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BFI Perspectives 

Brave New World: What the US Election Means for Investors

Nobody expected the 2020 US election to go absolutely smoothly, to quickly result in a clean, confident and universally accepted victory, or to be even remotely reminiscent of any other past election. And yet, the way it actually played out arguably defeated even those very low expectations. We still don’t know who the next president will be, despite what the CNNs of this world loudly proclaim. And, as Biden’s crew and plans become more visible, the concerns don’t lessen…


The blue wave that never was


As we highlighted in our blog before the election, there was always a big risk that the pollsters and forecasters would get it wrong, much like they did in 2016. Of course, most reporters and pundits dismissed these concerns, counter-arguing that the nation’s foremost statistics wizards certainly learned their lessons and adequately updated and modified their models.


This was bombastically disproved almost immediately after the count began and the first results started to come in. The “blue wave” that was so confidently predicted and the landslide victory of the Democratic party that was all but guaranteed never materialized. On the contrary, the race proved to be extraordinarily tight and the suspense has continued to persist for days on end, as the process was slowed down by the new challenges brought about by the pandemic and the record volume of mail-in votes.


Even more spectacular was the failure to predict the election result on a more granular level. The voting patterns of minorities and key voting blocks turned out to be the exact opposite of what most experts and political analysts expected. It was especially striking, given the widespread unrest, protests and riots that gripped the nation over the last few months. Despite all the leftist spin, the incumbent actually managed to secure more votes from minorities compared to 2016, especially from Latinos and Black men and women. In fact, on a national level, Donald Trump garnered the highest percentage of non-white voters of any Republican presidential candidate since 1960, while he also doubled his share of the LGBTQ community votes compared to the last election.


As a result of the many surprises and curveballs of this election, the Biden/Harris ticket secured a weak mandate, with their key losses coming from groups that they, and almost everyone else, assumed would be their strongholds. This could have important implications going forward and potentially impact their much-touted changes, promises and campaign narratives that focused heavily on those groups and what they perceived as their shared interests.


This election also sheds some light on campaign-trail assertions and hypotheses about the nature and political inclinations of various minorities. As it turns out, people prefer to think for themselves and form their own opinions, based on their individual circumstances, unique motivations and beliefs, rather than be defined by some arbitrary and superficial label that would have them grouped together on the basis of their race, gender or postal code.


Trump cards


Almost all-important heads of state, international media, Biden supporters and even some prominent Republicans have already recognized Mr. Biden as the President-elect and most of them warmly welcomed and openly celebrated his victory. In fact, one might conclude that it’s basically old news by now, as mainstream coverage has moved on to focus on the transition plan and to speculate on the new President’s picks for the top jobs. And yet, there’s an entirely different version of reality and set of assumptions that the incumbent’s team is laboring under.

"These legal challenges should not be tainted by partisan bias and be summarily dismissed as mere symptoms of “sore loser” syndrome, no more than they should be accepted as valid from the get-go."

As far as President Trump is concerned, the election is far from over. The result is not only contested, but vehemently decried as the product of pervasive voter fraud, and the very idea of a “traditional” concession is simply out of the question. Trump’s team has already mounted numerous legal challenges and has made clear the President’s intention to take the fight to the courts and to exhaust all options available. Little is known at this stage about the heft and quality of the actual evidence that underlie these legal claims and actions, but the media and Trump’s political opponents have so far appeared totally dismissive of his chances to achieve anything significant through these efforts, let alone a reversal of the election outcome.


No matter how plausible such scenarios might seem from the outside, it is still important to bear in mind that it is up to the courts to resolve the questions and objections raised by the Trump campaign. The judicial branch has the last and only word on such matters, just like it did the last time the US went through a contested election ordeal in Bush v. Gore. What’s also essential to understand is that Trump’s claims over voter fraud and manipulation need not be entirely upheld or fully proven in court in order for them to do considerable damage to the already overstrained social fabric of the country.


The dangerous divisions and the toxic tensions that have plagued the nation for years and seriously escalated after the death of George Floyd could once again boil over if the public’s faith in the democratic process itself be shaken. This would be tragically ironic should it be triggered by the election with the highest participation rate in 120 years, in a country with historically dismal voter turnout, compared to most OECD democracies.


Regardless of this risk, the need to get to the bottom of voter fraud allegations is absolutely necessary. A democratic system can only thrive and sustain the tests of time if the People trust the institutions they have mandated to serve and uphold their constitutionally guaranteed and inalienable rights. The moment that trust is broken, the state stands the danger of no longer acting with the consent of the governed. Therefore, assuming the allegations made by the Trump team have sufficient cause to be taken seriously by the courts, one would expect that EVERY American, and EVERY liberty-loving citizen that believes in democracy would support the efforts to uncover the truth.


These legal challenges should not be tainted by partisan bias and be summarily dismissed as mere symptoms of “sore loser” syndrome, no more than they should be accepted as valid from the get-go.


Economic policy U-turn


As on most other key issues, Mr. Biden’s vision and the incumbent’s plans on the economy could not be more at odds. There are many important differences and significant changes that investors and taxpayers can expect under a Biden presidency, if his campaign promises and commitments actually materialize.


Regarding the most urgent question, namely the pandemic and the relevant policies that will affect the economy, Mr. Biden can be expected to take a much harder and clearer stance on various restrictions and nationwide rules to combat spread of the virus. Apart from a national mask mandate and his pledge to “immediately restore” the country’s relationship with the World Health Organization, the Biden covid plan also includes a much broader use of the Defense Production Act, the emergency law that allows the federal government to seize control of private industry. He also plans to empower the CDC to directly guide states on restrictions on gathering sizes and on issuing stay-at-home orders to the public. As for the possibility of a national lockdown, Mr. Biden has vowed to “do whatever it takes to save lives”, including shutting down the US economy.


On the stimulus front, most analysts anticipate the stalemate to be resolved and progress to be made now that the election is over. Mr. Biden has repeatedly made it clear that he supports a larger stimulus plan, more direct relief and higher spending. A relief package around $3 trillion is what’s expected to be proposed, as part of the wider Biden/Harris $11 trillion spending plan, though its chances of materialization are largely dependent on which party will end up controlling the Senate. When it comes to infrastructure spending, we see the only area of convergence between the two parties, as both want to spend over $2 trillion, but certainly key differences remain there too. The Democrats’ vision includes a plan to move the U.S. to net-zero greenhouse gas emissions and massive budgets for clean energy and climate change.


Projected impact of a $15/hour minimum wage

The other major point of interest in the Biden economic agenda is his commitment to raise taxes on higher incomes. While Donald Trump intended to extend his 2017 tax cuts, his opponent’s plan clearly embraces the exact opposite approach, demanding that “the rich” and corporations pay “their fair share”. He has promised to roll back the previous administration’s cuts and to increase the tax burden on corporations and on anyone making over $400,000 by nearly $3.6 trillion over the next ten years, a move that the Manhattan Institute described as “the largest permanent tax increase since WWII”.


According to the Tax Policy Center, overall, those earning between $400,000 and $790,000 would see a tax increase of about 2.4%, while those with an income over $790,000 can expect a much larger hike of 16% that corresponds to an average loss of after-tax income of $265,000. The Biden plan’s implications are even more daunting for those who live in states that already impose a heavy tax burden. For example, high earners in California or New York would see their tax rate explode to a shocking 62% in combined federal and state taxes, a top tax rate that surpasses even most European nations.


“Small print” policies with a huge impact


Joe Biden’s proposed measures about the corona crisis and his striking tax hikes justifiably grabbed a lot of headlines before the election. However, there are many other significant policy changes that went underreported and could potentially have an even wider impact on the nation’s economy, and especially on its entrepreneurs, innovators and job creators. Many of those policy moves are particularly remarkable, given that Mr. Biden positioned himself as a moderate during the primaries and throughout his campaign, taking great pains to distance himself from his party’s extremist and fringe leftist elements.


Riding the wave of identity politics, class warfare, and the “climate emergency”, the Biden/Harris program includes a wide range of government interventions, new regulations and major disincentives for the private sector. The most obvious challenge to small and medium-sized enterprises is the former VP’s pledge to increase the minimum wage to $15 across the country, which the Congressional Budget Office has warned will kill millions of jobs nationwide.


The Biden plan also includes a promise to legally force publicly traded companies to disclose data on the racial and gender composition of their boards, while other policy initiatives go much further in regulating and interfering with private sector contracts and agreements between employees and company owners, such as the postposed ban of non-compete clauses.


However, all this is arguably nothing compared to Mr. Biden’s pledge to empower, subsidize and indulge unions. As his own policy manifesto plainly states, a Biden administration would use “aggressive remedies” to protect and incentivize unionization and collective bargaining. The most striking of those is his plan to ban state laws prohibiting unions from collecting dues from nonmembers. Also known as “right to work” laws, they currently ensure that workers are not forced to join a union or pay union dues as a condition of employment and they essentially outlaw compulsory union membership. Adjacent policies also include legal protections for strikers, a ban on permanent strike replacements, and a move to hold company executives personally liable when they interfere with organizing efforts, basically ensuring that employers can be held hostage at the whim of union organizers and whatever their demands may be at the time.


Of course, the Biden plan wouldn’t be complete without a huge section of it being devoted to climate change. Apart from the extraordinary budget allocations, the myriads of new rules and regulations and the fervor behind largely unrealistic goals, e.g. “complete zero emissions by 2025”, there are some additional policies that failed to garner the attention they arguably deserved. A great example is the establishment of an “Environmental and Climate Justice” division within the U.S. Department of Justice, that will “hold corporate executives personally accountable – including jail time where merited.“


Implications for investors


Most of the aforementioned policy shifts, while hugely consequential, are largely dependent on which party will control the Senate. According to the latest updates at the time of writing, it appears that the GOP is more likely to win this battle. A split government would likely spell disaster for many of the Biden/Harris grand designs, at least for those proposals that go through the normal democratic route and are not simply imposed by an executive order. It is thus impossible to make a sound prediction at this point about the precise risk levels connected to those policies, but it is still important for investors and business owners to understand the potential extent and gravity of those risks.


Nevertheless, there are other dangers that are much easier to spot in advance and to adequately prepare for. The clearest example is the monetary outlook and its implications. For all intents and purposes, “lower for longer” interest rates were already the prevalent scenario, no matter who won the election. Under a Biden administration, the probability of even more aggressive monetary expansionism is elevated at near-certainty levels.


The Fed's stockpile of US Treasuries is set to surge past its historic peak

What is even more worrying though is that the former VP has made no bones about looking at the Fed as merely another political weapon in his arsenal. As is clearly stated in his manifesto, the Federal Reserve will not only be made to “revise its own hiring and employment practices to achieve greater diversity”, but the central bank will also play a much bigger role in the “equality” context. As the plan clarifies, on top of its existing mandates of full employment and inflation control, “the Fed should aggressively enhance its surveillance and targeting of persistent racial gaps in jobs, wages, and wealth.” This will further erode the independent status of the central bank, that’s already been called into question for years, and quicken its demise and degeneration into just another government agency, beholden to and controlled by whomever sits at the Oval Office.


US public debt is projected to explode under Biden

Another bomb that’s been ticking long before November 3rd is the debt crisis. While it can be easily argued than neither candidate would address this issue in any meaningful way, the Biden approach to the budget and to deficits is likely to prove even more disastrous. Spending commitments and campaign promises of free college, more benefits, a "bigger and better" Obamacare, new government jobs, or simply just direct cash payments, all but guarantee that we’ll soon see another explosion in debt levels, causing financing costs to go through the roof.


Of course, all these dangerous trends predated the 2020 elections and would probably persist regardless of its results. There are bigger forces at play, not least among them the demographic developments of last couple of decades. The dismal savings rates of young adults, the steady decline of their household wealth, and the lack of economic opportunities compared to previous generations will continue to fuel their demands for more spending, more support, and ultimately more debt. For a deeper and expertly outlined analysis of this gigantic problem and its implications, we strongly recommend you sign up for or watch the recordings of our Fireside Conversations, with our special guests Felix Zulauf, Sune Sorensen, Benjamin Lodmell and Anastassios Frangulidis.


Ultimately, as we already highlighted in our Special Report, “On the Brink of a New Era - Are You Prepared?”,the core challenges facing investors moving forward are inflation and financial repression. There are quite a few tools and considerations that investors can factor into their strategic planning and there are solid solutions to help them protect their savings and family wealth.


In these efforts, we see physical precious metals playing an essential role. Under the present conditions and the clearly discernible risks that lie ahead, the real question now is not whether you should invest in gold or not, but if you own enough for what’s coming.


>> This article was published in the latest Global Gold Quarterly Digger. You can download the full report here.

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