The Jupiter Merlin team discuss the implications of the US midterm elections, and where it may leave President Biden’s policy agenda for the next two years.
US inflation gives some comfort
This week’s US inflation data has given a strong fillip that, for America at least, and barring any further exogenous shocks, perhaps the worst of the prices crisis really is behind us. Having seemingly peaked in June at 9.9%, headline CPI declined for the fourth sequential month, in October falling a half point to 7.7% from September, beating market estimates of 8%. Core inflation, which excludes volatile food and fuel prices, also slowed to 6.3% after September’s recent high of 6.6%. With both numbers in decline, not surprisingly global bond and equity markets responded immediately and positively; the yield on the US 10-Year Treasury decreased by a quarter of a point to 3.84%.
US mid-terms: the curate’s egg
The news was 48 hours too late to help Joe Biden in the mid-term elections, from which he can only look at the double negative of their not being the disaster he might have feared and which many predicted. Equally, the Republicans will be disappointed that given Biden’s abysmal approval rating, they were unable to make better progress than they seem to have done (bearing in mind the Senate race is still not concluded).
As we said in one of these musings ahead of the Presidential race in 2020, there is an enduring truism to American elections in a bi-partisan system: roughly half the electorate votes Democrat and roughly half votes Republican. Whether you win or lose the race to the White House or gain or concede a majority in Congress depends upon which side of that ‘roughly half’ your luck lands.
The mid-terms are always an oddity. The whole of the House of Representatives is contested, whereas only a third of Senate seats are fought over, and of course, there is no Presidential vote. The mid-terms are a double-edged sword for both parties. Turnouts tend to be low compared with Presidential elections. Regardless of Biden’s assertion to the contrary, the mid-terms are inevitably a sense-check if not a referendum on the electorate’s satisfaction with the incumbent President in the White House and his administration at the half-way stage in the Presidential term; the result can go either way but history says that in most cases the party in power tends to lose ground. On the other hand, for the party in opposition, while they might benefit from protest votes against the government, in terms of generating real positive momentum in their own favour, with no defined party leader such as we have in the UK or other European political parties tend to have, there is little in the way of a rallying point; with nobody to give firm leadership the opposition campaign tends to meander along a path of its own. In this election, the Democrats on weak ground with the economy chose to campaign on equality and particularly abortion, arising from the Supreme Court ruling on Wade v Roe; Republicans invoked the well-known advice to Bill Clinton when he was an aspiring President three decades ago that “its all about the economy, stupid”.
At the time of writing, in a tight contest and with the remaining votes still being counted, it appears that the Republicans will take the lower House, narrowly overturning the Democrat majority. The Senate, previously split exactly 50:50 (and thus by convention handing the majority to the government through the casting vote of the Vice President) is still too close to call. But assuming Biden loses the House, even if he keeps the Senate, the remainder of his term faces significant challenges in progressing the social reform agenda on which he campaigned in 2020. And it is not as if it has been a free ride thus far despite the supposed benefit of the ‘clean sweep’ of the White House and both houses of Congress.
Heavy weather at home……
Despite the major political and constitutional hiatus of Trump’s ill-mannered departure in 2021 and the apparent open goal presented to Biden with his own victory, Biden has successfully made heavy weather on virtually every policy front. Domestically, his ambitious plan for post-Covid recovery, infrastructure and climate change investment had to be significantly watered down, not only because of outright Republican opposition but because a small but vocal minority of Democrats lost their nerve. They baulked not at the principle but at the eye-watering sums involved when it was obvious the US economy was likely to slow as a result of pandemic dislocation and the frictional cost of central bank policy (however belated) with rising interest rates to try and contain the then burgeoning inflation rate. Even Biden’s recently enacted so-called Inflation Reduction Act (a mix of welfare-and-health policy, combined with deficit reduction and green incentives to persuade Americans to be more environmentally friendly, matched by significant tax rises), a rare but timely win, at $730bn was a diluted version of the original plan after protracted negotiations and compromises with his own side, notably Senator Joe Manchin who nearly rendered the bill stillborn.
Immigration policy, delegated to Vice President Kamala Harris, has proven a poisoned chalice, mired in controversy and almost zero progress (it is widely believed that Biden deliberately gave the brief to Harris in the full knowledge that it was a virtually impossible task, he was setting her up to fail to prevent her challenging his leadership). At home, the major outright success Biden can claim was his use of the Presidential Decree to wipe out up to $20,000 of every remaining student loan, a politically smart move which snookered the Republicans who knew that to challenge its economic viability in the Supreme Court would be a political own-goal of significant proportions (especially if they won the appeal!).
We have discussed Biden’s legion foreign policy failures on many occasions in these columns. The significant ramifications of the US’s disastrously executed, cack-handed exit from Afghanistan, a direct consequence of which (though clearly not the only one) was allowing Putin to feel emboldened in to attacking Ukraine. Biden’s failure to secure an international consensus to confront China, particularly in the aftermath of the pandemic (Trump’s ‘Chinese Flu’), the fissures among the western alliance in its dealings with Beijing laid open this week with Germany’s Olaf Scholtz’s visit to nurture German business prospects with General Secretary Xi (similar to Angela Merkel and her dealings with Putin and Russian gas supplies, Scholtz has a deluded idea that in doing business with Xi he will be able to exert influence to change Xi’s behaviour on such areas as climate change and his relationship with Putin etc). Biden has been humiliated by the Iranians and in the process has significantly poisoned the relationship with Saudi Arabia, formerly the key cornerstone western ally in a febrile and intensely sensitive region.
Biden has scored some key foreign policy victories, however. One, the CHIPS Act, covers the repositioning of domestic US semiconductor technological development and manufacturing vis-a-vis China. The other is in the two agreements he has signed since the spring to help replace the loss of Russian gas in western Europe by agreeing separately to supply vast quantities of Liquefied Natural Gas to the EU and, as of this week and ironically during COP27, to the UK. Both give him geopolitical leverage: “play ball, my ball, or no gas. Verstehen? You geddit?”
Where from here?
As to the future, for the remainder of his term Biden’s path is strewn with political cowpats. For policies requiring Congressional approval (which includes everything concerning the US budget, public expenditure and tax) he is now appealing to “working constructively with the Republicans”. At his inauguration he made much of his Presidency being one of unity, he wanted to ‘heal the wounds’ and divisions opened by his predecessor. The reality is he has done precisely the opposite, cheerfully pouring ordure on his opponents. Indeed, his language in this most recent campaign was assuredly not one of welcome and inclusion, on the contrary, “democracy and our constitution are at stake”: essentially, if you vote Republican, you are anti-democracy, virtually in league with the devil. It is hardly a winning formula for unity and healing. Therefore, with one eye on 2024, the Republicans will go out of their way not merely to block Biden when it suits, but to ensure that where there are areas of common interest, they extract the maximum heavy payment to their own advantage.
Biden, like Trump before him, may try and resort to Presidential Decree; literally making laws at the stroke of his own pen. However, Presidential Decree is constitutionally reserved only for matters ‘in the national interest’. All presidents stretch the limits of that definition; where the invisible boundary is crossed, the Decree can be challenged in the Supreme Court (as Trump found to his cost with his immigration quotas). That is why appointments to the Supreme Court become so politically sensitive: a) they are made by the President and b) theoretically they are for life.
One particularly sensitive area is Ukraine. Senior Republicans have made it very clear there is no blank cheque for President Zelensky. The US position on Ukraine is perverse, tinged with an undercurrent of war weariness. The Americans are very happy to see Putin’s war effort degraded and are even happier that it is someone else doing it by proxy on their behalf; but they are not prepared to accede unconditionally to Zelensky’s perceived begging bowl for more and better arms and equipment. Politically, the ground is muddied further by the Republicans’ dog-with-a-bone syndrome when it comes to President Biden’s son, Hunter, and his former dealings with the Ukrainian government, alleged to have been shady at best; the Republicans will not let go.
As to the next Presidential election and whether it will be Trump on the ticket for the Republicans and Biden for the Democrats, or whether either or both will be dumped, we will leave that for another day.
From an investment standpoint, Biden being boxed into a corner is no bad thing. It limits the scope for surprises and means that any policy, particularly fiscal, which makes it through the net, has cross-party agreement.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.