October 28, 2024 • 44 mins
Bob Stein — As Election Day looms, Bob analyzes the probabilities of different election scenarios. Additionally, we explore how tariffs and other tax policies might affect the economy, discuss the implications of government spending, and consider if advancements in AI might pave the way for universal basic income initiatives.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Ryan (00:10):
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Issakainen, ETFstrategist at First Trust, here.
We are less than two weeks awayfrom the election and I've got
Bob Stein joining me once againon the podcast.
Bob is going to break down whathe thinks is going to happen in
the election and I've got BobStein joining me once again on
the podcast.
Bob is going to break down whathe thinks is going to happen in
the election in less than twoweeks from now.
He's going to give us his oddsas well as implications for what
(00:34):
could happen in the wake of theelection.
We're also going to talk a bitabout the economy.
We're going to talk about theFed.
We're going to talk aboutinterest rates.
Lots to cover in this episode ofthe First Trust ROI podcast.
Bob, thank you for coming onthe podcast again.
I want to get your views onwhat's happening in the election
(00:56):
next week.
So we're recording this episodeon October 24th, which is
Thursday, and I recognize a lotcan change between now and then.
So this episode is set to airon Monday.
So keep that in mind with yourprognostications At this point.
Would you share with us and thelisteners of the ROI podcast
(01:19):
how you would handicap thepresidential election.
Bob (01:22):
So, as we tape this which, as you mentioned Ryan, is 12
days away from the actualelection, so everybody's going
to watch it eight days away.
A lot can happen in four days,especially over a weekend with
the news cycle.
My anticipation is that Trump,who has now pulled a little bit
(01:43):
closer in the polls, willprobably win, but not definitely
not by a long shot.
So between August and I think aweek ago, I basically gave
Donald Trump about a 60% chanceof winning and the Republican
sweep scenario a 45% chance ofhappening, and I recently took
(02:05):
that up a few days ago to a 65%chance of Trump winning and a
50% chance of a Republican sweep.
So flip a coin, see whathappens.
Now.
Just to let our viewers knowwhat we're translating that into
a way that many of our viewerswill understand more easily.
It's that if you have a 65%chance of winning a game in the
(02:29):
NFL, a regular season game,you're probably a
four-and-a-half point favorite.
Now think about your home teamor your favorite team and how
often they lose when they'refavorites.
Okay, if you're a Kansas CityChiefs fan, it probably doesn't
happen very often, but if you'rea Chicago Bears fan, it happens
all the time.
So I'm not saying that Trumpcan't lose.
(02:51):
He has about a 35% chance oflosing, but I think he's in a
somewhat better position than Ithought he was the last time we
spoke, ryan, one of the reasonsfor that is simply that Harris'
lead in the polls is diminishedcompared to where it used to be
and she only has 12 days left.
What I've been saying all alongis basically that if I wake up
(03:13):
on Election Day and VicePresident Harris is ahead in the
polling averages by about threepoints, then I think it's a
toss-up, because I think Trumphas a two-point advantage in the
Electoral College relative tothe popular vote, because I
think Trump has a two-pointadvantage in the electoral
college relative to the popularvote.
And I'm guessing, and nobodyshould have a high degree of
confidence in this, but my bestguess is that the polls will
(03:39):
probably underestimate themargin for Trump by about one
percentage point, which is a lotsmaller than the error, or what
some people call bias fouryears ago, when it was two and a
half to three percentage pointsagainst Trump, and more in line
with what happened in 2016,when the polls were off by only
roughly one percentage point.
Ryan (03:55):
So I've often wondered, when we're thinking about
polling and just kind ofwatching how it plays out,
sometimes it feels like pollsare intended to influence rather
than measure.
Does that happen, or am I justparanoid?
Bob (04:13):
No, I think it does, but I'm not sure they have the
intended effect.
I mean, let's say you're aDemocrat and you see a bunch of
polls that are secretly or notso secretly funded by
Republicans, with Trump narrowlybehind, which you would assume
means he could win in theelectoral college, or maybe even
(04:35):
Trump ahead, like some recentpolls have shown.
Would that make you more orless likely to vote?
I actually think that wouldmake you a little more likely to
vote and turn out and to try tomake sure your side wins,
because more assistance isneeded by your side to win.
So the whole idea that pollsare just trying to mess with
(04:58):
people's head, I don'tnecessarily think that's a big
issue because I don't know ifthere's if the intended effect
demoralizing the other sidewould actually work in a close
election.
Ryan (05:11):
It feels like maybe they're just trying to create
momentum.
Like you know, some peopledon't pay that close attention
to what's actually happening.
They're kind of a bandwagoneffect.
So that's that's.
I thought maybe there would besome bandwagoners that would
jump on because they think theyit's almost like they want to
vote for the winner and so maybethat has an influence.
Bob (05:31):
I think that's the theory, Ryan.
I don't know if there's any datato to buy to back that up,
because, yes, you might affectthe bandwagoners, but you might
might also intensify the turnoutrate of the people who are now
worried that they're going tolose.
So you know, if you had a bunchof polls showing Trump up five
(05:54):
OK, we don't have polls likethat, but let's imagine you did
Wouldn't that scare thedaylights out of Democrats and
get them to turn out to highernumbers?
And couldn't it actually reduceturnout among Republicans who,
frankly, now that Republicansget more votes from lower
education voters than they usedto, might be more of the
(06:14):
marginal voters than theDemocrats?
So I don't necessarily thinkthe theory works.
Ryan (06:22):
Nevertheless, I'm guessing there are polls out there that
try to accomplish that, whetherthe theory works or not, yeah,
okay, so I live in New YorkState, and one of the things
that I've noticed in New YorkState is that there doesn't seem
to be a lot of polling for thepresidential candidates.
(06:43):
There's maybe three or fourpolls that have been done that I
can find on Real Clear Politicsfor New York, and it's kind of
surprising.
I think I understand why,because it seems like it's a
lock for the blue team, right.
But one of the things that I'venoticed, as I compared those
polls this time to the polls in2020 and 2016, is that it seems
(07:05):
like the margin in favor of theDemocrats is pretty
significantly less than it wasthe last couple, and so I want
your take on that.
I think the swing is dependingon the poll.
You're looking at somethinglike eight to 10 points in favor
of Trump.
Compared to the margin, kamalais still way ahead in New York,
but the margin is less.
(07:26):
So what are the implications ofthat?
Bob (07:29):
So I actually have a very counterintuitive interpretation
of that data.
I have little doubt that whatyou've observed is true and I
think the Democrats will stillwin in a close election easily
at the state of New York and sayNew Jersey and several others.
(07:49):
But I also agree that themargins in those states will be
smaller than they have been inprevious presidential election
cycles.
So the counterintuitive part ofmy opinion is that that is, or
that phenomenon is, actuallygood for Democrats.
Okay, and here's why Inprevious cycles they would win
New York and say New Jersey,overwhelmingly, and what that
(08:14):
would mean is that they had alot of wasted votes relative to
the national popular vote,because they're already going to
get the electoral college votesfor those particular states,
like just focusing on the stateof New York.
But if, for example, theirmargin is lower because perhaps
Jewish voters are moreRepublican than they were in
previous cycles or because someHispanic, especially Dominican,
(08:37):
voters are more Republican thanin previous cycles, then the
Democrats, relative to thepopular vote nationwide, are
going to waste fewer votes inNew York.
Meanwhile, the Republicans, whoused to have a narrow edge in
close elections in the state ofFlorida, will now probably win
(08:58):
Florida more comfortably.
Maybe.
Not a landslide, possibly, butI define a landslide as winning
by 10 percentage points, butmore likely just a large victory
, which means they're wastingvotes in Florida and that the
Republican electorate is notquite as efficiently laid out
across the country ordistributed across the country
(09:21):
relative to the Democrats,compared to the way it was in
2016 and 2020.
So, if you look back to 2016,donald Trump's advantage in the
Electoral College was almostthree percentage points, I think
.
To be exact, I think it was 2.8percentage points.
His advantage in the ElectoralCollege in 2020, even though he
(09:41):
lost was even larger relative tothe popular vote, it was almost
four percentage points.
I'm assuming it's something inthe vicinity of two percentage
points this time around, andwhat I mentioned about Florida
and the phenomenon you correctlyobserved about New York is a
big part of that.
Republicans are still moreefficiently distributed by
Democrats, but their advantageis diminishing.
Ryan (10:04):
I think that is really counterintuitive.
And so what I'm hearing you sayand just make sure I'm hearing
you say it properly is thatbasically the amount that say
New York is contributing to theoverall popular vote advantage
is much less.
Therefore, that actually meansthat there's maybe a margin
(10:25):
working in the favor of maybesome of the more close states
towards the Democrat.
Bob (10:29):
That's right.
Let's compare two electionsjust so you see a snapshot 2016,
trump versus Hillary Clinton.
2024, trump versus KamalaHarris.
So let's say the polling marginin the same poll by the same
pollster, both times showed theDemocrat up three percentage
points national average.
(10:50):
Well, if we know that HillaryClinton was up by and I'm just
making up numbers here to giveyou an example was up by 20 in
the state of New York, thatmeans Harris's three-point edge
is less reliant on New York'spopular vote and therefore she
(11:11):
has a better chance of winningsome of the battleground states
that will determine the outcomeof the election.
I'm not saying a better chanceof winning than Trump, but a
better chance relative to thepopular vote than Hillary
Clinton had, but a better chancerelative to the popular vote
than Hillary Clinton had.
Ryan (11:26):
And that's assuming that you know some of the polling is
consistent between those statesand the national polling and you
know it's a fairly small samplewith New York, as I mentioned.
There's only been a few pollsthat have been actually
conducted this fall that I'veseen anyway.
Bob (11:41):
Why would you waste your money and poll a whole state of
New York?
Now it is worthwhile to pollindividual congressional
districts in the state of NewYork because we have some newly
carved out ones that might favorthe Democrats relative to the
Republicans compared to theirprevious cycle.
That's definitely worthwhileand it would be to the country's
benefit to see more polls ofthose particular congressional
(12:02):
districts.
But the whole state it's reallynot worth it.
There's no statewide contestedelection this year.
Ryan (12:10):
All right, I want to shift a little bit to kind of a
linkage between what's beingtalked about in the election and
economics, which you're aneconomist.
That makes sense.
A lot of talk about tariffslately.
You know, president, formerPresident Trump seems to be the
candidate that argues morefavorably about tariffs,
(12:31):
although I will observe that theBiden administration hasn't
really rolled back much of thetariffs that the first Trump
administration put on.
But I guess, more generallyspeaking, can you give us your
view on the overall impact oftariffs?
Are they a good policy tool?
Are they a bad policy tool?
Do you think Trump is actuallygoing to implement the tariffs
(12:55):
that he's talked about in thecampaign this year?
Bob (12:59):
So I think he will raise tariffs on the rest of the world
and he will raise tariffs onChina.
There's very little Congresscan do to prevent him from
raising tariffs on a particularcountry like China, and I think
he'll go heavily after China,because it's not just an
economic issue.
It's really a geopoliticalissue, and this is a country
(13:23):
that has aspirations in thePacific to be a regional power.
That might include seizing thecountry of Taiwan, and so if
there's a possibility thatAmericans and Chinese military
forces will be shooting at eachother sometime in the next
decade I'm not saying it'sguaranteed or even above 50%,
(13:43):
but there's more of apossibility we will be shooting
at each other than say we'll beshooting at Frenchmen, okay or
many other countries.
So in that scenario, the tariffreally has more of a
geopolitical aspect or ajustification, rather than an
economic justification.
Now what's going to happen ifwe raise tariffs and there's a
(14:10):
legal issue about whether hecould do a blanket increase in
tariffs across the board for allcountries?
There is a lot of legalambiguity.
I'm not saying he can't.
I'm not saying he can't, butthere are a lot of people who
have looked at this issue andit's ambiguous and it might go
to a very high level of thefederal courts to decide, so I
think, in the end, he'llprobably be able to get those
into law.
I think they're passed throughto consumers, and US consumers
(14:32):
will pay the vast majority ofthe cost.
That doesn't necessarily,though, mean it's bad policy.
I mean the federal governmentis going to need more revenue in
the future, so this might notbe a horrible way of doing it.
I don't think it's going tobring back Youngstown, ohio, to
be an industrial power like itwas 50 years ago, but it might
(14:55):
have some impact collectively.
The tariff regime on movingcertain industries to be more
heavily concentrated in the USthan they would otherwise be.
The tariffs on China I don'tthink that's going to move much,
if at all, back to the US.
I do think it'll have apotentially positive effect on
(15:16):
other countries like India, whowould benefit, because if
American investors or consumerswant to access low skilled labor
, that's a better country.
Lots of people there in theprocess of industrializing, so
it'll be a shift.
I don't think it would end upactually in reducing our trade
deficit much, if at all.
The US runs a trade deficitbecause we're a great place to
(15:39):
invest, and so Americancompanies and American consumers
because foreign capitalcontinues to move into the US,
can afford to purchase more thanwe produce.
It's kind of a high-classproblem, if you will.
Now, in terms of inflation, Iexpect the Trump tariff regime
would probably lift inflation inthe US by about a percentage
(16:02):
point for about a year.
But once prices have adjustedto the tariffs, that doesn't
mean inflation remains high.
Inflation can then go back downto whatever the Fed is
targeting.
Ryan (16:12):
So now that so it's kind of a one-time effect.
Bob (16:16):
It's a one-time effect, maybe one percentage point of
additional inflation.
For a year, that doesn't meaninflation has to go much higher
than it is today.
Inflation for a year thatdoesn't mean inflation has to go
much higher than it is today.
And the reason is because Ithink, given the tightness of
monetary policy and the lagsbetween monetary policy shifts
and inflation, we may actuallyfor a time next year go below
the Fed's 2% target on PCEinflation.
(16:39):
We may end up in the vicinityof 1.
A half percent.
So if the introduction of thosetariffs coincides with where we
would otherwise be temporarilylow inflation, we might just not
get that temporarily below twopercent inflation.
Ryan (16:56):
The other thing I wanted to ask you about was the
implications from a tax policystandpoint of the elections.
I think it's the individual taxrate that is set to go up once
the Trump tax cuts expire.
Corporate tax rates werepermanent.
What's your view on?
(17:18):
I guess, the differentscenarios are you know a sweep
one way or sweep the other way,or a sort of a mixed election in
either direction.
You know a sweep one way or asweep the other way, or a sort
of a mixed election in eitherdirection.
You know, I guess, if you couldbreak that down, what's likely
to happen in your view with thetax code in the Next year or two
.
Bob (17:34):
Let's go through the four scenarios that I think are
possible and I'll give you thepercentages for each.
So I give a 50% chance to aRepublican sweep.
Where they control the House,the Senate and the White House,
we get a Republican sweep and ifthat happens, they will almost
certainly extend not permanentlybut temporarily the Trump tax
cuts originally enacted sevenyears ago and they'll probably
(17:55):
try to go a little deeper.
Trump has talked about cuttingthe corporate rate, which he
already cut from 35 to 21, downto 15.
I think 15 is probably a bridgetoo far because of our deficit
issues in the years ahead, but Ithink he could bring it down to
something like 18 percent.
I also expect some sort of taxrelief for tips, given how much
(18:17):
he's talked about that.
And, by the way, that's reallya play for Nevada's electoral
votes.
No state, I would imagine, hastip income relative to regular
income more than the state ofNevada, with all those blackjack
and other dealers at all thecasinos.
So it's basically a play forNevada's electoral votes, which
is why Harris copied the policy.
So I think that would be likely.
(18:40):
I think it's gonna be hard toimplement, so they might have to
keep it narrow and say only forcasino employees or something
like that, or only forrestaurants.
You know firms that sell morethan a certain percentage, where
they get a percentage of thegross from serving food or
(19:02):
something like that, but it'sgoing to be tougher to define in
the tax code than you think.
Otherwise, you know, if they'resloppy with it, then I'm going
to go to my employers at FirstTrust Advisors and ask to be
tipped.
I want to be tipped, you know,rather than paid.
We'll see how that works, howthat goes over.
Have you ever waited tables?
(19:23):
Very briefly, when I wasyounger.
You might not believe this,ryan, but I'm not actually the
best in the consumer serviceenterprise situation.
Yeah, I know you are.
I know you are.
You're probably going to losesleep imagining like how that
could have happened.
So I think with Trump, theywould basically extend the tax
(19:44):
cuts and do a little more.
Trump has also talked abouteliminating or reducing the
income tax on Social Securitybenefits.
I think that falls by thewayside because it would only
expedite the point in time atwhich the Social Security trust
fund would go bust, and I don'tthink he wants to be perceived
as responsible for that.
So he's going to forget aboutthat promise after the election.
(20:06):
That's my best guess.
Now let's imagine Trump winsand the Republicans get control
of the US Senate, but somehowthe Democrats narrowly control
the US House of Representatives.
In that instance, hakeemJeffries probably becomes
Speaker of the House.
He would be by far the mostpowerful Democrat in Washington
DC.
I don't think he'll be in.
(20:28):
He'll have any inclination tojust roll over for Donald Trump.
I think he would fight DonaldTrump with a Republican's tooth
and nail for everything theywant out of Congress.
And Republicans would reallywant to extend those tax cuts,
right?
I think in the end theRepublicans will have to
negotiate and compromise to getsome Democrats to sign on to
that extension.
So what would that look like?
(20:49):
I think the top rate wouldprobably have to go back up to
39.6%, where it had been in the90s for eight years under Bill
Clinton and the last four yearsunder President Obama.
And in addition, in order toget some Democrats to vote for
that.
And Democrats generally comefrom high-tax states, right, you
know Massachusetts, maryland,new York, new Jersey,
connecticut, california,illinois.
(21:10):
So I think it will cost themsome expansion of the state and
local tax deduction.
Right now it's capped at 10,000.
I think it would have to go to20, 25,000 instead.
It's not gonna become unlimited, essentially like it used to be
, but I think they'll raise it alittle bit, which you're
probably happy to hear becauseyou hail from the state of New.
Ryan (21:30):
York.
It wouldn't be a disappointmentfor me personally.
Bob (21:32):
Personally, you'd love it.
Yeah, and it would be atemporary extension.
Now let's look at two morescenarios.
One scenario would be Harriswins but she faces off against
the Republican Senate, and ifshe does win, that's likely to
be the scenario Maybe aRepublican House, but definitely
a Republican Senate or almostcertainly a Republican Senate.
(21:55):
Now, if that happens, this isis gonna surprise a lot of the
viewers, because the Harriscampaign has all these
tremendous tax increaseproposals taxing unrealized
capital gains, raising thecapital gains tax to, like you
know, maybe 40% or 38% or 32% orsomething like a lot from where
it currently is.
Well, I actually think shewould end up largely extending
(22:19):
the Trump tax cuts originallyenacted seven years ago.
Now how can I possibly say that, given the tone of her, of her
proposals coming from hercampaign?
Because we saw this happen in2012.
I mean, president Obama spenthis first term in office
complaining about the Bush taxcuts originally enacted in 2001
and 2003.
(22:39):
He wins reelection versus MittRomney and literally a month
later, in December of 2012, hecuts a deal with the Republicans
who were in charge of the USHouse of Representatives at the
time, fully and permanently.
Permanently extending the Bushtax cuts into the future.
(23:00):
With one exception At the tippytop, the top bracket was moved
back from 35 to 39.6, where ithad been for eight years at that
point in time under BillClinton.
Now why would he do that?
Because the Republicans jammedhim.
The Republicans heard hisrhetoric, but after the election
they went to him and saidcongratulations, mr President,
(23:22):
you're going to be in the OvalOffice four more years.
But about those tax cuts?
If you want to extend them foranyone and President Obama did
campaign on extending them forpeople in the lower brackets
then you're going to have toextend them for almost everyone.
Otherwise, we don't pass a billand you're going to preside
over a massive across-the-boardincome tax hike going into the
(23:45):
2014 election cycle.
And President Obama blanked andI expect a President Harris
would blank for very similarreasons.
These tax changes will be madeat the very beginning, january
1st 2026.
Everybody would see theirwithholding tables change.
It would be a politicaldisaster for the Harris
administration.
(24:05):
So I think if she wins butthere's a Republican Senate
you're not going to get any ofthose big tax increases she's
been talking about, except atthe tippy top, highest bracket
goes back up.
One more scenario, and I'm onlygiving it a 10% possibility at
this point, as we sit here 12days away from the election, and
that's the Democrat sweep.
(24:25):
I believe that even in thatscenario, you're not going to
see the major tax increases thatthe Harris campaign has
proposed.
You're not going to see a taxon unrealized capital gains.
You're not going to see a taxon unrealized capital gains.
You're not going to see amassive increase in the capital
gains tax, because even in thatsweep scenario, it's possibly a
50-50 Senate.
John Tester from Montana, withall those big wealthy landowners
(24:49):
and ranchers, is still in theUS Senate in that scenario, and
Mark Kelly, representing thestate of Arizona, with all those
wealthy investors in Scottsdale, is still in the US Senate.
Mark Kelly is not elected byArizona because he's a firebrand
leftist.
He's elected because theyperceive him as an economic,
moderate and social liberal.
(25:10):
That's how he ran, and so Ithink that's how he would
probably vote to maintain thatimage, whether it's true or not,
personally, that's the image hecultivates, and so I think he
and Tester, or maybe a couple ofothers, would be a firewall
against massive tax increasescoming from the Harris
administration.
So what would she actually do?
I think the top rate goes backto 39.6%.
(25:32):
You might see you might seesome upper income brackets also
paying the 37% that arecurrently at a lower rate.
Right now, I think the capitalgains tax and dividend rate goes
from 20% to 24%.
So you throw in the Medicaretax and it essentially makes it
a 28% tax rate.
(25:53):
Guess what?
That's where it was when Reaganleft office in 1989.
It's hard for the Republicansto argue against Reagan's tax
rate regime on capital gains anddividends.
I think the estate tax rateswould probably stay the same,
but the exemptions might go tosomething like halfway down to
where they were in 2017, okay,halfway back.
(26:14):
I think the corporate rate,which Trump cut from 35 to 21,
probably goes halfway back to28%.
And there is some possibility Ihave not read this elsewhere,
this is just my reading of thepolitical situation Some
possibility of introducing acarbon tax into the USA, not on
(26:36):
individuals, not on households.
You wouldn't get it when yougot your energy bill or anything
like that.
Be on corporate side only, andI think they'd start the rate
really, really low, because theheavy lifting is just getting
that tax system into thecorporate code in the first
place and then, once it's there,some future generation of
(26:56):
Democrats can raise that ratefurther, and I'm not arguing for
or against it, I'm just sayingit's possible Now.
Why is that possible now, whenit wasn't like 30-some-odd years
ago?
A lot of people don't recognizethis or remember this, but Bill
Clinton flirted with the idea ofa carbon tax but then abandoned
it because he realized therewere two Democratic senators
from West Virginia and anothertwo from Nebraska and another
(27:19):
two from Louisiana at the time.
But next year, if the Democratssweep, there ain't going to be
any Democrats from any of thosestates, at least in the US
Senate, and so the compositionof what states are representing
by Democrats has changed, and sotheir ability to pass
legislation with a carbon tax, Ithink, has increased.
Now the two holdouts would beFetterman and Casey from the
(27:41):
state of Pennsylvania.
With all that natural gas, Ithink they cut a sweetheart deal
in that scenario withPennsylvania and get their votes
for that legislation in thatway.
Ryan (27:53):
So, even though I mean, this is only a 10% chance based
on your odds, so I don't want tospend a ton of time on it, but
even in that case you introducea carbon tax on corporations.
Ultimately, that does getpassed along to consumers,
unless they're going to havetheir margins compressed or
something like that.
Bob (28:09):
Yes, absolutely.
It's a sales tax oncarbon-related goods and
services.
Ryan (28:15):
Yeah, for better or worse.
I mean, maybe that's, butthat's what happens.
Okay, so those scenariosthere's a different mix of
taxation and spending.
I think in the last time youcame on the podcast you called
the federal budget the mostreckless budget that you have
seen in your lifetime.
(28:35):
Maybe in American history it'sbeen a lot of spending.
In which of those scenarios doyou think the federal budget
gets better or worse?
It seems like this is my guess,and I want to get your reaction
that some sort of a mixedscenario where you know the
(28:55):
Trump administration, if Trumpwere to win, would want to cut
taxes but they would have to cutsome deals that would keep
spending high and that wouldkind of you know, be a problem
on both sides, but what's your?
I have a weird interpretation.
Bob (29:07):
Now, remember, you might not read this in the press.
You might read something that'scompletely, 100% against what
I'm saying.
The problem is, when the pressanalyzes what each major
candidate would do in office,they take their campaign
promises at face value oh,that's what they're going to
enact.
I don't do that at all.
(29:28):
I look and try to figure outwhat they'll actually enact,
what they've promised to enactand so I think that the best
solution for the federal budgetand the budget deficit in the
years ahead would probably be asweep for either side and total
responsibility for the federalbudget.
(29:49):
Now, on the Democratic side,they might reduce the deficit
because they're going to raisetaxes.
Okay, it's very straightforward.
On the Republican side, theywould extend current law in
terms of the tax regime wecurrently have probably
temporarily, they won't have thevotes to make it permanent but
they're going to do other thingson entitlements.
(30:09):
I mean, they're going to raisetariffs.
That'll raise a little bit ofrevenue.
I think they reduce greenenergy subsidies not end them
completely, not eliminate them,but reduce green energy
subsidies so that it helps withthe federal budget and I think
they would do significantreforms to the Medicaid system
(30:29):
for low-income Americans.
I think they basically blockgrants to the states and let the
states experiment with reformand squeeze that program over
time for budget savings.
I have to tell you Medicaid isa very inefficient program in
terms of delivering value to itsrecipients.
There have been several studieson this.
So I think improvements can bemade and they don't necessarily
(30:52):
have to cost more money.
They can save the taxpayermoney instead.
Now, the mixed governmentscenarios might lead to much
higher deficits.
Let's say I'm right about whathappens if Harris wins, but she
faces off against a GOP Senate.
Okay, what I argued was thatshe would end up, contrary to
(31:15):
her campaign promises, at leasttemporarily extending the tax
cuts originally enacted in 2017.
Well, a Harris administrationis not going to cut Social
Security or Medicare orObamacare or Medicaid, and she
doesn't want to cut green energysubsidies.
So if you get a mix of nospending cuts, we're not going
to see tariff increases like youwould under a Trump
(31:36):
administration.
I think everybody agrees on that.
So if I'm right about whatwould happen to the income tax
code on individuals in a Harrisadministration basically extend
status quo, just kind of similarto what Trump would do in the
end, that is the most dangerousbudget scenario Harris, with a
(31:57):
Republican Senate and then maybeor not a Republican House.
That's where you have.
We end up with two and a halftrillion dollar deficits.
As far as I can see Because Ithink again the tax system stays
similar to what it is today,with only cosmetic changes, and
there are no spending orentitlement reforms.
Ryan (32:15):
What about military spending between the eventual?
Whoever the winner is?
Is one administration morelikely to spend more on military
spending?
Bob (32:25):
I think a Republican administration would probably
spend more, but it reallydepends on events.
So in the end, I think theremight be we might be below the
sustainable level of militaryexpenditures that the US can
continue with, in the sense thatif our ability to project power
(32:48):
to key places around the worlddiminishes more, we might be
enticing a conflict that costsus more money in the long run,
rather than spending a littlebit more today to prevent that
future conflict.
So I think in the end,regardless of whether it's a
Harris administration or a Trumpadministration, spending on the
(33:09):
military relative to GDP isgoing to be higher in the
decades to come.
We live in a multipolar worldit's not just the US versus
Soviet Union or, after the fallof the Berlin Wall, where the US
rules the Rus' and in amultipolar world, I think
conflicts may require more USspending in the decades to come.
Ryan (33:33):
You know, the last time we got together we were just after
the Supreme Court had made adecision regarding Chevron
deference and I had asked youabout that and some of the
implications from a regulatorystandpoint.
Has there been anything thatany sort of follow on test cases
(33:53):
after that that you've noticed?
Bob (33:55):
You know I haven't followed it closely enough.
Cases after that that you'venoticed.
You know I haven't followed itclosely enough.
Now I have to say that at thetime I thought it would be.
My one disappointment in theruling was that they didn't
really go after olderregulations that had been kind
of grandfathered in under thatChevron deference.
But it now looks to be adebatable issue, like they might
(34:20):
not have really touched on that, and so I think so they didn't
knock everything down.
They didn't knock everythingdown, that wasn't written into
law code.
Ryan (34:27):
essentially Correct.
Bob (34:30):
They did not knock down previous regulations that had
been in place.
However, that doesn't meanthose can't be challenged.
So there may be more of anopening than I previously
thought to challenge oldregulations to say those
regulations did exceed thestatute as it existed at the
(34:50):
time and so we have to nullifythose.
I don't know what the status isoff the top of my head.
Ryan (34:57):
Well, it's been a short amount of time, but it is
something that is kind ofinteresting thinking about the
impact of regulations on theeconomy and economic growth and
how funds are spent to pay forto be on the right regulatory
footing.
It seems like if you can deploythose funds elsewhere and still
(35:18):
have a well-functioning economy, that might contribute to
economic growth.
Is that what you economistswould say?
Bob (35:26):
It would and frankly I think Trump would be much more
agreeable to the energy sectorin terms of the regulatory you
know.
Ryan (35:39):
The other thing I wanted to ask you about is are we?
Early in the year?
The forecasts from our team wasthat we were probably I don't
know 60% likely to have arecession.
Something like that 60, 65%.
It was better than even odds.
Bob (35:56):
At the very beginning of 2024.
Ryan (36:00):
So here we are, october 24th, not in a recession, yet
how has your thinking changed orevolved since then?
Are we still likely to have arecession that just got pushed
off, or has the Fed, as theylike to say, maybe created the
soft?
Bob (36:17):
landing.
So, as you know, ryan, I'm aneconomist, so I'm going to
exercise professional privilegeand talk out of both sides of my
mouth.
I think the odds of a recessionat this point happening sometime
in the next 12 to 18 months arebelow 50%.
However, I also think they'resignificantly higher than the
markets are currently pricing in.
I also think they'resignificantly higher than the
(36:38):
markets are currently pricing in.
So I still think we're in aposition where, over the last
couple of years, with theenormous budget deficits we've
run, even though theunemployment rate has been less
than 4 percent and even thoughwe're not in a World War
situation which is reallyunprecedented in US history, I
think those enormous budgetdeficits have masked or hidden
(37:03):
some of the pain we'lleventually feel from the
tightening of monetary policyover the past couple of years.
I don't think we're completelyout of the woods on a recession,
but I think the odds havefallen because they simply
haven't hit yet.
And so, just like from apractical standpoint, from a
basic forecasting standpoint, ifwhat you thought was going to
happen with more probabilityearlier rather than later,
(37:26):
hasn't happened yet, you have toreduce your odds of it
happening at all.
Ryan (37:29):
Sure.
So the unemployment rate isstill really low from like a
historical standpoint, but ithas begun to shift a little bit
higher from the lows about ayear ago or so.
Bob (37:41):
Yeah, it's off the bottom.
I think it bottomed in thevicinity of 3.5%.
I think the most recent monthwas 4.1%.
I wouldn't be surprised if thereport that comes out, I guess
next Friday, a few days afterthis tape is released has a tick
up again from 4.1 to 4.2,.
Looking at the unemploymentclaims data recently the share
(38:04):
of people, size of the workforceso that hints at a potential
increase in unemployment fromhere Doesn't say it has to be
some massive increase, but atick up is more likely than a
(38:27):
tick down.
Next.
Ryan (38:28):
Friday.
So how does the Fed think aboutwhat full employment is?
I know we were in the threeswith the three handle, but I— it
seems like not that long agothat full employment was
something like you know theythought of like 5% or something
like that.
It depends when you went toschool.
Seriously, Right.
Bob (38:45):
So I got to school back in 1983.
Okay, that makes me an old man,obviously.
So I got to college in 1983.
And at the time my firstprinciples of economics class
was a macro class and I rememberlearning that full employment
was 7%, that if we went below 7%it was only due to an overly
(39:07):
stimulative monetary and fiscalpolicy that could not be
sustained and which would causehigher inflation.
So you didn't want to do it.
And then by the end of thedecade we had unemployment, like
in 1989, at roughly 5%, and wereally didn't have any
significant inflation problem.
We had a little bit of one, butnot much.
And then inflation went lowerfor the bottom in the late 1990s
(39:30):
and into 2000, before thebursting of the internet bubble,
and we had pretty low inflationunder George W Bush, like going
into the housing bubblesituation, the bust.
And then we had very lowunemployment under President
Obama, president Trump,pre-covid and we have so far
under President Biden.
So my personal view is that wecould probably sustain somewhere
(39:52):
in the vicinity of 4%.
But that will change over time,given demographics, given the
age profile of the workforce,and it will also change based on
other government policies if,for example, they become more
generous to the able-bodiedunemployed, like if some
jurisdictions and end up movingtowards some sort of like basic
(40:16):
income plan for everybody inthat state, then that might
raise unemployment a little bit.
If you incentivize people notto moving towards some sort of
like basic income plan foreverybody in that state, then
that might raise unemployment alittle bit.
Ryan (40:24):
If you incentivize people not to work because you're going
to pay them, they might work alittle less.
Bob (40:28):
They might work a little less, but everybody in the
Antifa encampments in Portlandcan riot and protest all they
want, and they know that a checkwould be coming in from either
the state or the federalgovernment in that situation.
So why not?
It's like you could make, likeanybody who had a low amount of
financial ambition in their lifecould basically sit in a
hammock all day for the rest oftheir life and know the
(40:49):
government's taking care of yeah, do you think that that's a
possibility, that there's auniversal basic income at some
point?
Ryan (40:56):
I know a lot of times, as I hear people talk about that
concept, it's like oh, ai isgoing to basically do everyone's
job, so you'll have nothing todo, so you know, we're going to
have to pay you to do nothing.
Bob (41:06):
There is a school of thought on that.
I don't believe that.
Ryan (41:09):
I think it's basically a Luddite view that's been around
for hundreds of years, it seemslike you could apply that to any
technology in the past Like nopeople aren't going to be
farming anymore, so I guesswe're going to have to pay a
basic income, Exactly Now thatsaid, if you look at federal
policy, we have a very haphazardversion of a universal basic
(41:29):
income, but it's just called abunch of different things.
Bob (41:32):
So the health portion of it is Medicaid and we have Section
8 housing vouchers and we havefood stamps and we have other
forms of welfare benefits.
So we're not that far from it,but it's a little harder to do
(41:53):
it than just if you've got acheck in your account every
month.
Ryan (41:55):
So would a universal basic income be a more efficient way
to administer all thosedifferent programs that you just
mentioned?
I mean because there's a lot ofbureaucracy attached to all
those different programs.
Bob (42:07):
Here's what happens, ryan.
So the person receiving theuniversal basic income yeah,
they will totally take advantageof it in a way If you just get
a check sent directly to youraccount.
In a way, it might belogistically more difficult to
go after Medicaid and then foodstamps separately and then a
Section 8.
I think there's a little morelevel of shame involved in
(42:32):
pursuing those benefits from amyriad of different programs
than what you would have toexercise in signing up once and
getting the money sent youraccount every two weeks or
something like that.
Ryan (42:42):
Yeah, interesting.
Well, the time has flown byagain here, bob.
I look forward to seeing ifyour forecasts on what's
happening with the election nextweek actually play out.
My final question for you isone that I've asked you in the
last few times you've been onthe podcast, and that is what is
on the Bob Stein book list.
(43:02):
What are you reading lately, orsomething that you've recently
read, or something that you justrecommend that the viewers of
the ROI podcast should check out?
Bob (43:10):
So right now I'm reading a book.
It's called the Rise and Falland Rise of Communism.
It's basically a history of theidea of communism as well as
how it existed.
It's basically a history of theidea of communism as well as
(43:36):
how it existed, how it kind ofmetastasized out of an odd
interpretation of Soviet Russiawith the Bolsheviks and has
moved around from there, and theidea behind it is that there's
always going to be this desirefor equality to some point, and
it might be based on resentmentand jealousy, but it's always
(43:57):
going to be there, and that nowthat people on the far left
don't have to answer, don't feelresponsible for what's going on
in the Soviet Union, and nowthat they can basically say well
, china might have a leadershipcalled the Communist Party, but
they're really capitalist, itfrees the left globally to
(44:18):
support policies that might havebeen just proven in the past,
but the current generation isunfamiliar with those events,
and so it makes it easier tospread communism and the ideas
behind it once again.
Ryan (44:30):
Interesting.
Well, we will check out thatbook.
Thank you for the bookrecommendation, thanks for all
your comments and insights onthis episode, and thank you to
all of you who have joined us onthis episode of the First Trust
ROI podcast.
We'll see you next time.
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Issakainen, ETFstrategist at First Trust, here.
We are less than two weeks awayfrom the election and I've got
Bob Stein joining me once againon the podcast.
Bob is going to break down whathe thinks is going to happen in
the election and I've got BobStein joining me once again on
the podcast.
Bob is going to break down whathe thinks is going to happen in
the election in less than twoweeks from now.
He's going to give us his oddsas well as implications for what
(00:34):
could happen in the wake of theelection.
We're also going to talk a bitabout the economy.
We're going to talk about theFed.
We're going to talk aboutinterest rates.
Lots to cover in this episode ofthe First Trust ROI podcast.
Bob, thank you for coming onthe podcast again.
I want to get your views onwhat's happening in the election
(00:56):
next week.
So we're recording this episodeon October 24th, which is
Thursday, and I recognize a lotcan change between now and then.
So this episode is set to airon Monday.
So keep that in mind with yourprognostications At this point.
Would you share with us and thelisteners of the ROI podcast
(01:19):
how you would handicap thepresidential election.
Bob (01:22):
So, as we tape this which, as you mentioned Ryan, is 12
days away from the actualelection, so everybody's going
to watch it eight days away.
A lot can happen in four days,especially over a weekend with
the news cycle.
My anticipation is that Trump,who has now pulled a little bit
(01:43):
closer in the polls, willprobably win, but not definitely
not by a long shot.
So between August and I think aweek ago, I basically gave
Donald Trump about a 60% chanceof winning and the Republican
sweep scenario a 45% chance ofhappening, and I recently took
(02:05):
that up a few days ago to a 65%chance of Trump winning and a
50% chance of a Republican sweep.
So flip a coin, see whathappens.
Now.
Just to let our viewers knowwhat we're translating that into
a way that many of our viewerswill understand more easily.
It's that if you have a 65%chance of winning a game in the
(02:29):
NFL, a regular season game,you're probably a
four-and-a-half point favorite.
Now think about your home teamor your favorite team and how
often they lose when they'refavorites.
Okay, if you're a Kansas CityChiefs fan, it probably doesn't
happen very often, but if you'rea Chicago Bears fan, it happens
all the time.
So I'm not saying that Trumpcan't lose.
(02:51):
He has about a 35% chance oflosing, but I think he's in a
somewhat better position than Ithought he was the last time we
spoke, ryan, one of the reasonsfor that is simply that Harris'
lead in the polls is diminishedcompared to where it used to be
and she only has 12 days left.
What I've been saying all alongis basically that if I wake up
(03:13):
on Election Day and VicePresident Harris is ahead in the
polling averages by about threepoints, then I think it's a
toss-up, because I think Trumphas a two-point advantage in the
Electoral College relative tothe popular vote, because I
think Trump has a two-pointadvantage in the electoral
college relative to the popularvote.
And I'm guessing, and nobodyshould have a high degree of
confidence in this, but my bestguess is that the polls will
(03:39):
probably underestimate themargin for Trump by about one
percentage point, which is a lotsmaller than the error, or what
some people call bias fouryears ago, when it was two and a
half to three percentage pointsagainst Trump, and more in line
with what happened in 2016,when the polls were off by only
roughly one percentage point.
Ryan (03:55):
So I've often wondered, when we're thinking about
polling and just kind ofwatching how it plays out,
sometimes it feels like pollsare intended to influence rather
than measure.
Does that happen, or am I justparanoid?
Bob (04:13):
No, I think it does, but I'm not sure they have the
intended effect.
I mean, let's say you're aDemocrat and you see a bunch of
polls that are secretly or notso secretly funded by
Republicans, with Trump narrowlybehind, which you would assume
means he could win in theelectoral college, or maybe even
(04:35):
Trump ahead, like some recentpolls have shown.
Would that make you more orless likely to vote?
I actually think that wouldmake you a little more likely to
vote and turn out and to try tomake sure your side wins,
because more assistance isneeded by your side to win.
So the whole idea that pollsare just trying to mess with
(04:58):
people's head, I don'tnecessarily think that's a big
issue because I don't know ifthere's if the intended effect
demoralizing the other sidewould actually work in a close
election.
Ryan (05:11):
It feels like maybe they're just trying to create
momentum.
Like you know, some peopledon't pay that close attention
to what's actually happening.
They're kind of a bandwagoneffect.
So that's that's.
I thought maybe there would besome bandwagoners that would
jump on because they think theyit's almost like they want to
vote for the winner and so maybethat has an influence.
Bob (05:31):
I think that's the theory, Ryan.
I don't know if there's any datato to buy to back that up,
because, yes, you might affectthe bandwagoners, but you might
might also intensify the turnoutrate of the people who are now
worried that they're going tolose.
So you know, if you had a bunchof polls showing Trump up five
(05:54):
OK, we don't have polls likethat, but let's imagine you did
Wouldn't that scare thedaylights out of Democrats and
get them to turn out to highernumbers?
And couldn't it actually reduceturnout among Republicans who,
frankly, now that Republicansget more votes from lower
education voters than they usedto, might be more of the
(06:14):
marginal voters than theDemocrats?
So I don't necessarily thinkthe theory works.
Ryan (06:22):
Nevertheless, I'm guessing there are polls out there that
try to accomplish that, whetherthe theory works or not, yeah,
okay, so I live in New YorkState, and one of the things
that I've noticed in New YorkState is that there doesn't seem
to be a lot of polling for thepresidential candidates.
(06:43):
There's maybe three or fourpolls that have been done that I
can find on Real Clear Politicsfor New York, and it's kind of
surprising.
I think I understand why,because it seems like it's a
lock for the blue team, right.
But one of the things that I'venoticed, as I compared those
polls this time to the polls in2020 and 2016, is that it seems
(07:05):
like the margin in favor of theDemocrats is pretty
significantly less than it wasthe last couple, and so I want
your take on that.
I think the swing is dependingon the poll.
You're looking at somethinglike eight to 10 points in favor
of Trump.
Compared to the margin, kamalais still way ahead in New York,
but the margin is less.
(07:26):
So what are the implications ofthat?
Bob (07:29):
So I actually have a very counterintuitive interpretation
of that data.
I have little doubt that whatyou've observed is true and I
think the Democrats will stillwin in a close election easily
at the state of New York and sayNew Jersey and several others.
(07:49):
But I also agree that themargins in those states will be
smaller than they have been inprevious presidential election
cycles.
So the counterintuitive part ofmy opinion is that that is, or
that phenomenon is, actuallygood for Democrats.
Okay, and here's why Inprevious cycles they would win
New York and say New Jersey,overwhelmingly, and what that
(08:14):
would mean is that they had alot of wasted votes relative to
the national popular vote,because they're already going to
get the electoral college votesfor those particular states,
like just focusing on the stateof New York.
But if, for example, theirmargin is lower because perhaps
Jewish voters are moreRepublican than they were in
previous cycles or because someHispanic, especially Dominican,
(08:37):
voters are more Republican thanin previous cycles, then the
Democrats, relative to thepopular vote nationwide, are
going to waste fewer votes inNew York.
Meanwhile, the Republicans, whoused to have a narrow edge in
close elections in the state ofFlorida, will now probably win
(08:58):
Florida more comfortably.
Maybe.
Not a landslide, possibly, butI define a landslide as winning
by 10 percentage points, butmore likely just a large victory
, which means they're wastingvotes in Florida and that the
Republican electorate is notquite as efficiently laid out
across the country ordistributed across the country
(09:21):
relative to the Democrats,compared to the way it was in
2016 and 2020.
So, if you look back to 2016,donald Trump's advantage in the
Electoral College was almostthree percentage points, I think
.
To be exact, I think it was 2.8percentage points.
His advantage in the ElectoralCollege in 2020, even though he
(09:41):
lost was even larger relative tothe popular vote, it was almost
four percentage points.
I'm assuming it's something inthe vicinity of two percentage
points this time around, andwhat I mentioned about Florida
and the phenomenon you correctlyobserved about New York is a
big part of that.
Republicans are still moreefficiently distributed by
Democrats, but their advantageis diminishing.
Ryan (10:04):
I think that is really counterintuitive.
And so what I'm hearing you sayand just make sure I'm hearing
you say it properly is thatbasically the amount that say
New York is contributing to theoverall popular vote advantage
is much less.
Therefore, that actually meansthat there's maybe a margin
(10:25):
working in the favor of maybesome of the more close states
towards the Democrat.
Bob (10:29):
That's right.
Let's compare two electionsjust so you see a snapshot 2016,
trump versus Hillary Clinton.
2024, trump versus KamalaHarris.
So let's say the polling marginin the same poll by the same
pollster, both times showed theDemocrat up three percentage
points national average.
(10:50):
Well, if we know that HillaryClinton was up by and I'm just
making up numbers here to giveyou an example was up by 20 in
the state of New York, thatmeans Harris's three-point edge
is less reliant on New York'spopular vote and therefore she
(11:11):
has a better chance of winningsome of the battleground states
that will determine the outcomeof the election.
I'm not saying a better chanceof winning than Trump, but a
better chance relative to thepopular vote than Hillary
Clinton had, but a better chancerelative to the popular vote
than Hillary Clinton had.
Ryan (11:26):
And that's assuming that you know some of the polling is
consistent between those statesand the national polling and you
know it's a fairly small samplewith New York, as I mentioned.
There's only been a few pollsthat have been actually
conducted this fall that I'veseen anyway.
Bob (11:41):
Why would you waste your money and poll a whole state of
New York?
Now it is worthwhile to pollindividual congressional
districts in the state of NewYork because we have some newly
carved out ones that might favorthe Democrats relative to the
Republicans compared to theirprevious cycle.
That's definitely worthwhileand it would be to the country's
benefit to see more polls ofthose particular congressional
(12:02):
districts.
But the whole state it's reallynot worth it.
There's no statewide contestedelection this year.
Ryan (12:10):
All right, I want to shift a little bit to kind of a
linkage between what's beingtalked about in the election and
economics, which you're aneconomist.
That makes sense.
A lot of talk about tariffslately.
You know, president, formerPresident Trump seems to be the
candidate that argues morefavorably about tariffs,
(12:31):
although I will observe that theBiden administration hasn't
really rolled back much of thetariffs that the first Trump
administration put on.
But I guess, more generallyspeaking, can you give us your
view on the overall impact oftariffs?
Are they a good policy tool?
Are they a bad policy tool?
Do you think Trump is actuallygoing to implement the tariffs
(12:55):
that he's talked about in thecampaign this year?
Bob (12:59):
So I think he will raise tariffs on the rest of the world
and he will raise tariffs onChina.
There's very little Congresscan do to prevent him from
raising tariffs on a particularcountry like China, and I think
he'll go heavily after China,because it's not just an
economic issue.
It's really a geopoliticalissue, and this is a country
(13:23):
that has aspirations in thePacific to be a regional power.
That might include seizing thecountry of Taiwan, and so if
there's a possibility thatAmericans and Chinese military
forces will be shooting at eachother sometime in the next
decade I'm not saying it'sguaranteed or even above 50%,
(13:43):
but there's more of apossibility we will be shooting
at each other than say we'll beshooting at Frenchmen, okay or
many other countries.
So in that scenario, the tariffreally has more of a
geopolitical aspect or ajustification, rather than an
economic justification.
Now what's going to happen ifwe raise tariffs and there's a
(14:10):
legal issue about whether hecould do a blanket increase in
tariffs across the board for allcountries?
There is a lot of legalambiguity.
I'm not saying he can't.
I'm not saying he can't, butthere are a lot of people who
have looked at this issue andit's ambiguous and it might go
to a very high level of thefederal courts to decide, so I
think, in the end, he'llprobably be able to get those
into law.
I think they're passed throughto consumers, and US consumers
(14:32):
will pay the vast majority ofthe cost.
That doesn't necessarily,though, mean it's bad policy.
I mean the federal governmentis going to need more revenue in
the future, so this might notbe a horrible way of doing it.
I don't think it's going tobring back Youngstown, ohio, to
be an industrial power like itwas 50 years ago, but it might
(14:55):
have some impact collectively.
The tariff regime on movingcertain industries to be more
heavily concentrated in the USthan they would otherwise be.
The tariffs on China I don'tthink that's going to move much,
if at all, back to the US.
I do think it'll have apotentially positive effect on
(15:16):
other countries like India, whowould benefit, because if
American investors or consumerswant to access low skilled labor
, that's a better country.
Lots of people there in theprocess of industrializing, so
it'll be a shift.
I don't think it would end upactually in reducing our trade
deficit much, if at all.
The US runs a trade deficitbecause we're a great place to
(15:39):
invest, and so Americancompanies and American consumers
because foreign capitalcontinues to move into the US,
can afford to purchase more thanwe produce.
It's kind of a high-classproblem, if you will.
Now, in terms of inflation, Iexpect the Trump tariff regime
would probably lift inflation inthe US by about a percentage
(16:02):
point for about a year.
But once prices have adjustedto the tariffs, that doesn't
mean inflation remains high.
Inflation can then go back downto whatever the Fed is
targeting.
Ryan (16:12):
So now that so it's kind of a one-time effect.
Bob (16:16):
It's a one-time effect, maybe one percentage point of
additional inflation.
For a year, that doesn't meaninflation has to go much higher
than it is today.
Inflation for a year thatdoesn't mean inflation has to go
much higher than it is today.
And the reason is because Ithink, given the tightness of
monetary policy and the lagsbetween monetary policy shifts
and inflation, we may actuallyfor a time next year go below
the Fed's 2% target on PCEinflation.
(16:39):
We may end up in the vicinityof 1.
A half percent.
So if the introduction of thosetariffs coincides with where we
would otherwise be temporarilylow inflation, we might just not
get that temporarily below twopercent inflation.
Ryan (16:56):
The other thing I wanted to ask you about was the
implications from a tax policystandpoint of the elections.
I think it's the individual taxrate that is set to go up once
the Trump tax cuts expire.
Corporate tax rates werepermanent.
What's your view on?
(17:18):
I guess, the differentscenarios are you know a sweep
one way or sweep the other way,or a sort of a mixed election in
either direction.
You know a sweep one way or asweep the other way, or a sort
of a mixed election in eitherdirection.
You know, I guess, if you couldbreak that down, what's likely
to happen in your view with thetax code in the Next year or two
.
Bob (17:34):
Let's go through the four scenarios that I think are
possible and I'll give you thepercentages for each.
So I give a 50% chance to aRepublican sweep.
Where they control the House,the Senate and the White House,
we get a Republican sweep and ifthat happens, they will almost
certainly extend not permanentlybut temporarily the Trump tax
cuts originally enacted sevenyears ago and they'll probably
(17:55):
try to go a little deeper.
Trump has talked about cuttingthe corporate rate, which he
already cut from 35 to 21, downto 15.
I think 15 is probably a bridgetoo far because of our deficit
issues in the years ahead, but Ithink he could bring it down to
something like 18 percent.
I also expect some sort of taxrelief for tips, given how much
(18:17):
he's talked about that.
And, by the way, that's reallya play for Nevada's electoral
votes.
No state, I would imagine, hastip income relative to regular
income more than the state ofNevada, with all those blackjack
and other dealers at all thecasinos.
So it's basically a play forNevada's electoral votes, which
is why Harris copied the policy.
So I think that would be likely.
(18:40):
I think it's gonna be hard toimplement, so they might have to
keep it narrow and say only forcasino employees or something
like that, or only forrestaurants.
You know firms that sell morethan a certain percentage, where
they get a percentage of thegross from serving food or
(19:02):
something like that, but it'sgoing to be tougher to define in
the tax code than you think.
Otherwise, you know, if they'resloppy with it, then I'm going
to go to my employers at FirstTrust Advisors and ask to be
tipped.
I want to be tipped, you know,rather than paid.
We'll see how that works, howthat goes over.
Have you ever waited tables?
(19:23):
Very briefly, when I wasyounger.
You might not believe this,ryan, but I'm not actually the
best in the consumer serviceenterprise situation.
Yeah, I know you are.
I know you are.
You're probably going to losesleep imagining like how that
could have happened.
So I think with Trump, theywould basically extend the tax
(19:44):
cuts and do a little more.
Trump has also talked abouteliminating or reducing the
income tax on Social Securitybenefits.
I think that falls by thewayside because it would only
expedite the point in time atwhich the Social Security trust
fund would go bust, and I don'tthink he wants to be perceived
as responsible for that.
So he's going to forget aboutthat promise after the election.
(20:06):
That's my best guess.
Now let's imagine Trump winsand the Republicans get control
of the US Senate, but somehowthe Democrats narrowly control
the US House of Representatives.
In that instance, hakeemJeffries probably becomes
Speaker of the House.
He would be by far the mostpowerful Democrat in Washington
DC.
I don't think he'll be in.
(20:28):
He'll have any inclination tojust roll over for Donald Trump.
I think he would fight DonaldTrump with a Republican's tooth
and nail for everything theywant out of Congress.
And Republicans would reallywant to extend those tax cuts,
right?
I think in the end theRepublicans will have to
negotiate and compromise to getsome Democrats to sign on to
that extension.
So what would that look like?
(20:49):
I think the top rate wouldprobably have to go back up to
39.6%, where it had been in the90s for eight years under Bill
Clinton and the last four yearsunder President Obama.
And in addition, in order toget some Democrats to vote for
that.
And Democrats generally comefrom high-tax states, right, you
know Massachusetts, maryland,new York, new Jersey,
connecticut, california,illinois.
(21:10):
So I think it will cost themsome expansion of the state and
local tax deduction.
Right now it's capped at 10,000.
I think it would have to go to20, 25,000 instead.
It's not gonna become unlimited, essentially like it used to be
, but I think they'll raise it alittle bit, which you're
probably happy to hear becauseyou hail from the state of New.
Ryan (21:30):
York.
It wouldn't be a disappointmentfor me personally.
Bob (21:32):
Personally, you'd love it.
Yeah, and it would be atemporary extension.
Now let's look at two morescenarios.
One scenario would be Harriswins but she faces off against
the Republican Senate, and ifshe does win, that's likely to
be the scenario Maybe aRepublican House, but definitely
a Republican Senate or almostcertainly a Republican Senate.
(21:55):
Now, if that happens, this isis gonna surprise a lot of the
viewers, because the Harriscampaign has all these
tremendous tax increaseproposals taxing unrealized
capital gains, raising thecapital gains tax to, like you
know, maybe 40% or 38% or 32% orsomething like a lot from where
it currently is.
Well, I actually think shewould end up largely extending
(22:19):
the Trump tax cuts originallyenacted seven years ago.
Now how can I possibly say that, given the tone of her, of her
proposals coming from hercampaign?
Because we saw this happen in2012.
I mean, president Obama spenthis first term in office
complaining about the Bush taxcuts originally enacted in 2001
and 2003.
(22:39):
He wins reelection versus MittRomney and literally a month
later, in December of 2012, hecuts a deal with the Republicans
who were in charge of the USHouse of Representatives at the
time, fully and permanently.
Permanently extending the Bushtax cuts into the future.
(23:00):
With one exception At the tippytop, the top bracket was moved
back from 35 to 39.6, where ithad been for eight years at that
point in time under BillClinton.
Now why would he do that?
Because the Republicans jammedhim.
The Republicans heard hisrhetoric, but after the election
they went to him and saidcongratulations, mr President,
(23:22):
you're going to be in the OvalOffice four more years.
But about those tax cuts?
If you want to extend them foranyone and President Obama did
campaign on extending them forpeople in the lower brackets
then you're going to have toextend them for almost everyone.
Otherwise, we don't pass a billand you're going to preside
over a massive across-the-boardincome tax hike going into the
(23:45):
2014 election cycle.
And President Obama blanked andI expect a President Harris
would blank for very similarreasons.
These tax changes will be madeat the very beginning, january
1st 2026.
Everybody would see theirwithholding tables change.
It would be a politicaldisaster for the Harris
administration.
(24:05):
So I think if she wins butthere's a Republican Senate
you're not going to get any ofthose big tax increases she's
been talking about, except atthe tippy top, highest bracket
goes back up.
One more scenario, and I'm onlygiving it a 10% possibility at
this point, as we sit here 12days away from the election, and
that's the Democrat sweep.
(24:25):
I believe that even in thatscenario, you're not going to
see the major tax increases thatthe Harris campaign has
proposed.
You're not going to see a taxon unrealized capital gains.
You're not going to see a taxon unrealized capital gains.
You're not going to see amassive increase in the capital
gains tax, because even in thatsweep scenario, it's possibly a
50-50 Senate.
John Tester from Montana, withall those big wealthy landowners
(24:49):
and ranchers, is still in theUS Senate in that scenario, and
Mark Kelly, representing thestate of Arizona, with all those
wealthy investors in Scottsdale, is still in the US Senate.
Mark Kelly is not elected byArizona because he's a firebrand
leftist.
He's elected because theyperceive him as an economic,
moderate and social liberal.
(25:10):
That's how he ran, and so Ithink that's how he would
probably vote to maintain thatimage, whether it's true or not,
personally, that's the image hecultivates, and so I think he
and Tester, or maybe a couple ofothers, would be a firewall
against massive tax increasescoming from the Harris
administration.
So what would she actually do?
I think the top rate goes backto 39.6%.
(25:32):
You might see you might seesome upper income brackets also
paying the 37% that arecurrently at a lower rate.
Right now, I think the capitalgains tax and dividend rate goes
from 20% to 24%.
So you throw in the Medicaretax and it essentially makes it
a 28% tax rate.
(25:53):
Guess what?
That's where it was when Reaganleft office in 1989.
It's hard for the Republicansto argue against Reagan's tax
rate regime on capital gains anddividends.
I think the estate tax rateswould probably stay the same,
but the exemptions might go tosomething like halfway down to
where they were in 2017, okay,halfway back.
(26:14):
I think the corporate rate,which Trump cut from 35 to 21,
probably goes halfway back to28%.
And there is some possibility Ihave not read this elsewhere,
this is just my reading of thepolitical situation Some
possibility of introducing acarbon tax into the USA, not on
(26:36):
individuals, not on households.
You wouldn't get it when yougot your energy bill or anything
like that.
Be on corporate side only, andI think they'd start the rate
really, really low, because theheavy lifting is just getting
that tax system into thecorporate code in the first
place and then, once it's there,some future generation of
(26:56):
Democrats can raise that ratefurther, and I'm not arguing for
or against it, I'm just sayingit's possible Now.
Why is that possible now, whenit wasn't like 30-some-odd years
ago?
A lot of people don't recognizethis or remember this, but Bill
Clinton flirted with the idea ofa carbon tax but then abandoned
it because he realized therewere two Democratic senators
from West Virginia and anothertwo from Nebraska and another
(27:19):
two from Louisiana at the time.
But next year, if the Democratssweep, there ain't going to be
any Democrats from any of thosestates, at least in the US
Senate, and so the compositionof what states are representing
by Democrats has changed, and sotheir ability to pass
legislation with a carbon tax, Ithink, has increased.
Now the two holdouts would beFetterman and Casey from the
(27:41):
state of Pennsylvania.
With all that natural gas, Ithink they cut a sweetheart deal
in that scenario withPennsylvania and get their votes
for that legislation in thatway.
Ryan (27:53):
So, even though I mean, this is only a 10% chance based
on your odds, so I don't want tospend a ton of time on it, but
even in that case you introducea carbon tax on corporations.
Ultimately, that does getpassed along to consumers,
unless they're going to havetheir margins compressed or
something like that.
Bob (28:09):
Yes, absolutely.
It's a sales tax oncarbon-related goods and
services.
Ryan (28:15):
Yeah, for better or worse.
I mean, maybe that's, butthat's what happens.
Okay, so those scenariosthere's a different mix of
taxation and spending.
I think in the last time youcame on the podcast you called
the federal budget the mostreckless budget that you have
seen in your lifetime.
(28:35):
Maybe in American history it'sbeen a lot of spending.
In which of those scenarios doyou think the federal budget
gets better or worse?
It seems like this is my guess,and I want to get your reaction
that some sort of a mixedscenario where you know the
(28:55):
Trump administration, if Trumpwere to win, would want to cut
taxes but they would have to cutsome deals that would keep
spending high and that wouldkind of you know, be a problem
on both sides, but what's your?
I have a weird interpretation.
Bob (29:07):
Now, remember, you might not read this in the press.
You might read something that'scompletely, 100% against what
I'm saying.
The problem is, when the pressanalyzes what each major
candidate would do in office,they take their campaign
promises at face value oh,that's what they're going to
enact.
I don't do that at all.
(29:28):
I look and try to figure outwhat they'll actually enact,
what they've promised to enactand so I think that the best
solution for the federal budgetand the budget deficit in the
years ahead would probably be asweep for either side and total
responsibility for the federalbudget.
(29:49):
Now, on the Democratic side,they might reduce the deficit
because they're going to raisetaxes.
Okay, it's very straightforward.
On the Republican side, theywould extend current law in
terms of the tax regime wecurrently have probably
temporarily, they won't have thevotes to make it permanent but
they're going to do other thingson entitlements.
(30:09):
I mean, they're going to raisetariffs.
That'll raise a little bit ofrevenue.
I think they reduce greenenergy subsidies not end them
completely, not eliminate them,but reduce green energy
subsidies so that it helps withthe federal budget and I think
they would do significantreforms to the Medicaid system
(30:29):
for low-income Americans.
I think they basically blockgrants to the states and let the
states experiment with reformand squeeze that program over
time for budget savings.
I have to tell you Medicaid isa very inefficient program in
terms of delivering value to itsrecipients.
There have been several studieson this.
So I think improvements can bemade and they don't necessarily
(30:52):
have to cost more money.
They can save the taxpayermoney instead.
Now, the mixed governmentscenarios might lead to much
higher deficits.
Let's say I'm right about whathappens if Harris wins, but she
faces off against a GOP Senate.
Okay, what I argued was thatshe would end up, contrary to
(31:15):
her campaign promises, at leasttemporarily extending the tax
cuts originally enacted in 2017.
Well, a Harris administrationis not going to cut Social
Security or Medicare orObamacare or Medicaid, and she
doesn't want to cut green energysubsidies.
So if you get a mix of nospending cuts, we're not going
to see tariff increases like youwould under a Trump
(31:36):
administration.
I think everybody agrees on that.
So if I'm right about whatwould happen to the income tax
code on individuals in a Harrisadministration basically extend
status quo, just kind of similarto what Trump would do in the
end, that is the most dangerousbudget scenario Harris, with a
(31:57):
Republican Senate and then maybeor not a Republican House.
That's where you have.
We end up with two and a halftrillion dollar deficits.
As far as I can see Because Ithink again the tax system stays
similar to what it is today,with only cosmetic changes, and
there are no spending orentitlement reforms.
Ryan (32:15):
What about military spending between the eventual?
Whoever the winner is?
Is one administration morelikely to spend more on military
spending?
Bob (32:25):
I think a Republican administration would probably
spend more, but it reallydepends on events.
So in the end, I think theremight be we might be below the
sustainable level of militaryexpenditures that the US can
continue with, in the sense thatif our ability to project power
(32:48):
to key places around the worlddiminishes more, we might be
enticing a conflict that costsus more money in the long run,
rather than spending a littlebit more today to prevent that
future conflict.
So I think in the end,regardless of whether it's a
Harris administration or a Trumpadministration, spending on the
(33:09):
military relative to GDP isgoing to be higher in the
decades to come.
We live in a multipolar worldit's not just the US versus
Soviet Union or, after the fallof the Berlin Wall, where the US
rules the Rus' and in amultipolar world, I think
conflicts may require more USspending in the decades to come.
Ryan (33:33):
You know, the last time we got together we were just after
the Supreme Court had made adecision regarding Chevron
deference and I had asked youabout that and some of the
implications from a regulatorystandpoint.
Has there been anything thatany sort of follow on test cases
(33:53):
after that that you've noticed?
Bob (33:55):
You know I haven't followed it closely enough.
Cases after that that you'venoticed.
You know I haven't followed itclosely enough.
Now I have to say that at thetime I thought it would be.
My one disappointment in theruling was that they didn't
really go after olderregulations that had been kind
of grandfathered in under thatChevron deference.
But it now looks to be adebatable issue, like they might
(34:20):
not have really touched on that, and so I think so they didn't
knock everything down.
They didn't knock everythingdown, that wasn't written into
law code.
Ryan (34:27):
essentially Correct.
Bob (34:30):
They did not knock down previous regulations that had
been in place.
However, that doesn't meanthose can't be challenged.
So there may be more of anopening than I previously
thought to challenge oldregulations to say those
regulations did exceed thestatute as it existed at the
(34:50):
time and so we have to nullifythose.
I don't know what the status isoff the top of my head.
Ryan (34:57):
Well, it's been a short amount of time, but it is
something that is kind ofinteresting thinking about the
impact of regulations on theeconomy and economic growth and
how funds are spent to pay forto be on the right regulatory
footing.
It seems like if you can deploythose funds elsewhere and still
(35:18):
have a well-functioning economy, that might contribute to
economic growth.
Is that what you economistswould say?
Bob (35:26):
It would and frankly I think Trump would be much more
agreeable to the energy sectorin terms of the regulatory you
know.
Ryan (35:39):
The other thing I wanted to ask you about is are we?
Early in the year?
The forecasts from our team wasthat we were probably I don't
know 60% likely to have arecession.
Something like that 60, 65%.
It was better than even odds.
Bob (35:56):
At the very beginning of 2024.
Ryan (36:00):
So here we are, october 24th, not in a recession, yet
how has your thinking changed orevolved since then?
Are we still likely to have arecession that just got pushed
off, or has the Fed, as theylike to say, maybe created the
soft?
Bob (36:17):
landing.
So, as you know, ryan, I'm aneconomist, so I'm going to
exercise professional privilegeand talk out of both sides of my
mouth.
I think the odds of a recessionat this point happening sometime
in the next 12 to 18 months arebelow 50%.
However, I also think they'resignificantly higher than the
markets are currently pricing in.
I also think they'resignificantly higher than the
(36:38):
markets are currently pricing in.
So I still think we're in aposition where, over the last
couple of years, with theenormous budget deficits we've
run, even though theunemployment rate has been less
than 4 percent and even thoughwe're not in a World War
situation which is reallyunprecedented in US history, I
think those enormous budgetdeficits have masked or hidden
(37:03):
some of the pain we'lleventually feel from the
tightening of monetary policyover the past couple of years.
I don't think we're completelyout of the woods on a recession,
but I think the odds havefallen because they simply
haven't hit yet.
And so, just like from apractical standpoint, from a
basic forecasting standpoint, ifwhat you thought was going to
happen with more probabilityearlier rather than later,
(37:26):
hasn't happened yet, you have toreduce your odds of it
happening at all.
Ryan (37:29):
Sure.
So the unemployment rate isstill really low from like a
historical standpoint, but ithas begun to shift a little bit
higher from the lows about ayear ago or so.
Bob (37:41):
Yeah, it's off the bottom.
I think it bottomed in thevicinity of 3.5%.
I think the most recent monthwas 4.1%.
I wouldn't be surprised if thereport that comes out, I guess
next Friday, a few days afterthis tape is released has a tick
up again from 4.1 to 4.2,.
Looking at the unemploymentclaims data recently the share
(38:04):
of people, size of the workforceso that hints at a potential
increase in unemployment fromhere Doesn't say it has to be
some massive increase, but atick up is more likely than a
(38:27):
tick down.
Next.
Ryan (38:28):
Friday.
So how does the Fed think aboutwhat full employment is?
I know we were in the threeswith the three handle, but I— it
seems like not that long agothat full employment was
something like you know theythought of like 5% or something
like that.
It depends when you went toschool.
Seriously, Right.
Bob (38:45):
So I got to school back in 1983.
Okay, that makes me an old man,obviously.
So I got to college in 1983.
And at the time my firstprinciples of economics class
was a macro class and I rememberlearning that full employment
was 7%, that if we went below 7%it was only due to an overly
(39:07):
stimulative monetary and fiscalpolicy that could not be
sustained and which would causehigher inflation.
So you didn't want to do it.
And then by the end of thedecade we had unemployment, like
in 1989, at roughly 5%, and wereally didn't have any
significant inflation problem.
We had a little bit of one, butnot much.
And then inflation went lowerfor the bottom in the late 1990s
(39:30):
and into 2000, before thebursting of the internet bubble,
and we had pretty low inflationunder George W Bush, like going
into the housing bubblesituation, the bust.
And then we had very lowunemployment under President
Obama, president Trump,pre-covid and we have so far
under President Biden.
So my personal view is that wecould probably sustain somewhere
(39:52):
in the vicinity of 4%.
But that will change over time,given demographics, given the
age profile of the workforce,and it will also change based on
other government policies if,for example, they become more
generous to the able-bodiedunemployed, like if some
jurisdictions and end up movingtowards some sort of like basic
(40:16):
income plan for everybody inthat state, then that might
raise unemployment a little bit.
If you incentivize people notto moving towards some sort of
like basic income plan foreverybody in that state, then
that might raise unemployment alittle bit.
Ryan (40:24):
If you incentivize people not to work because you're going
to pay them, they might work alittle less.
Bob (40:28):
They might work a little less, but everybody in the
Antifa encampments in Portlandcan riot and protest all they
want, and they know that a checkwould be coming in from either
the state or the federalgovernment in that situation.
So why not?
It's like you could make, likeanybody who had a low amount of
financial ambition in their lifecould basically sit in a
hammock all day for the rest oftheir life and know the
(40:49):
government's taking care of yeah, do you think that that's a
possibility, that there's auniversal basic income at some
point?
Ryan (40:56):
I know a lot of times, as I hear people talk about that
concept, it's like oh, ai isgoing to basically do everyone's
job, so you'll have nothing todo, so you know, we're going to
have to pay you to do nothing.
Bob (41:06):
There is a school of thought on that.
I don't believe that.
Ryan (41:09):
I think it's basically a Luddite view that's been around
for hundreds of years, it seemslike you could apply that to any
technology in the past Like nopeople aren't going to be
farming anymore, so I guesswe're going to have to pay a
basic income, Exactly Now thatsaid, if you look at federal
policy, we have a very haphazardversion of a universal basic
(41:29):
income, but it's just called abunch of different things.
Bob (41:32):
So the health portion of it is Medicaid and we have Section
8 housing vouchers and we havefood stamps and we have other
forms of welfare benefits.
So we're not that far from it,but it's a little harder to do
(41:53):
it than just if you've got acheck in your account every
month.
Ryan (41:55):
So would a universal basic income be a more efficient way
to administer all thosedifferent programs that you just
mentioned?
I mean because there's a lot ofbureaucracy attached to all
those different programs.
Bob (42:07):
Here's what happens, ryan.
So the person receiving theuniversal basic income yeah,
they will totally take advantageof it in a way If you just get
a check sent directly to youraccount.
In a way, it might belogistically more difficult to
go after Medicaid and then foodstamps separately and then a
Section 8.
I think there's a little morelevel of shame involved in
(42:32):
pursuing those benefits from amyriad of different programs
than what you would have toexercise in signing up once and
getting the money sent youraccount every two weeks or
something like that.
Ryan (42:42):
Yeah, interesting.
Well, the time has flown byagain here, bob.
I look forward to seeing ifyour forecasts on what's
happening with the election nextweek actually play out.
My final question for you isone that I've asked you in the
last few times you've been onthe podcast, and that is what is
on the Bob Stein book list.
(43:02):
What are you reading lately, orsomething that you've recently
read, or something that you justrecommend that the viewers of
the ROI podcast should check out?
Bob (43:10):
So right now I'm reading a book.
It's called the Rise and Falland Rise of Communism.
It's basically a history of theidea of communism as well as
how it existed.
It's basically a history of theidea of communism as well as
(43:36):
how it existed, how it kind ofmetastasized out of an odd
interpretation of Soviet Russiawith the Bolsheviks and has
moved around from there, and theidea behind it is that there's
always going to be this desirefor equality to some point, and
it might be based on resentmentand jealousy, but it's always
(43:57):
going to be there, and that nowthat people on the far left
don't have to answer, don't feelresponsible for what's going on
in the Soviet Union, and nowthat they can basically say well
, china might have a leadershipcalled the Communist Party, but
they're really capitalist, itfrees the left globally to
(44:18):
support policies that might havebeen just proven in the past,
but the current generation isunfamiliar with those events,
and so it makes it easier tospread communism and the ideas
behind it once again.
Ryan (44:30):
Interesting.
Well, we will check out thatbook.
Thank you for the bookrecommendation, thanks for all
your comments and insights onthis episode, and thank you to
all of you who have joined us onthis episode of the First Trust
ROI podcast.
We'll see you next time.
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I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy And Charlamagne Tha God!
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.