Many have been asking about how the outcome of November’s presidential and congressional elections will impact the future of our economy and the markets, and how recent government stimulus dollars will impact future tax policy. To get some answers, I’m joined by Chris Edwards, economist and director of tax policy studies at the Cato Institute. We discuss how the upcoming election results will impact our financial future.

Program Length: 25 minutes

Program Transcript:

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Welcome to your life, your well network, helping you find clarity and comfort for your life and well, now here’s your host.

Financial adviser and CEO of Cordasco Financial Network, Steve Cordasco. Welcome to the Your Life Your Wealth podcast.

Due to Kofod, we have done programs in many unique places. And this particular time. We are sitting. Believe it or not, in a back porch area with a thunderstorm rolling in. So you might hear a little background noise. There’s an actual storm rolling in, but due to kov it and due to social distancing, we found a spot that we thought were OK. So sit back, enjoy the show.

If you hear a little thunder or rain going on, you know that we are outside and sheltered from a storm that seems to be rolling our way at the moment.

I’d like to address a very common question that I’ve been getting over the last few months, and it reads like this. Hey, Steve, looks like President Trump has his work cut out for him. Doesn’t look like he will get reelected. Look like big changes coming. What does that mean to the markets and people’s money as well as their livelihoods on an economy that has been so good up until the Kovik crisis? Where do we go from here? And what does a Democratic sweep look like to our money? So we’re going to address that coming up a little bit later in today’s podcast, Obbie speaking with Chris Edwards, economist and director of tax policy studies at the Cato Institute, to add some color commentary to what we’re talking about right now. But I want to give you my take of what I see. And right now, we have two big concerns, at least as it comes down to what the future of your money looks like. And one is virus concerns. And you get these big swings in the markets when the stock market goes up. The bond market goes down. And when the stock market goes down, the bond market goes up. The bond market tends to be where safe money goes. Stock markets where risk money goes. And when the virus looks like it’s subsiding, money flows into stocks out of bonds. So you have the seesaw effect. Things are going pretty traditional in markets down, bonds are up and vice versa. That’s helping. What we do at Cordasco Financial Network, because much of our money is diversified between stocks and bonds and some cash. And so we kind of play within that arena and add an investment plan that is matched up to really who you are should be diversified properly. So things have been doing OK between what’s happening with the virus news and the volatility in the markets. It’s predictable, so to speak. What’s not so predictable is election concerns. And that’s where your questioning is coming in. Hey, I don’t feel so good about the upcoming election. Are we going to give back all the gains that were made under the Trump administration based on a Biden win in the upcoming election and also picking up some seats in the Senate, as well as with the House staying the way it is? With that said, let’s focus on the election side. And the question is, why aren’t the markets reacting now to what looks pretty obvious? And that is Trump having a lot of work cut out for himself and not very likely to get elected? Look, don’t shoot me the messenger. My job is to create these scenarios and stress test them so you can see what it might look like against your money. And one would say with logic. Well, jeez, you got polls showing a Biden win.

You got the public saying, yeah, I don’t know how Trump pulls this one off, but nobody’s settling for that now. Right. We have we have a grind coming up between now November. And many are saying, how do I position my money today for what change could happen in November? So let’s discuss that before we talk to Chris Edwards about his take on it. And here’s my view.

The reason why you’re not seeing major market fallout right now based on politics. It’s because of all the fuel being added to the economy. And what I mean by fuel is I mean money. Money that the Treasury and the Federal Reserve, who are working together with elected officials. To put free money into the system.

Now, money has always been put into the system, people who collect unemployment. That’s money coming into the system. People who might live in poverty, who get help from the government that’s put into the system.

The Fed manipulates interest rates to direct money into the system when they bring rates down. It creates more demand for expansion. And that’s called growth.

That’s called expansion. The money supply expanding the stock market is correlated right now to the money supply, expanding Democrats because some would often argue and we have this debate, a Cordasco Financial network, we have, you know, someone, our staff who say, hey, the markets always seem to do great under the Democrats. So what’s the worry? Well, usually Democrats tend to spend a little bit more. They want more money being spent. Now, unfortunately, that goes to growing government. So there’s an argument of where it’s being spent. But there are import spending.

And so therefore, the theory is, OK, we’re not having a fiscal conservative in office, whether it’s Biden or Trump. So therefore, the markets are feeling pretty good because the money supply is saying that it will continue. The expansion of the balance sheet of our government is expand and the government’s taking on more debt. Now, some would say, why is the market reacting this way if it’s taking on more debt and we’re going more in debt, that creates less stability in our government? Well, they’re gonna worry about that down the road. Should you worry about it? Yes. So let’s take a look at where the problem would come in and where do you position. So this expansion of the money supply, which is helping the stock market now, which is helping businesses today, it’s helping those with four one case. It’s helping those that are out of work. Let’s not forget that because those out of work want to complain about those who are working, getting something. Forget the politics of this. Every pocket, every wallet is finding something that the government is offering. So with that said, the markets are riding a wave. What do we need to be concerned about down the road? Well, it’s inflation. The only way out of this is to collapse the currency, so to speak. Or wipe it out off the books. The debt. But there is a price to be paid and that is the value of the dollar. So one of the arguments right now that is if Biden gets elected and wins a majority in the Senate and the House. That we are looking at. A weak dollar situation. Biden and policies that come in that area will take a strong dollar. And work to weaken the dollar. Look, Trump has worked to weaken the dollar during his administration, too, because we’ve had a problem about inflation and there’s no inflation in the system. The Fed wants at least two percent inflation, that’s their mandate. So inflation isn’t so bad, but it’s bad if it’s runaway inflation, it’s bad if it’s uncontrolled inflation. So a weaker dollar is inflationary on asset prices. I happen to think the market is anticipating that. Now, if you look over the last six months. Real estate prices. Stock prices. Gold price. Physical asset prices.

Are going up at a much higher rate than the cost of goods and services in our country today.

So that is something that we at Cordasco are looking at deeply to say, hey, how diversified are we that if we go from the dollar being king to a weaker dollar, where do we want to be positioned? And much of those asset classes that have been positioned to be a hedge against inflation have not done well over the last couple of years. Things like Mel P’s, energy, hard assets. Real assets. Take a look at gold over the last 10 years. Terrible comparatively to other asset classes. But if you take a look at recently, you’re seeing changes there. So that’s where we are. In my opinion, with a Biden win. The markets would normally react negatively, but due to Kofod, it’s almost like there’s a blank check book. And that’s what’s driving the system right now. Whoever wins office will probably be able to still carry on with that same policy.

The difference on a Biden win is that and this is what I’m paying more attention to. It’s regulation and what happens to regulation. Of course, we’re gonna have higher taxes. Right. So from going from twenty to twenty five, it’s a five percent increase on capital gains. Maybe they’ll try to overextend. There’s gonna be these fights. But look, at the end of the day, you can tax to a certain amount and then you tax out of the issue. And at this point, higher taxes. OK, we can see that. Is that enough to shock the system? No. But what could shock the system on top of higher taxes would be an increase across the board of regulations, a wipeout of ease of doing business. And that is something we need to consider. But that won’t happen overnight. That will take time to do and maybe the markets will react. There’s no doubt we’ll have volatility in here. But taxes, equal numbers that we can see, they’re more predictable. You start to wipe out. The loosening of regulations and create more hurdles, more regulation. That’s the unknown. That’s a problem. Some would argue that right away you’ll see tariffs go away. Wolf, tariffs go away, that’s tends to be business friendly, unfortunately, it’s not worker friendly in our country, but all of this is like putting a puzzle together. And where does that piece fit in? To talk about some of this with us is Chris Edwards, economists and director of tax policy studies at the Cato Institute. He’s also editor of Down Sizing Government dot org. He’s a lot like me, falls in the libertarian space. He’s testified to Congress on fiscal issues and had been published in The Wall Street Journal, among others. And also I’ve seen Chris a few times on CNBC. He joins us to discuss how the outcome of November’s elections could impact our economy, the markets, and how the recent government stimulus will impact tax policies in coming years. Chris Edwards, welcome to the Your Life Your Wealth podcast would be Steve Cordasco.

Hey, thanks a lot for having me. Steve, I really appreciate you having me on.

Great panel. I appreciate you being available to talk about this particular big question that we are getting from a lot of people who are listening right now. And the question is, what happens if Trump loses and everything that has happened to help the economy kind of get spun around. So what does a Biden win look like to you?

Well, the two parties are have vastly different economic policies these days.

On the one hand, they both like spending a lot of money. So deficits are gigantic under both parties. But, you know, the big difference is going to be taxation. Trump cut taxes substantially in 2017. And, you know, he would he would, you know, hold the taxes lower if he were reelected. Biden has produced a big tax plan that would massively raise taxes, especially at the top end. And I think would crush economic growth. I mean, just to give you a real quick thumbnail. He would repeal the 2017 tax cuts. He would hike the capital gains and dividend tax rates from the current 20 percent, up to 40 percent. He would increase the corporate income tax rate from 21 to 28 percent. Those are huge increases. So if you think about the stock market, the stock prices are the present value of future of the future after tax returns. If you increase the taxes on capital gains, dividends and corporate income, you are massively reducing the after tax returns and therefore directly. That’s going to be a big hit on the stock market, which actually ends up not just hurting rich people, but, of course, everyone, because the you know, the great majority of people in the middle class have money in the stock market through their pension or borrow one K plans. So I think that, you know, the the Biden it used to be the Democratic politicians. You know, they they promise they wouldn’t raise taxes than they did. But we’re at a point today where the Democratic candidate for president for the White House is promising this massive tax increase, which I think would be it’s just really dangerous for the U.S. economy.

So with that said, why is the market showing so much strength here at a time when if you look at the polls, it looks like Trump’s got a fight on his hands? Many would think, hey, why isn’t the market selling off?

If a Biden win would be so detrimental to the economy and to stocks in general, I think that the markets are misjudging what the Biden scenario will be. They may think of Joe Biden as like the Democratic Party used to be on economic matters.

They under President Clinton, sort of more centrist.

And we’ve always had a 60 vote threshold in the Senate to pass large changes in legislation. But one thing that will probably insider D.C. types have told me is that the Democrats, if they get the majority in the Senate, which I understand is maybe around 50/50, they will very quickly dispense with the 60 vote rule in the Senate. Would become a pure majority body like the House. At the same time that the leadership and House and Senate is much more centralized than it used to be, it’s it’s the leadership can get what they want. So if you’ve a Biden president and you know and most people think that, you know, Joe Biden will get a quite left of center vice president and his cabinet will be left of center in the control House and Senate. They’re going to push through a lot of really anti market policies very quickly. I think at the same time, you know, we have these massive deficits caused by the recession this year. The recession added six trillion dollars to the deficit along with the various relief bill. That’s going to be another incentive or push for politicians to raise. Act is greatly down the road.

This big shift just within the last four or five months of an incumbent looked like he was going to get reelected as a shoo in. Meaning President Trump, that now it’s all up for question and debate. I’m looking at it. And as people are asking me, why is the market moving up with such as negative overtone? I look at and say it’s all direct correlation to the amount of money in the system and a money supply system that has just flooded business government in our lives. It’s it’s tremendous deficit spending. And it seems as if the market climbs that wall of of easy money. If you take a look at the Democrats, Biden coming in, you don’t necessarily see the easy money policy going away or do you?

I guess my view on it is as an economist, I see what the Federal Reserve is doing as a lie. They’re creating a lot of distortions in markets when the government spends all this money on these relief bill that’s creating all this economic distortion. I mean, a good example is the the six hundred dollar per week bonus that people are getting in their unemployment compensation. While that help people in the short run, it creates a distortion and makes them more hesitant to go back to work. And you can look through all these spending programs the government is doing. And again, while it helped people in the short run, you’re adding distortion. You’re adding debt, which makes investors and businesses more nervous in the future. Businesses start to think, well, gee, maybe I’m not going to do that capital investment because, you know, the government’s going to be raising my taxes. I’m not going to build that new silicon chip factory in Arizona. I think I’m going to put it in Taiwan instead, because the U.S. is going to be increasing corporate taxes. So, you know, it was an unexpectedly deep recession. No one thought Cauvin, 19, coming. I understand why the federal government and the Fed would step in with some relief because, you know, this was the one expected.

But the more relief you have, the more distortion you create, the more debt you put on people down the road and the more nervous you make businesses and investors down the road.

You know, it’s also probably going to weaken the dollar. I look at a Biden win as something that would weaken the dollar, that would create inflationary forces, asset price increases. It’s an interesting scenario, but the markets aren’t reacting nervously with a Biden win. What’s your take right now with what the polls look like? And am I missing something that might be hidden in some of the data, like last election when I thought Trump didn’t have a chance?

Yeah, it’s you know, with inflation is an interesting one, I guess. Markets are saying, well, look, you know, a decade ago, every moment thing that the a lot of economists were saying that the Federal Reserve unorthodox interventions would create inflation and hasn’t happened over the last 10 years. I think markets often seem to be they’re looking backwards to see what our experience in the past was. But then we get surprised, economists get surprised, and markets are always getting surprised by things. So, you know, there are certainly scenarios you could that you could see in the future where, you know, inflation would come back. We’re in an unprecedented situation with the Democratic Party. I think they really have gone so far left on economics. I mean, if you compare it with the 1990s, we had a Democratic and Democrat in the White House, but he was sort of centrist and he was balanced by a more conservative House and Senate controlled by Republicans. And even President Obama is all of these themes, you know, only moderately left compared to the type of stuff that’s coming out of the Democratic Party today. So I you know, I really worry. And again, there isn’t going to be if they get the Senate as well, there isn’t going to be the usual.

On balance, often balance the government or, you know, government with opposition.

It’s worked well. But I think that if the Democrats win the Senate, they’re really going to have an unprecedented amount of power we haven’t seen in a long, long time in American politics.

Let’s take a look, because it seems as if the markets and the public seems to be liking stimulus. I wouldn’t say we have a fiscal conservative in office right now. The amount of stimulus being pumped into the system and the amount of deficit spending is tremendous. What’s the reckoning look like?

There will be a reckoning. And I always ask smarter people in Washington here than me. Financial Waltraud expert. When is the reckoning coming? And economists, you know, both conservative and liberal libertarian will. Well, well, kind of agree that there is a reckoning coming. No one knows when. And, you know, economists are lousy at forecasting as we saw that no one thought. Very few economists call the Great Recession coming a decade ago and no one saw this coming. So so I don’t know. I really worry about the piling. That I mean, there’s a good story in The Wall Street Journal, but how the Federal Reserve actions have spurred corporate America to issue really unprecedented amounts of debt. Well, that actually put that put business in an even more precarious situation down the road.

You know, unlike equity, debt is make businesses very precarious. When you run into a recession. So, you know, all all the big, you know, pieces in our economy, government, business and individual, everyone have too much debt. People aren’t saving enough, you know. And the trend that course the federal government is on, it’s just it’s remarkable. You know, we will soon hit the highest level of debt in U.S. history at over 100 percent of GDP. The only other time we got close, as you may know, was during World War Two. But here’s what happened after World War Two. In the decade following World War Two, the government substantially reduced its debt load not by running SIRF surpluses, but by running pretty high inflation in the 10 years after World War Two.

That is why the federal government was able to reduce the debt at the time.

So it mean, for my view, if you look at what the federal government has been becoming more irresponsible all the time, ever since the 1930s and the New Deal, there were four years of balanced budgets under under President Clinton. But that was a real anomaly. Just because the economy was growing boomed in the late 90s and revenues flooded into Washington. So there has been this long term trend in Washington getting more and more irresponsible. And the problem is, is that politicians, they don’t fear deficits anymore. They don’t see any negative consequences of it in the short term. So they just keep spending more and more. You know, even before this crisis, federal deficits were a trillion dollars a year, which was already unprecedented. And this is just put us in a whole different orbit.

Chris Edwards, real quick last question. Under President Trump, did we see an expansion of government or a downsizing of government? What’s the score card read?

As of today, well, his say has been awful on spending and deficits. I mean, he’s massively increased spending, just like just like President Obama and President Bush did. I mean, the last sort of fiscally responsible president we had president we had was with Clinton that said on regulation, President Trump has been very good and he has deregulated in areas like environment and transportation, which has been very good for the economy. I think most regulation watchers in Washington argue, I think rightly, that he’s actually done more deregulation than President Reagan did. So he he has done a very good job there. I think what’s partly what’s missing now is President Trump hasn’t told us what he would do in a second term. He needs to provide a vision of more open and free markets, a vision of startup businesses and entrepreneurship in America. And he’s not giving that to us right now.

Yeah, he needs to come out and really be clear on what he’s running for, what his purpose is. And look, you know, the other side is going to be running for time for change. And classically, it’s four more years for the incumbent. But it’s not as simple as four more years because prior to March 1st, four more years would’ve been an easy campaign slogan right now. That’s right. There is no playbook for this. And he’s got to get it figured out.

They’ve been caught flat footed because of the Koven 19 crisis, and they’ve they haven’t reformulated their method.

I still am in the camp that I think he wins once the other side gets flushed out here and is forced to get into dialog, even though I would tell you, we don’t have great communicators on each side. Time will tell. But thanks so much, Chris Edwards, for the work you do as an economist and director of tax policy studies at the Cato Institute. Chris Edwards, thanks so much. Thank you, Steve. Feel free to reach out to me. Simple. Sending an email. Ask Steve at CNN Plan dot com. Have a great week and enjoy this Fourth of July weekend.

Be safe. Be healthy, and we’ll be back next week on Your Life Your Wealth podcast. If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit Cordasco Financial Network at CNN Plan dot com or call our office at two one five five five eight.

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