FreightWaves hosted a 30-minute webinar with Jason Schenker. A renowned economist, and Chairman of the Futurist Institute, Schenker is author of the recent release, Midterm Economics: The Impact of Midterm Elections on Financial Markets and the Economy.
FreightWaves: What is the genesis of the book? Thinking about macroeconomics and the election, what was your thought process? What was the design of the book like? What did you find?
Jason Schenker: I did some research and realized there was really nothing quite like this on the market. What are the implications in the economic indicators no matter who wins? I didn’t go in with any assumptions. This is a nonpartisan approach. I just wanted to see what the numbers would tell me. I did find some interesting things in my findings.
FW: What kind of things were you looking for? What kind of metrics did you use? What worked and didn’t? Give us a sense of the number of elections you looked at.
J.S.: I looked at a number of different things. How are midterms different from general elections? What are the current economic and market conditions right now? What the near-term important risk factors? What happens if we look back 90 years at midterms? This isn’t just backward looking. What are the implications going forward a couple of years in terms of financial markets and the economy?
We could look at equity too, but generally speaking we went back to Truman. In some cases we went to Hoover. We looked at the dollar. We looked at gold. We looked at silver. In some things it wasn’t relevant to look at certain markets until the 1970s. When we looked at the economic and the financials we saw some different things.
We asked what are the most important economic factors that impact elections? What are those things going into the midterms now? What does that say for the Republican-controlled Congress?
First, the economy is very healthy right now. The unemployment rate is as low as it was as in 1969. Exceptionally low. That’s a major market driver.
People have been comparing these elections to the 2010 midterms. In my mind, on what planet? Unemployment then was 10%! Now it’s 3.7%. That’s not even the same ballpark.
FW: Right, it was the kind of situation when you might see a lot of incumbents being voted out.
J.S.: And that’s a normal historical political thing. People vote on their economic interests in a significant way. Right now the health of the economy is not really one of the prime on the table pieces. Other things to consider—even though we’ve had economic volatility the past couple of weeks—overall the economy is still way over where it was in the 2016 general election. It’s a really interesting factor. There’s also some frothiness. In that respect, this election feels like, to me, 2000. It was contentious. The economy was great, but you still had dissatisfaction with the system.
In that respect the economy wasn’t the problem. I realize it was a general election. And there was a tech bubble. The issues now are also outside of the economy. The risks for the year ahead are like with trade and monetary policy and the US debt. As I see it those are the big risks for the next 12-24 months.
FW: Will those be affected by who wins the election?
J.S.: This was a part of my analysis for “could things change”? The president has almost unilateral authority to make these changes without consent to legislative.
For tariffs and trade, let’s look at the USMCA—the new Mexico and Canada trade. It’s a treaty and has to be ratified by Congress. Now, tariffs don’t have to be run through Congress. If you’re wondering how the China situation will play out there’s a lot of things that could play into this. The only way to get a change is to impeach the president. An impeachment could move forward with a simple majority in the U.S. House. That’s step one. The House does look like it’s likely to go Democratic. But it’s wildly unlikely that he would be impeached. You need a 2/3 majority in the Senate. Even if every single election this fall results in a Democratic one—every single person up for election—you would still need nine Republican senators to cross the aisle. It’s a mathematical impossibility. There’s never even been a single crossing of the aisle for an impeachment.
What that means for trade is that there’s nothing there. The current trade risks and policy will continue to be in place very much along the lines of what we’ve seen. For deeper insight into the China issue check out Peter Navarro’s Crouching Tiger and The Coming China Wars, and the one that’s practically a blueprint for the U.S.’s trade policy with China is called Death by China.
Expect the China and U.S. trade situation to remain frayed and maybe get worse. The Fed Chairman is going to remain the same for the next six years. He’s not going anywhere. That’s not going to change no matter who wins.
Finally, the national debt, while the debt is as high as it’s ever been. The tax cuts were once in a generation, and they weren’t balanced. So that’s a problem. Cuts are good. Debt is bad. The National debt is going to go up no matter who wins. Long-term interest rates are going to go higher.
FW: If those mid-to-long term risks aren’t going to be effected what are your best guesses for what markets will be effected?
J.S.: When we look at financial markets we’re asking generally between the midterm and the general, what happens? Does it matter by party? There’s not a huge data series, but equity markets almost always go up. They almost always end higher between a midterm election and a general. The equity markets usually end higher. The dollar is usually lower during that two-year period. For oil they usually end higher. For silver and gold it’s a mixed bag since the 1970s. The rises are generally greater than the decline. This is important now for the economy. There’s an interesting set of mixed dynamics.
What’s going to happen 2020? You can already see the candidates going out and laying the groundwork for presidential runs.
FW: What happens if the tech bubble pops, and the fed tightens the money supply more, and the US-China trade war tamps down GDP growth even more, what happens then in the general election?
J.S.: Over the past 100 years there’s only one economic indicator that matters: the unemployment rate. Again, it’s the lowest since 1969. Whatever that rate is, if the rate is higher than that in October of 2020 the president is unlikely to get re-elected. GDP doesn’t matter. Only if there’s a change in the unemployment rate. Hoover saw a change. Ford, Carter, and George H.W. Bush saw a change, and they’re the only ones not to be re-elected in the last 100 years.
FW: What are permanent large risk factors especially as it relates to freight and transportation companies and their associated risks?
J.S.: What we might expect from freight is the USMCA deal. It can add transactional friction. Higher interest rates is negative for capital purchases, business investment, equipment purchases. The trade policy with China as well. A big bump in inventory ahead of tariffs you could see a lot of frenzied trade activity, but once we hit next year, the slowing housing and auto and equipment sales with the tariffs and higher interest rates, you could see some real downside.
These things are already brewing, whether they’re slow moving or not, I don’t know. It can happen quite quickly. The point is, I guess, it doesn’t really matter whether the leadership is Republican or Democrat.