Roads to Nowhere: Politics, Policy & Markets Today With Dan Clifton







It’s no secret that today’s political landscape is one of the most volatile in the U.S. since the Civil War. In this episode, we invited Dan Clifton, partner and head of policy research at Strategas Securities, to sit down with Greg Dowling on the FEG Insight Bridge to connect politics, policy, and markets today.  Listen in as Dan breaks down some of the most important moving targets for the market, from China’s geopolitical risk to the Biden administration’s Build Back Better Program and the historically large infrastructure bills being debated in Congress. Dan also offers some valuable insight into how the proposed tax bill may impact future S&P 500 earnings and thoughts on the debt ceiling.  Dan shares words of wisdom for investors as he details how the “September to remember” has now become the October, November, and even December to remember as markets attempt to absorb the blows of the ongoing political dramas in D.C. 

This episode was recorded on October 21, 2021.


00:00:00 Intro

00:00:32 Episode Overview

00:01:23 A brief introduction of Dan and Strategas Securities

00:02:45 How Dan originally got into the investing business

00:04:44 The current political environment

00:06:38 What’s in store for October and November now that the “September to remember” has passed

00:09:50 Breaking down Biden’s Build Back Better program

00:14:47 The nuts and bolts of the Infrastructure Bill

00:17:30 Dan’s tax rate forecast and its potential impact on future S&P 500 earnings

00:24:38 The near-term future of the debt ceiling

00:27:33 Jerome Powell’s chances of reelection

00:32:02 Upcoming elections and musical chairs in seats of the House and Senate

00:37:59 Geopolitical risk re: China

00:43:45 Lightning Round


Dan Clifton

Partner, Head of Policy Research, Strategas Securities

Daniel Clifton is a Partner and Head of Policy Research for Strategas Securities. In this capacity, Mr. Clifton evaluates the financial market implications of policy and political developments. This includes analyzing tax, trade, infrastructure, healthcare, energy, and other policy initiatives to determine how public policy changes impact the economy and financial markets for institutional investors. Daniel leads the top ranked Washington policy team on Wall Street according to Institutional Investor magazine. Mr. Clifton has been ranked as a top Washington policy analyst in each of the past twelve years. Daniel is also a top ranked analyst in the category of Tax and Accounting Policy. Mr. Clifton’s research on the interaction between policy, elections, and financial markets is widely cited in the media and Daniel is a frequent guest on CNBC, Bloomberg, and Fox Business. Prior to joining Strategas, Mr. Clifton was Executive Director of the American Shareholders Association (ASA), a non-partisan, non-profit organization which analyzes public policy affecting shareholders. Daniel also worked on tax policy issues prior to the ASA and has been involved in every major tax policy change over the past twenty years. Prior to moving to Washington, Mr. Clifton served as a senior staff member in two gubernatorial administrations working on economic and fiscal policy issues. Mr. Clifton received both his BA in Urban Planning and his MS in Public Policy from Rutgers University where he was a Fellow at the Eagleton Institute of Politics and a Harold Martin Fellow for Public Policy.


Greg Dowling

Chief Investment Officer, Head of Research, FEG

Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.


Greg Dowling (00:02):

Welcome to the FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG, an institutional investment consultant and OCIO firm serving nonprofits across the U.S. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic, and philanthropic minds to provide insights on how institutional investors can survive and even thrive in the world of markets and finance.

Greg Dowling (00:32):

Today on the FEG Insight Bridge, we are trying to connect markets with policy and politics. Helping to guide us on this difficult journey is Dan Clifton, partner and head of policy research at Strategas Securities. Dan leads one of the top-ranked Washington policy teams on Wall Street and he is a regular media guest on places like CNBC and Bloomberg. He's going to help us make sense of the current political environment, how to frame the new spending plans, and maybe more importantly, how we pay for them. We are also going to discuss Fed policy, China, and thoughts on next year's midterm elections. It should be your civic duty to listen to this jam-packed podcast on market-moving politics. Don't miss a minute.

Greg Dowling (01:15):

Dan, thanks for joining us on the FEG Insight Bridge.

Dan Clifton (01:18):

Greg, thanks for having me today. Exciting time to be talking about politics.

Greg Dowling (01:21):

Absolutely. Some of our clients are probably pretty familiar with you--you've spoken at the FEG Forum before or they may have seen you on CNBC or Bloomberg--but for those that aren't, who are you and what is your organization?

Dan Clifton (01:33):

First, thank you for having me. My name is Dan Clifton. I work at Strategas Securities. We're a macro investment research organization. We do investment strategy, economic strategy, technical analysis, fixed income. And I have the great pleasure of just trying to understand what's happening in Washington and what the economic and financial market implications are of political and policy changes that are happening. When I got into this business in 2007, I was the lowest guy on the totem pole in the firm. But since the Financial Crisis in 2008, Washington has had a much greater impact over financial markets, and I think investors are paying a lot more closer attention to what's happening here in Washington. So this is a nice blend of politics, policy, economics, stocks--all the great things that we get to combine in one. But ultimately, at the end of the day, we have to have an investment conclusion or we're no better than the pundits that are on TV. And that's really what we're trying to get at by analyzing public policy issues.

Greg Dowling (02:32):

A quick plug for you guys, it is one of our go-to's in terms of trying to help make sense of the crazy world of markets and politics and how they intersect. So it is some good stuff. And you're going to hear a little bit, just a little bit of that, here today. But before we get down to business, how did you get into this business? Did you always love politics?

Dan Clifton (02:51):

Great question. I always loved politics. I was senior class president in high school, I represented the student athletes at the first college I attended before I transferred over to Rutgers, and so I always loved politics. I started on campaigns. I basically helped people get elected at the local level. That eventually rose all the way up to the state level, worked on a few presidential campaigns. As I got older, I started to get much more involved in public policy changes and really kind of migrated from the political world into the policy world. I served in government. I served as a senior staff member for two gubernatorial administrations working on economic policy issues. Over time that began to mold again, as I began to embark on a lobbying career where I lobbied, I ran a nonprofit called the American Shareholders Association and we lobbied on behalf of individual investors.

Dan Clifton (03:43):

It was a great non-partisan organization that was very focused on policy, but it was a great blend of the interaction between financial markets and public policy. And eventually it merged into this type of Washington analysis that we do. I was fortunate enough to meet the Strategas founder, Jason Trennert, years ago before he started this firm. When he made a decision to start Strategas in 2006, he asked me to run the Washington office and I said, "Look, there's about 20 people who are more qualified than me." And he said, "No, I'm not going to let you off the hook that easily." We were able to not only start a firm, but really start that firm from the ground up while we were going through the Financial Crisis. I think that formed the culture of the firm in terms of being understanding of what our clients' needs are and being a very client-centric organization.

Greg Dowling (04:33):

That's great. In the next 30 minutes or so, we're going to try to make sense of all things going on in D.C.--and boy there's a lot--and then we'll maybe finish up with a few fun questions. Maybe a great starting point is the environment. What is the current political environment that we find ourselves in today?

Dan Clifton (04:51):

I think that's a great place to start because we're so focused on the day-to-day activities and it changes every day. We need to take a step back and say, "What are we going through in the U.S.?" And what we're going through in the U.S. right now is the single greatest period of political volatility we've had since we've come out of the Civil War over 150, 160 years ago. What we have found is that you've had 8 federal elections since the Financial Crisis, and the voters of this country have removed the party in power in 7 of those 8 elections. We've had all-Republican, we've had all-Democrat, we've tried to mix it up. We said, "Okay, let's try this Trump guy," in 2016. And if you look at where the data is today, it looks like we're going to change political parties again next November, so that means 8 of 9.

Dan Clifton (05:37):

So now think about if you're an investor and one year Congress is passing the Affordable Care Act and the next year the Republicans are trying to repeal it. Or just 4 years ago--literally to the day--Trump was cutting the corporate tax rate, and I spent my day very much involved in, "Are we going to raise the corporate tax rate today?" So it's much harder to have certainty if you're changing political parties. And we believe that this is a function of low economic growth. We've had 2% GDP growth since the Financial Crisis. Voters know there's something inherently wrong and they're demanding political change. So that's the backdrop by which this legislation and many of the issues that they're going to be debating is actually going to fall within. And there are a lot of Democrats right now who know that they're very vulnerable in their reelections and yet they're being asked to raise taxes, do a very big spending bill, and I think that's why the process has become much more contentious and much more important for investors.

Greg Dowling (06:38):

As a follower of all your materials, I know you coined the phrase--or maybe borrowed it from somebody else, I don't know, but it's great--you call it "a September to remember." Well, that got moved a little bit or shifted. So as we are towards the end of October, moving into November, what can we expect now?

Dan Clifton (06:55):

Over the course of the summer, what we noticed was that stocks were at an all-time high and investors were like, "Hey, I'm vaccinated, I'm going to the beach. Wake me up when things get important." It was a nice summer, I'll say. But we saw this storm coming from Washington and we wanted to make it very clear that you have to stand up and pay attention. And that's why we termed it "the September to remember." Our point was that the risks from Washington are changing. For the last 18 months, we've had unlimited fiscal and monetary policy. It didn't matter who was fighting with who in Washington, or this or that, as long as the system was being pumped with stimulus, we were going to be okay. What the September to remember is really about is that that liquidity is now being drained and we have to figure out how we're going to drain that liquidity.

Dan Clifton (07:44):

We have a laundry list of catalyst items that need to be dealt with. Is Jay Powell going to be re-nominated for the Federal Reserve? How is the Federal Reserve going to do its tapering? Additionally, are we going to have a government shutdown? Is Congress going to be able to raise the debt ceiling? What are we going to do about the infrastructure package? Congress is trying to pass the largest spending package... When you adjust it for inflation, it's actually bigger than the New Deal by which we started. And then you have all this geopolitical tension happening at the same time, the Afghanistan withdrawal, and you have a lot of tensions building with China. That is just way too much bandwidth for Washington to be able to execute perfectly, and we felt that there was going to be a speed bump involved until we can resolve those issues.

Dan Clifton (08:28):

We were basically informed by the experience of 2013, where we had a very similar situation than we do today. If you actually take the stock market, you take the S&P 500, and you overlay today with the S&P 500, it is trending almost perfectly. We had a 10% drawdown in September of 2013 or right into mid-October. We have about a 7% or 8% drawdown now, and now we're recovering. The big difference between September of 2013 and September of 2021 is that we resolved the issues 8 years ago. We just did the kick, as you mentioned, and so now it's the October to remember, the November to remember, and possibly going to be the December and January to remember. So those are things that we need to think about because we're still going to have to deal with these issues.

Dan Clifton (09:14):

But the great thing about markets is they're very efficient. They now understand the risks and the bookends around what those risks are, and they're able to digest it better. So we're going to go through earnings season. We're going to get through earnings--probably more important. And then investors are going to be able to book out what their consensus forecast is for next year. Then it's going to be Washington all the time as we begin to debate these issues and we start to see some of these issues coming to resolution. By the way, it's exciting, and we love it, but we just urge that there's gotta be a little bit of caution here for investors.

Greg Dowling (09:44):

You've got to be exhausted. I don't know how you could keep track of all those things, but I'm glad you found time for us. Biden's kind of big push has been this Build Back Better program. The original price tag was $4 trillion. We'll actually see what the final price tag looks like--some things are going to fall out and then some things will stay in there. Just bigger picture, what is he trying to accomplish?

Dan Clifton (10:08):

What I would say is that the original proposal, which was $3.5 trillion over 10 years, when the House passed this bill through committee, we estimate it was over $4.5 trillion over 10 years. We haven't seen the last estimate for that, and there's a reason, because it was $4.5 trillion. Okay. Their goals really are severalfold. They looked at the pandemic response and they said, "Where were the holes in the safety net during COVID?" So number one was childcare. Number two was universal pre-K. Number three was the child tax credit, so that consumers have more income. And so the largest portion of what the Democrats are trying to do is on this social safety net, that's about a trillion dollars. Their second largest is on healthcare.

Dan Clifton (10:54):

As you know, President Obama passed what is called the Affordable Care Act or "Obamacare." During the pandemic we made those subsidies more generous to purchase health insurance, so their first goal was to lock that in. Their second goal was to get Medicaid to people in states that haven't expanded Medicaid--about 13 states haven't done that. And then you'll see Bernie Sanders talking about getting dental, vision, and hearing in Medicare for senior citizens, which is very costly. We think there will be a 1-year voucher for people to go out and buy dental within Medicare. And then on top of that, to pay for those healthcare initiatives, the Democrats have long wanted to get tough on drug pricing. And so they have a proposal that would basically allow the government to "negotiate." I'm saying that in quotes, "negotiate." Where if you don't negotiate, then you get hit with a tax of 95% on your drug sales. It's negotiation by Hugo Chavez type of way, saying that. But my point here is that the Democrats see healthcare as a big priority. This is a bigger healthcare bill than Obamacare was, and it's just one sleeve in this bill.

Dan Clifton (11:59):

Then the third big priority is climate change, where the Democrats are increasingly believing that we need more aggressive on climate change as we start to figure out how can we reduce emissions here in the United States. So they have a number of proposals in there to reduce emissions, such as a clean electricity standard requiring utilities to provide more renewables, and then lots of tax credits for wind, solar, battery storage, nuclear, EVs--electric vehicles--electric vehicle charging stations, the list goes on and on. Even biofuels are big winners in this bill. Their goal is to have this bill passed before Joe Biden leaves for Europe, which is November 1 or October 31. That's seems very unlikely, but that was their third priority.

Dan Clifton (12:46):

And then their fourth and fifth priority, which I don't want to minimize, are education and housing. What I would argue to you, if you're going to try and jam this down into a smaller package, one that's going to fit more with the political environment that we're in, is that education and housing provisions are likely going to get thrown out. Then the Democrats are going to have to figure out how to narrow down a lot of their child tax credit or their healthcare proposal. Let me give you one example. In the original bill, those healthcare provisions were for 10 years. Now they're going to be for 3 years. So just on the Affordable Care Act alone, that's going to save you $400, $450 billion by changing the length of the program. They're also going to put income limits on who can qualify for these programs.

Dan Clifton (13:31):

Do we really want rich people getting a $12,000 benefit to go buy a Tesla? Probably not. But do you want a middle-income person who's thinking about buying a car to be able to go and buy an electric vehicle with an increased subsidy? That's probably more in-line with Democratic goals. So you'll see that. And then when you pull all that together, you're probably going to get somewhere close between $1.5 trillion and $2 trillion, and then you look at that and say, "Okay, well they got the package size lower." If I actually take those provisions and extend them out over a period of time, we're probably going to be right back to where we started, but probably around $3 trillion. So it's a lot of budget gimmicks, it's a lot of games. Both parties do it.

Dan Clifton (14:08):

Senator Manchin is saying, "I'm not sure I want to be part of this," and thinks that more time is needed to get this bill done. But that's the essence of what the Democrats are trying to do in terms of this. Where they're running up against some speed bumps though, is inflation is going up and voters are increasingly blaming government spending for inflation. Supply chain issues are a big issue that aren't being focused on because we're so focused on this spending package. And as you know, it's a very, very limited majority where the Democrats can only lose three votes in the house, zero in the Senate. So this is a very complicated process that we're going through in trying to get a lot of this spending passed.

Greg Dowling (14:47):

We have the Human Infrastructure Bill, and that's big, it's complicated, and it's going to change every day from when we record this to when it's passed. We do have agreement--at least from a bipartisan standpoint--on the traditional infrastructure bill, but this is a really modern infrastructure bill. This isn't your dad's infrastructure bill. This isn't the Highway Act of 1956. What is actually in there and what are we paying for?

Dan Clifton (15:12):

In addition to this other spending package that we just talked about, you're absolutely correct, there's another trillion dollars here. The word trillion just makes my head spin.

Greg Dowling (15:21):

A trillion here, a trillion there.

Dan Clifton (15:23):

Now it's real money. This is like a traditional highway bill, like you referenced, but then we've put it on steroids and then we modernized it at the same time. And so the incremental spend that investors will see is about $550 billion. It's a historic investment. Fifty-five billion dollars for water. There's like 4 publicly traded water companies--it's a very small industry--and you're going to go dump all of this money in there. Seventy-five billion dollars for grid spending, because if you're going to have all this plug-in charging stations and all this kind of renewable energy, you're going to need to upgrade and modernize the grid system. And so the industrial companies that are very focused on grid-type spending are going to be huge beneficiaries of this. Then $110 billion on highways, money for broadband. We often joke there's $20 billion for port dredging. How many port dredging companies are there? But that allows bigger ships and tankers to come through. Rails, which are different than Amtrak.

Dan Clifton (16:20):

So it's across the board. It's a pretty big investment. It shouldn't be a very complicated bill to pass the House, but what we have going on right now is what I call mutually assured destruction. The bipartisan moderate Democrats in the House are saying, "Let's pass this infrastructure bill." And the progressives are very worried that if this bill passes, the appetite for all that social spending that we talked about will fall. So today there's not 218 votes in the house that you need to pass a bill for the infrastructure or for the social spending, and everybody's holding each other hostage. It all goes or nothing goes. And there's a real push from the president to try and see if he could get an agreement on everything so that he can at least get this infrastructure bill passed before he goes to Europe and then he can claim that he's making progress on his agenda. But I gotta tell you, you have 90 members in the progressive caucus, you had the president who was really with them for most of the time, and they're saying, "absolutely not." So they're going to have to figure out how to resolve that. But even the no-brainer stuff like the infrastructure is running into complications today.

Greg Dowling (17:28):

Yeah. That's the spending side of it. When we get to actually paying for this, we're talking about some of the largest increases in taxes since the late 60s. What does that look like?

Dan Clifton (17:39):

Again, I have to say that the tax bill that is being proposed is by far anything that we've seen over the last 50 years. And so what happens is people will say, "Hey, Dan, we raised taxes in 1993 and everything was okay." Or, "We raised taxes in 2013 and everything was okay." And I say, "Not all taxes are created equal." One, the size of this is much larger. The original Biden proposal was about 1.5% of the gross domestic product of the country. All of the tax increases we've done over the last 40 years are somewhere between 0.3 and 0.4 of a percent of the nation's economy. Okay. So one on size, two, what we are taxing. We are taxing capital formation and savings, and that tends to have the most negative effect on the economy. And so what Biden had proposed is really a couple of tax increases.

Dan Clifton (18:25):

The first is a major change to the U.S. corporate tax system. One, a higher corporate tax rate, which got a lot of attention, but what he was proposing was taxing worldwide income of U.S. companies. So as a company earns profit overseas, they would not only have to pay tax to the host government, they would also have to pay tax to the U.S. government. We would be one of the few countries in the world that double taxes foreign source income like that, and put U.S. companies at a major disadvantage. On the individual side, he was proposing to tax individual income tax rates 39.6. He was trying to tax capital gains and dividends at ordinary income tax rates, so you're talking about an over 40% capital gains and dividend tax rate. And a major restructuring of the estate tax--one that would move the effective tax rate on the estates from 37% to 61%.

Dan Clifton (19:14):

When you look at the totality of the proposals, Biden was not trying to repeal the Trump tax cuts, he was not trying to repeal the Bush tax cuts, he was literally trying to repeal the Reagan tax cuts from 1981. There's a lot of similarities between what Biden proposed and what happened in the 1968, 1969, and 1976 tax bills. So what you were starting to see is that that was probably a bit too much for Congress, that Congress is going to take these proposals and say, "This is new. I don't understand this. My constituents are upset over it. How do we do a tax bill?" And the more traditional tax bill came out of the House of Representatives. That tax bill raised corporate tax rates to 25% and raised the tax on multinationals but didn't create a multinational worldwide tax system, it had a top marginal tax rate consistent with what Biden wanted.

Dan Clifton (20:03):

But the capital gains rate was raised to 25% with a 3.8% Obamacare tax at 28.8, and just a simple lowering of the exemption for the estate tax. So the House bill was very what I call "plain vanilla," very different than what Biden was trying to do. We looked at it and we said, "Look, this is going to hurt earnings, this is going to hurt growth, but a lot of what's in this bill is somewhat manageable and can be dealt with by financial markets." What you are seeing today--and what you've been seeing over the last couple of days--is that the Senate and the Biden administration didn't get what they wanted, so now they're saying, "Okay, we want all these new tax increases. How do we do an unrealized capital gains tax on billionaires? How do we do a stock buyback tax?"

Dan Clifton (20:45):

When I pull that apart and I say to myself, "Okay, what is likely going to happen?" That 90% of what's going to happen is in the House bill. If you have to give something to the Senate, then it will likely be the restoration of an alternative minimum tax, both at the individual and corporate level. I've been calling these kind of like "backdoor tax changes." Maybe you're going to tighten up the tax credits on the foreign tax credit in the corporate tax code. I think there's going to be less focus on the rate moving forward and more focus on the deductions. And if you do that, you could probably get a more generous reinstatement of the state and local tax deduction as an offset to some of the income tax rate increases that are going to be put into this bill.

Dan Clifton (21:25):

But I just want to say I've seen smaller tax bills move financial markets. This is a bigger tax bill, and it is one that goes after multiple forms of capital taxation at once, so a company is going to be less profitable after taxes and your after-tax rate of return on stocks is going to be lower. Both of them are going to be done at the same time. People say, "Oh, it's not a big deal." We haven't done that since like 1952, okay? I'm not going to use the example of 1952 to say that everything is going to be fine. It just warrants some caution, because this is a whole new territory that we're in.

Greg Dowling (22:01):

All right. This is the time of year when we start working on our capital market assumptions for next year. How are these proposed tax changes going to impact S&P 500 earnings?

Dan Clifton (22:12):

Great question. Again, it all comes down to earnings. If you look at the consensus 2022 forecast for earnings next year on S&P, it's going to grow about 9% next year. It's been relatively flat for the last 2 months, so it's been stable, but those numbers are subject to change. Once you get all third quarter earnings, you'll see a pretty robust revision of what earnings are going to be. At that point, we'll start getting much more serious. But here's the way that we have identified it. We think there's going to be a 25% corporate tax rate. We think that there's going to be a 16.5% rate on multinational income. And when we pull that together with some smaller corporate tax changes, we find that the corporate earnings are probably going to grow 5% next year rather than 9% next year.

Dan Clifton (22:56):

So you're chopping off 4% off earnings. It's meaningful, but if you think growth is going to be good next year, then that's going to be okay. If for some reason the consensus is wrong and the economy starts heading south, then that 4% really becomes meaningful, because then you could be close to 0% earnings next year. And I don't think the market is priced for that. Alternatively, if we go in the other direction and the economy just goes up tremendously, then that 4% becomes even more manageable. So what I'm arguing to you is that the tax changes are a hit and they should be paid attention to, but they also have to be viewed in context of what the economy is doing at the same time.

Dan Clifton (23:35):

In terms of allocation, we actually think the market is completely offsides in terms of thinking about these tax increases, because there's going to be two types of tax increases: one on the corporate tax rate and one on the multinational income. When Biden released his plan, 60% of the earnings hit was going to be faced by U.S. multinationals, 40% by more domestic earnings. That House bill right now has a 13% hit on multinationals, not 60--13. And most of the hit is on more domestic-based companies.

Dan Clifton (24:07):

In the give and take, that's probably going to change a little bit and that 13% is going to go a little bit higher. But as the odds of a corporate tax rate have come down over the last 2 days based on all the news, it's the multinational selling off. And in fact, that should not be the case, it should be the other way around. So I just think that the market is just thinking about it a little bit differently, because they're based on what happened in April and the plan is changing and the winners and losers are changing.

Greg Dowling (24:32):

Interesting. We're going through all these different topics, and everybody has been talking about all these different infrastructure bills, but debt ceiling--are we just moving that to December? Are we going to have another fight in December?

Dan Clifton (24:43):

I think so. Now we have to raise the debt ceiling on December 3. The debt ceiling is a very powerful tool to mess with financial markets. Most of the stuff in Washington, we can just figure out, but the debt ceiling is a serious game. It is something I learned in 2011, that process is more important than outcome. I told my clients in July of 2011, "It will get raised. Here's the path forward to get raised. Here's how it's going to get raised." Everything just went crazy in the month of July, and then it got raised and there were all these other effects. So I'm very focused on both outcome and process. And it's the process that we worry about.

Dan Clifton (25:15):

The Republicans helped the Democrats raise the debt ceiling last time around. There are still a lot of Republicans who are upset at Senate Republican leader Mitch McConnell for allowing that to go through. So McConnell has zero bandwidth, zero political capital to help the Democrats raise the debt ceiling. You need 60 votes to raise the debt ceiling or there's 2 other options where you can do it alone. The first is the budget reconciliation process. It requires 51 votes, you've got to go open up a reconciliation window. The Democrats have been hesitant to go down that route largely because it creates an open amendment process. And largely because if they do it that way, they have to vote on a level of debt. "Do I want $4 trillion of debt?" Most members of Congress don't want to vote on $4 trillion of debt, they would just rather suspend the debt ceiling for a certain date, but you can't do that in reconciliation so they have been avoiding that.

Dan Clifton (26:03):

The other way to do that is you could break the filibuster for the debt ceiling and say the filibuster doesn't apply. That gives the Democrats greater flexibility, but there are certain senators who don't want to break the filibuster and that creates problems. So you are going to see a game of chicken. The White House believes that the Republicans will cave, just like they caved last time. You're going to see that the Senate leadership do not want to go down the reconciliation route, and the House says, "We don't care--we just want to get it up--if we've got to go to reconciliation." So I see all three sets of players in a different universe right now. That tells me there's going to be some risk in the short-term credit markets as we start to approach that date.

Dan Clifton (26:40):

Now we don't believe the date is December 3. One of the greatest stories that we've seen is the massive reduction in the budget deficit since March. The budget deficit's down about $1.4 trillion in the last 5 months. This is great news. What we think is going to happen is that as we get into December, taxpayers are going to start pulling forward their income into 2021, and that's going to create some extra cashflow for the federal government. It's going to allow this to go into January.

Dan Clifton (27:06):

If that doesn't happen, there are some drawbacks. We pass the bipartisan infrastructure bill, we immediately got to do a transfer to the general fund and it will start to drain some of those reserves. So if we have to raise the debt ceiling in December while we're debating this fiscal bill, put your seatbelt on for this. We think the market should more appropriately though, be pricing the risk in January rather than December, and right now the market's pricing that risk in December.

Greg Dowling (27:33):

So a question that I have that I honestly didn't think would even be a question at this point is: Will Jerome Powell be reelected?

Dan Clifton (27:41):

When I call my market-leading clients, clients that tend to be ahead of the trends, they are more focused on the reappointment of Jerome Powell than they are on this big spending package. I'll tell you why. I mean, it's just, you get these relationships sometimes that are just so beautiful they're hard to ignore. I'll be the first person to tell you that correlation is not causation, but you can go to the betting odds and you can look at Jerome Powell's odds of being Fed chairman, and then you can take the 2-10 yield curve or you can take growth vs. value stocks, and they're literally the same chart. This is amazing development in financial markets. What the markets are saying is that the most dovish Federal Reserve chairman of our lifetime is going to be more hawkish on inflation than if Joe Biden selects somebody else to be the Federal Reserve chairman.

Dan Clifton (28:28):

The volatility that is allowing us to see this relationship recently is all over these trading scandals going on at the Federal Reserve. And again, I'm not going to say whether people should have a right to do this or not, what the laws are. You're serving a government purpose, you shouldn't be doing that--that's the view amongst legislators. Janet Yellen is very committed to Jerome Powell being Fed chair, that's why Powell's odds are 70%. They used to be 85%. What has happened here is that Yellen has not been able to get Democratic buy-in for Powell's reappointment. Then you throw on the trading scandals and it basically just created another stain in the process. Interestingly, the people they want Powell replaced with--Lael Brainard--is actually in charge of overseeing the regional Fed presidents who were trading E-mini futures during a pandemic!

Greg Dowling (29:15):


Dan Clifton (29:16):

So like nobody is innocent in this and there's equal amount of guilt, and she's going to be faced with that if she's the pick. So those are the issues that are going around right now. What I would argue to you is that Powell has the votes in the Senate Banking Committee, he has the votes on the Senate floor, but he doesn't have the support of the Senate banking chairman, and that's where this volatility is coming from. If Powell got replaced, it's over that fact. The way I think about it is that the Fed is going to be more dovish next year, Biden has a chance to remake the entire Federal Reserve because he will have at least one open seat--he's probably going to replace Rich Clarida, who's seat comes up in January. There's talk that Randal Quarles is going to step down in December--that would give Biden the third seat. And then if he gets a fourth seat, which is the chairman, he can really remake the Federal Reserve.

Dan Clifton (30:04):

What the financial markets are telling you is that if those selections are made--particularly around the chairman--that that Fed is going to be more tolerant of inflation, they're more willing to keep short-term interest rates lower. That has important implications from a sector basis on financials and energy relative to growth. If Powell gets reappointed, then Powell will likely raise interest rates. That's probably going to flatten the yield curve, and historically that's been good for the growth trade when the yield curve begins to flatten. So it's counterintuitive to some of our clients, largely because low interest rates have been good for, say, tech companies. I just think the framework is changing in light of higher inflation. That pick is basically going to come in the next week or two, to be honest with you, because if you want to get Senate confirmation and the next person in when the seat opens on February 5, it's going to take some time. So if Biden is thinking about putting somebody else in there, now is the time to do it. He may actually wind up doing it before he goes to Europe.

Greg Dowling (31:05):

Is there some horse trading that goes on? Maybe Powell gets reelected but they give something to the progressives?

Dan Clifton (31:11):

Absolutely. There could be horse trading in either direction. From the progressive basis, they're going to get left-of-center economists for those three other seats that are there, ones that are more focused on employment than inflation. I think that's going to be the only way Jay Powell would be able to go through. On the other side, the progressives are taking a really big haircut in this big fiscal package. Of all the dreams of the left, universal child credit payments and free community college--all that is going out. And so the question is, is there a tradeoff that they get a new Fed chair who's much more progressive in exchange for taking the haircut on the spending package? I think that's been an interesting speculation swirling around Washington recently, as we start what I call the "great shrinking" of this fiscal package.

Greg Dowling (31:57):

Yeah. Just fascinating how all these things are really tied together.

Dan Clifton (32:00):

Everything is connected in Washington, everything.

Greg Dowling (32:02):

I think historically--at least in recent history--the incumbent president, they lose some seats, right? What is the projected magnitude? Is it going to be bigger, smaller, or about the same? And what does that do to the next three years? Like what can a Biden administration get done in the next three years?

Dan Clifton (32:23):

After the last election I just stopped talking about it. What I realized is that people in Washington were already onto the next election, our clients were already on to the next election. So I get kind of forced into it, but we're now at a point where you have a good color of what's going to happen. About a year out, you can really kind of put bookends around potential outcomes. Let me first say that nearly every president has gotten wiped out in their first midterm election. There are only two that have actually gained seats, that was George W. Bush after 9/11 and FDR in the Great Depression. There's a lesson from that. People say, "Oh, the economy has to be good." Yeah, you want a good economy rather than a bad economy, but if you actually did the analysis, it's actually a worse economy leads to better outcomes for incumbent presidents.

Dan Clifton (33:06):

Both 2002 and 1934 were pretty bad economies that we were in. And that's where the seats were won. Great economy for Trump in 2018 and he got wiped out. The average number of seats a president loses is about 28 seats. The last 2, Obama and Trump, were much larger. Obama was 63 seats, Trump was about 43 seats. So we've been seeing wider swings in more recent years. And what is the big factor that drives midterm elections? Well they're referendums on the incumbent's first 2 years in office, and the president's approval rating is highly correlated to the number of seats that you lost. So if you plug in Biden's approval rating now, he's down by about 40 seats. Now we don't think that the Democrats are gonna lose 40 seats. There's another factor going on, and that is that independent voters haven't fully embraced Republicans like you would expect when the president's approval rating comes down.

Dan Clifton (33:59):

A lot of that is just some remembrance from Trump. They're like, "Look, we didn't want Trump. Now you want us to go back there? It's tough to do." So I think the Democrats are probably going to lose about 20 seats in the house. This is a redistricting year, but Democrats can only afford to lose 5 seats. The Republicans can basically redistrict 5 seats. What you see happening in the off-year elections are extremely telling for what's going to happen in the midterm election. We're facing a Virginia governor's race on November 2, and that election has already swung 8 to 10 points. Where Biden won by 10, that race is tied today. What I try to do for my clients is just show them that if the country is really swinging 8 to 10 points, that would wipe out 2 congressional districts for the Democrats.

Dan Clifton (34:46):

By the way, New Jersey has moved five or six points as well. Now we expect the Democrats are gonna win in New Jersey, but if New Jersey moves five or six points in this election, that's a sign that the Democrats could probably lose two seats in New Jersey. So off-year elections alone are showing you that four of the five seats can go in two states. It's telling you that there's a wave developing that Biden is definitely going to have to overcome. Biden's numbers went down because of COVID, but COVID is getting better and Biden's numbers aren't going up. There's a very strong correlation between Biden's numbers going down and GDP estimates coming down. So the economy, inflation... It's the first time in my lifetime that I've ever seen more voters worried about inflation than I have seen them worried about unemployment, first time. These are longer-term issues that are not going away, and that's why I think the president--his numbers may bounce from here, but I think he's in an environment where voters are going to demand change. Continuing this political volatility that we referred to at the beginning of this call, where it just keeps changing every two years. It's just a symptom of our politics and a symptom of being in a low economic and income growth environment.

Greg Dowling (35:54):

Let's assume that the projections are correct and they lose maybe 20 seats or so. What does that do to his agenda for the last 2 years? Is he just a lame duck president and we have to wait another 2 years to get something done? Or are there other things that you think the Biden administration will do through executive order or some other means?

Dan Clifton (36:12):

First, let me say that American voters are fickle. They elect the president, they give him a majority, two years later they wipe them out. And then usually two years later, they reelect them. Now that didn't happen for Trump. It didn't happen for Jimmy Carter or George Herbert Walker Bush. But usually once Biden's on stage fighting with Mitch McConnell and Kevin McCarthy, his numbers go up. Right now it's Biden with Pelosi and Schumer, and they always look like they're up to no good and they're talking about trillions of dollars of spending. So it's hurting him right now. Sometimes getting the opposition elevated helps, but that first year of divided government has not been a good year. That's when we had the big debt ceiling fight in 2011. That's when the Democrats started impeaching. What was amazing is when we were at your conference in September of 2019, the Democrats basically said the night before that they were going for impeachment.

Dan Clifton (37:01):

Those are the things that happen in that third year of a presidency. The irony is that the third year of a presidency is the best for the S&P 500 in the 4-year cycle. You usually get a big selloff into the midterm election. And the S&P 500 has not declined in the 12-month period from the midterm election, 1 year later. So that third year is amazing because we get caught up in gridlock. They may kind of kill each other and stuff, but it's actually been good for stocks. Then when we get past the primaries in year 4, then all of a sudden everybody wants to work together and we actually get a lot done in presidential election years. But in terms of substantive policy, it's just budget trench warfare. How do you get the budget passed? Do you make a deal--a little bit more defense spending for a little bit more social spending? Those are the types of things that happen. And that's then going to force Biden into the regulatory structure, particularly as it relates to climate change, given his view that there's this urgent need to be dealing with climate change.

Greg Dowling (37:56):

Gotcha. No, that's helpful. So it seems like maybe the one issue that both Republicans and Democrats agree on is China. Talk to us a little bit about that just on the geopolitical front. You mentioned China a little bit earlier, but where are we with that?

Dan Clifton (38:11):

We're at a very important inflection point with China. I just want to be clear: at the beginning of every administration, every side is going to try and test you and they're going to draw red lines out, so some of this is normal. A lot of it is not normal. The idea of openly talking about taking Taiwan, doing beach exercises--like these are things that were just never discussed five or six years ago. The taking of Hong Kong, the taking of Crimea years ago. And so our sense here is that there is going to be greater geopolitical risk at a very different way than we're used to. Since the Cold War ended, there was no real geopolitical risk. It was buying opportunities when those happened.

Dan Clifton (38:48):

What we are facing today is both a trade war and a geopolitical war that--maybe it's not physical, but it is cyber, it is definitely on the intelligence side. Think about equity markets in the lead-in to the election, 2020, you can take Donald Trump's odds of winning the election and you can literally put the Vietnam stock market over the Chinese stock market. As Trump's odds went up, Vietnam outperformed China, as Biden's odds went up then China outperformed Vietnam. That was the market saying, "Under Trump, the U.S. is going to decouple from China quicker than under Biden. " And it worked. Biden won, the dollar is going to go down, China is going to go up, buy emerging markets. It was a beautiful scenario. And we get to February and the market said, "Nope, I don't think so. There's something here that needs to change." What you started to learn was that there was no difference between Biden's policy and Trump's policy, and that means that it's the official U.S. government policy now, regardless, and as you mentioned, it's got wide bipartisan support.

Dan Clifton (39:55):

And the Chinese saw that Biden is making much more progress with our European allies than Trump was in rallying them against them. You can almost time these periods, right to the China crackdown of what they're doing--both economically and on human rights. There's been a lot of action in that this year. I would argue that Xi Jinping and China are the aggressor; four years ago, Trump was the aggressor. So that environment has changed. Now I think we're in an environment of learning how to coexist--almost like it's a bad divorce and you got to figure out what you're doing with your children. That means there's going to be enormous pressure on companies to be able to pick sides here.

Dan Clifton (40:35):

If you look at what the big loser in the stock market was, are the companies that are most levered to China. U.S. companies that are most levered to China, they are down for the year. Stocks are up like 15% for the year. They are down for the year. And it won't last continually, but you are going to see that decoupling continue to move away and it, at some point, is going to trigger a response that we're going to have to deal with. Now, do I think that China is going to invade Taiwan? Probably not. And probably not before the 2022 Olympics. But I wouldn't be surprised if both sides are gaming for events to happen in 2023 and 2024 just so that neither side is caught off guard, should something happen. And I say that from my gut, I don't have any real actionable intelligence from that, but that's my sense of where policy is going.

Dan Clifton (41:26):

So this has moved fairly quickly and much faster than we would ever have anticipated. And it will have very important complications for U.S. companies that have built supply chains there. The best way to think about is, if you're in China, you're going to be doing work for the Chinese consumer. Anything that you're producing in China today that's not going to China, is going to go somewhere else. So we think India is going to be a big winner from that. Vietnam in the short run. But we think India could wind up being a long-term winner from that. And if you look at Vietnam and India's stock market this year, they've just had a tremendous year, particularly on a relative basis with China.

Greg Dowling (42:02):

Yeah. It's interesting. One, it's a good reminder that we do have the Beijing Winter Olympics here in '22. But it's also interesting that... You mentioned Crimea. I believe the Russians took Crimea right after the Sochi Olympics.

Dan Clifton (42:17):

It was like the day after. Right? And so you say, "Well, why wouldn't China want to do something before?" Well, everybody will boycott the Olympics. But very importantly, the Chinese digital currency will be released at the winter Olympics, where they're going to try and get all the Olympians hooked on their currency as they begin to make a long-term push to become the reserve currency and replace the United States. Now we're talking decades on that, but that's the goal.

Dan Clifton (42:41):

And they're very much into symbolism. You look at 2008, we have these magnificent Olympics in Beijing. Meanwhile, Fannie Mae was going out of business here and Putin was invading Georgia the country at the same time. I just remember the Western chaos versus the Eastern party. And that was China's way of saying, "This is where the future is." So they believe in that symbolism. They're trying to create that symbolism for 2022.

Dan Clifton (43:05):

That's why I don't think they'll act before then, but it could happen like the day after, to your point, the same way Putin did it with Crimea. What I say to my father--he was born in 1945--is that you lived in the greatest period of world prosperity and peace from 1945 to 2008. Those days are over now, where you're in a much more contentious environment. Growth is much less, geopolitical issues are much less, and we're changing borders. We haven't really done that since World War II. And that creates a whole new set of issues. I don't want people to construe this as overly bearish comments, it's just the challenges that we're facing are different. The framework is changing and we just need to adjust to it.

Greg Dowling (43:45):

We're going to do a couple of fun questions here at the end. Though way too soon and probably very wrong, give me your prediction on a couple of the Republican candidates and maybe the Democratic candidates for the next presidential election.

Dan Clifton (43:59):

First, Donald Trump owns the Republican party. He's remade it to his model. What I am seeing from Republican voters this year is a push for more practicality in their candidates. They want the Trump populism, but they want somebody who can handle a pandemic, should that issue arise on them. And so you look at Virginia: Glenn Youngkin. He is the former chief operating officer--I think he might've been even CEO--of Carlyle Group. He's a rich, private equity guy who won a statewide convention in Virginia, which usually brings out the more extreme parts of a party when you're elected through a convention. Okay. And by the way, he is like tied as we're speaking about this right now in the last two polls that have come out. He is tied. Okay. And he's getting outspent.

Dan Clifton (44:40):

If Youngkin wins, I think then you're going to see the Republicans say, "We could be more practical here." So when you do this exercise, you've got to say to yourself, "Who would fit that mold for the Republicans in 2024?" I look at the governor of New Hampshire, Chris Sununu, as somebody who fits that mold. I look at somebody like Senator Tim Scott from South Carolina, as somebody who fits that mold. The big names that are out there, they'll be a big part of the conversation, but usually the big name is not the person who makes it at the end of the day.

Greg Dowling (45:12):

So the Trump, DeSantis, the Nikki Haley's. Their names are there, but it's probably... Your guess, the way-too-early, probably wrong forecast, are probably a little bit more practical version of that.

Dan Clifton (45:23):

Absolutely. And again, we're all guessing here, we could be way wrong and people could make fun of me four years out for saying this and Trump wins all over again. And Trump would be formidable if he got in. But my sense here is that people want to win, they're hungry to win. And they're hungry for those policy changes. In a lot of ways, Trump's going to be viewed as right. He's going to be viewed as right on China, he's going to be viewed as right on trade, on a lot of these issues that people thought he was crazy about. The Biden administration has accepted the same position as Donald Trump has on these issues, so now it's not so crazy, but it was crazy four years ago. I think that's becoming part of the Republican agenda and other members are going to accept it.

Greg Dowling (45:59):

So does Biden run again?

Dan Clifton (46:01):

You know, I don't think so, but Biden has to say that he is running again or he's a lame duck. The same way Donald Trump has to say he's running again or he's just not relevant anymore. Both of them are going to be in it until they can't be in it anymore. The problem that I see for Biden is that the Afghanistan withdrawal--a policy that most Americans support--saw a terrible execution and the lack of energy to sustain himself in that position once we got into it. I just don't think that voters see him as wanting it. I look at Vice President Harris--she probably wants to be president. We always thought Andrew Cuomo was going to challenge her before he ran into his problems, if she was going to be the person. I just read the newspaper today and I see that Jared Polis, the democratic governor from Colorado is talking about cutting property taxes today, a month ago he was talking about cutting income taxes.

Dan Clifton (46:51):

Those are interesting ideas. But clearly the progressives dominate the party, just the same way the conservatives dominate the Republican party, and voters are going to be looking for who is going to be able to build upon what Biden did the same way they're looking upon how who could build upon what Obama did 12 years ago. It's a constantly evolving process with the party bases, and you just gotta be careful not to overreach. But I wouldn't be surprised if you see the country coming a little bit more into the middle after a few years here of kind of going out to the extremes in both parties.

Greg Dowling (47:22):

Interesting. Maybe last question for you is: If you have an interest in this and you want to cut through all the spin--so you want to avoid some of the talking heads on MSNBC or Fox News--what do you read? What do the pros read?

Dan Clifton (47:33):

So there's a couple of really good things out there to read. The first is that we generally read Punchbowl. By the way, part of that is free, you can sign up right there. Jake Sherman is a former political reporter. Really handled the debt ceiling at a much different level than all of the big media reporters at the major newspapers. He's a total insider in Washington and I do think that he continues to cover the best coverage. For example, he's the one who figured out that it was going to be 3 years of healthcare--we always thought it would be there, everybody writes the same article and his is different--rather than 10 years of health care. So I would go with Punchbowl.

Dan Clifton (48:05):

On Twitter, there is a person named Liam Donovan. Most people have never heard of him, he worked for Senator Cornyn, the number two Republican in the Senate. If you are into the reconciliation negotiations, there is no one better on the internet to read. I can't believe his stuff is free, because my clients would pay for that type of analysis that he is doing. On certain days he just makes me look bad because he's just so good at it. So there are definitely different ways to be able to do that.

Dan Clifton (48:34):

And then we read all the tip sheets because what we realize is that communications people are giving one snippet to Axios, one snippet to Politico, one snippet to the Washington Post, and so our process from a public reading perspective is we go through all the major newspapers, all the Washington tip sheets, and then we have our own type of work, proprietary work, that we're doing. We pull all that together and we're ready to go before everybody is up by getting through those. What you realize is that the Wall Street Journal and the Washington Post and the New York Times write the same story. They have that one paragraph that is different than the others. You just pull that out and make sure that you know everything that's going on. We often ask ourselves, "Why does somebody want me to know this? Why did somebody give this to a reporter that wants us to know this?" And then we try and interpret it from there.

Greg Dowling (49:20):

Well, you heard it right there. They read it so you don't have to. They put it all together. This was absolutely fantastic, and we sure covered a lot. Thank you very, very much for sharing your insights on D.C. and politics.

Dan Clifton (49:32):

Thank you, Greg.

Greg Dowling (49:34):

If you are interested in more information on FEG, check out our website at and don't forget to subscribe to our communications so you don't miss the next episode. Please keep in mind that this information is intended to be general education that needs to be framed within the unique risk and return objectives of each client; therefore, nobody should consider these to be FEG recommendations. This podcast was prepared by FEG. Neither the information nor any opinion expressed in this podcast constitutes an offer or an invitation to make an offer to buy or sell any securities. The views and opinions expressed by guest speakers are solely their own and do not necessarily represent the views or opinions of their firm or of FEG.

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