Larry Berman

Berman's Call

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We are about one year from the 2020 U.S. election. From our view, the market is so focused on U.S.-China trade, and it cannot see the forest through the trees. A regime change in the U.S. could have massive market implications that are nowhere near priced in or even on the radar. Like Wayne Gretzky would say: "Skate to where the puck is going, not where it’s been." 

Elizabeth Warren has a policy and plan for everything. She is now a front-runner to be the Democratic nominee for president in the 2020 election. Polls suggest that, in a head-to-head contest, more Americans would vote for her than for U.S. President Donald Trump. The betting pools, a better measurement of sentiment than polls, increasingly have her in front.

There was a good piece in this week’s Economist that I thought would be interesting to address on this week’s show.

It’s clear from understanding Warren's policy platform, that she hopes to remake American capitalism. She has a detailed plan to transform a system she believes is corrupt and fails ordinary people. Not that far off the message of Make America Great Again, when you think about it. I agree with a few of her ideas. I’ve suggested similar policy ideas in recent years. As The Economist points out, at its heart, her plan reveals a systematic reliance on regulation and protectionism—it’s not the answer to America’s problems.

The polarization of the have nots and have yachts are not being well served by current policies to stimulate the economy and we see the political world moving away from the centre in many economies. America has higher inequality than any other big rich country as measured by the Gini coefficient. To me, this is an abject failure of policy and politics as we know it. 

According to The Economist, some Republican and Wall Street critics claim that Warren is a socialist. She is not, according to The Economist because she does not support the public ownership of firms or political control of the flow of credit. Instead, she favours regulations that force the private sector to pass her test of what it is to be fair. While Democrat rival Bernie Sanders is an unapologetic self-proclaimed socialist, most of Warren’s and Sanders' policies are similar.

The scope of the regulations Warren proposes is jaw-dropping. Banks would be broken up, split between commercial and investment banking. Tech giants such as Facebook Inc. would be dismembered and turned into utilities. In energy, there would be a ban on shale fracking (which, for oil markets, would be a bit like shutting down Saudi Arabia), a phase-out of nuclear power, and targets for renewables. Private health insurance would be mostly banned and replaced by a state-run system. Private-equity barons would no longer be shielded by limited liability: instead they would have to honour the debts of the firms in which they invest.

Bottom line, the stock market will not like it. But can she pull it off? Remember, Trump tried to repeal and replace Barack Obama’s Affordable Care Act while Republicans controlled both branches of Congress and could not get it done. Warren does not want to cut, she wants to spend, and the fiscal Conservative part of Congress is AWOL.

Here are some of the details of her pledges:

• A 15-per-cent social security levy on those earning over US$250,000
• A two-per-cent annual wealth tax on those with assets over $50 million 
• A three-per-cent tax for those worth over $1 billion 
• A seven-per-cent extra levy on corporate profits

In a Big Brother kind of way, the government would loosen owners’ control of companies. All big firms would have to apply for a licence from the federal government, which could be revoked if they repeatedly failed to consider the interests of employees, customers and communities. Workers would elect two-fifths of board seats.

New requirements for trade deals would make them less likely. She’s a protectionist. This is something China will notice.

Her government would “actively manage” the value of the dollar.

Raising the federal minimum wage to US$15 over five years may be a reasonable way of helping poorer workers.

Very aggressive plans for clean-energy targets would make a big difference. This is a huge Trump distinguisher. I think this is where she pulls a huge vote from the 16 million 14-17 year olds that are now voting age and do not like Trump’s view on the environment and on guns. This may be the biggest factor supporting a Democrat in the White House.

The Economist estimates that if the entire Warren plan were enacted, America’s freewheeling system would suffer a severe shock. Roughly half the stock market and private-equity owned firms would be broken up, undergo heavy re-regulation or see activities abolished. And over time Warren’s agenda would entrench two dubious philosophies about the economy that would sap its vitality. The first is her faith in government as benign and effective. Government is capable of doing great good but, like any big organisation, it is prone to incompetence, capture by powerful insiders and Kafkaesque indifference to the plight of the ordinary men and women Warren most cares about. When telecoms firms and airline companies were heavily regulated in the 1970s, they were notorious for their stodginess and inefficiency. Warren’s signature achievement is the creation in 2011 of a body to protect consumers of financial services. It has done good work, but has unusual powers, has at times been heavy-handed and has become a political football.

The other dubious philosophy is a vilification of business. She underrates the dynamic power of markets to help middle-class Americans, invisibly guiding the diverse and spontaneous actions of people and firms, moving capital and labour from dying industries to growing ones and innovating at the expense of lazy incumbents. Without that creative destruction, no amount of government action can raise long-term living standards.

I believe one of the biggest economic and social problems is separation of class. The “trickle down” polices of recent generations have not helped much in the bottom half. Bridgewater Associates Founder Ray Dalio has done some great research in this area as I have highlighted on past shows. As the bottom half becomes more disenfranchised, you can bet policies will shift more toward left-wing socialism.

I have previously forecast that Trump would be impeached in the final year of his presidency, which may play out. U.S. Vice President Mike Pence would not get the job done for the Republicans and Mitt Romney or John Kasich would not likely either. But if someone could convince Nikki Haley, former U.S. ambassador to the UN and South Carolina Governor, to run as a Republican presidential candidate if Trump were to be impeached, it would be a game-changer.

Come out to my Fall roadshow moving across the county over the next month. I’ll show you the important roll fixed-income plays in your portfolio and some ideas how to deal with the low rate environment and the potential inflation in the future. I’ll also elaborate on U.S. Fed policy and elections and how that may swing your portfolios around heading into the 2020 U.S. elections.

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