 4, quarters, not the next unemployment report. So over the next three or four quarters, neither candidate is likely to be able to implement any policy that’s going to materially influence the direction of the unemployment rate, it’s going to be all business cycle dynamics. If the unemployment rate continues to rise, then the Fed will continue lowering interest rates. If the unemployment rate stops rising and decreases, and we see a three handle, then the Federal Reserve will pause their interest rate cutting campaign. So I think that the monetary policy decision going forward is pretty binary based on the unemployment rate. I don’t think there’s a huge influence from either candidate there over the next couple of quarters. As far as fiscal policy, we have to separate what’s again, going back to the conversation that we had in the beginning, we have to separate what’s mandatory, secular, fiscal policy versus what’s discretionary increases above that secular trend. So when we talk about the deficit as a percentage of GDP, it’s huge. It’s a big problem. It needs to be addressed. But there is a secular increase in the deficit that’s been going on since the early 2000s where the deficit has gone from 1% to 2% to 4% to now something around 6% of GDP. Most of that is the secular increase in fiscal spending from the three major items of Social Security, Medicare and Medicaid. That will continue into the future. We will see 6%, 7%, 8%, 9% deficits, should those policies continue in their current form. But that’s different than the COVID type fiscal policy, which caused a deficit that was significantly larger than that ongoing secular trend. I think that’s worth pointing out, because when we revert to these deficit numbers, the secular trend will continue to put large deficit numbers in front of us for the foreseeable future, most of that will be three line items, which is a lot different than the fiscal policy that we experienced in 2020, 2021 and 2022. JC: We can start to field some of the questions that have been coming in from our audience. If Trump wins and puts in extensive tariffs, which companies could be hurt the most? CS: Well, I think the companies that are going to be hurt the most are, you know, the China related companies you have, Apple, Tesla, Micron, Nvidia, Nvidia is less now because of blacklists. so maybe they’re hurt less, but everything in tech would be hurt because there’s going to be a tit for tat, and you know it would just limit sales back and forth. EB: Well, let me kick a hot item back into the discussion. Trump was in office for four years. He did enact tariff policy, he seemingly granted waivers for all of the top S&P 500 companies like Apple (AAPL). So why do we think that the next round of Trump tariffs will decimate the same companies that were wavered? CS: Yeah, I think, I mean, we’ve seen that there’s obvious market reaction. I mean whatever he follows through on, I mean, whatever he threatens is a lot of time for negotiating. So you don’t really know what he’s planning on using for negotiating leverage, or actually he’s planning on following through? We just don’t know. But the market doesn’t really decipher that initially. So I do think it adds volatility. Maybe it doesn’t mean down stocks, but it does add volatility to stocks that have kind of, you know, mostly only gone up. JC: The art of surprise. The index market is at its highest PE level of 35. Before COVID, it was at 28. Many people expect a heavy retracement of the indices, what do you think? MG: Sounds like a credit event, which I’ve been very wrong on, by the way, for the last year and a half, although I still argue that small caps, to Eric’s point about many stocks have still not hit their 2021 highs. Certainly after inflation by the way, they’ve not hit their 2021 highs. There’s been concerns about default risk. It’s just not in the credit markets, at least not yet. Just because you’re new highs doesn’t mean you suddenly have to go down very, very heavy. And just to keep that in mind, markets tend to go higher, and new highs tend to be getting new highs. But it goes back to that point around. how do you define the market Look, there’s two arguments very simply, I think. And I’ve made this point before on the Lead Lag Report, on my social media accounts. I myself believe we are in a concentration bubble, meaning that we have so much concentration in the top 10 names for the S&P 500 that resolves itself in one of two ways. Either you finally have breadth broadening right? Meaning you have more stocks participating, going up faster than the Mag 7, and particularly small caps and mid-caps, or those Mag 7s, those outliers, individual stocks that are the cause of that concentration bubble break very heavy, bring the averages lower. And under that scenario, small caps would likely be down, but down less as they have been in prior bear markets. It’s funny, because people seem to think that small caps would just get decimated in the recession. They have discounted a lot of negativity already. So I would caution anybody, and this is coming from me, as the guy that keeps saying gold is sending a warning on at Lead Lag Report, on X. I would caution anybody to think that you have to have a massive decline just because the S&P has hit new highs. What really will matter is what happened next to small caps? If you have small caps take the leadership role, then yes, the momentum is going to likely continue, and you’re going to have a much healthier type of environment for risk on assets, in which case the message of gold is wrong. If gold is right as a risk off defensive play, then yeah, I think watch out. JC: Can you please talk about how to balance a portfolio, minimize risk in a high tariff situation, if that were to come into play? CS: Well, I think, you need to obviously watch the effect on the market. I mean, we look at key levels, on the S&P 500. I mean, if it breaks a key level, medium term level, then maybe it takes some risk off. But a lot of the lot of times, like Eric posed the question, there are short term hits to the market, but they might not throw off the overall – the medium term trend. If they throw off the medium term trend, and you have a break on medium term trend, then you have to get a little bit more conservative. Get full access to EPB Marco Research Learn more about The Lead-Lag Report Investing Group Follow Elazar AdvisorsEditor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
