Client Update, September 15, 2024: The Economic Implications of the Election

“Kamala Harris and Donald Trump are shredding basic economic good sense.”

writer Roger Lowenstein in The New York Times

The U.S. presidential election, now less than two months away, is dominating news cycles and conversations. It’s also exhausting those of us who live in battleground states. Here in Pennsylvania, which may even end up as the tipping-point state, according to some forecasts, a deluge of relentless political advertising has long since started hitting the airwaves.

But ads are not what we’re here to discuss; the economic implications of the election are. Last month, financial journalist Roger Lowenstein wrote an op-ed in The New York Times that captured our own thinking about the economic proposals of both candidates: not great!

Certainly, we have a preferred candidate this election cycle, and we may return to that question in our letter next month. But today, our focus is purely on the economic ideas presented by Harris and Trump, and the bottom-line is that both candidates are squandering an opportunity to do real economic good given that neither of their proposals (so far) present workable or realistic solutions. Price controls (Harris) don’t work. Neither do tariffs (Trump).

By and large, unless the private sector is truly gasping for air (as it did after the Great Recession and after the pandemic first hit), then we probably want the government to just get out of the way. The public sector certainly has its place; it’s great for providing a safety net after major unexpected disruptions and for making investments in things the private sector won’t risk or can’t manage by itself (public investment in researching and developing the Covid-19 vaccines comes to mind as an example).

But most of the time, the U.S. has an economy that works fairly well, and sometimes doing nothing is the best and more effective path. However, the candidates know that “do nothing” won't satisfy voters, which is why we get proposals that don’t do anything more than sound good on paper, if that.

Let’s start with Harris. Her price control proposal seems grounded in the assumption that grocers are unambiguously villains in the arena of rising prices, as she has argued her price fixing scheme is designed to counter price gouging by food retailers. But it’s not at all clear that that’s what has been happening. "Even though profit margins for grocery stores have gone up," New York Federal Reserve researcher Thomas Klitgaard wrote in July, "the increase appears to be only a small contributor to the rise in food prices relative to the increase in their operating costs."

In other words, we’re talking about a low-margin business with an incredibly complex and price sensitive supply chain. Price controls are usually counter-productive in this kind of situation. A 2020 policy research paper from the World Bank summarized price controls as “good intentions, bad outcomes.” As the paper’s authors write: “[P]rice controls can dampen investment and growth, worsen poverty outcomes, cause countries to incur heavy fiscal burdens, and complicate the effective conduct of monetary policy.”

The problem is that when pricing is divorced from the dynamics of supply and demand, waste, shortages, and stagnation tend to result.

But it’s not like Trump’s economic ideas would work either. As Lowenstein writes, “Tariffs are a tax, paid by American consumers. They make the country poorer. When Mr. Trump tried them [during his Presidency], that resulted in no new net jobs, and American consumers, including employers that depend on foreign steel, were stuck with higher prices, hurting homegrown industry.”

What’s worse is that Trump’s own description of how tariffs work seems divorced from reality. He seems to believe that foreign companies or the U.S. importers would simply absorb the cost of the tariffs rather than raising prices to account for them. That never happens; instead, as Lowenstein says, they would function as an added tax paid by the American consumer. If the goal is to relieve Americans of increases to the cost of living, tariffs would have the opposite effect.

Why are both candidates presenting such unworkable economic plans? Our guess: it’s more about riling up the electorate than solving economic challenges. Politicians are going to spend the time remaining until the election trying to make us believe that if we don’t vote for them, then the sky is going to fall.

Let us return to Pennsylvania, where we are getting flooded with commercials and ads. Trump and Harris collectively spent roughly $42 million in Pennsylvania alone in the three weeks between July 22 and August 15 alone, according to The Wall Street Journal. Far more is planned; between the two campaigns, they will likely end up spending hundreds of millions of dollars on ad buys here.

In turn, this kind of nonstop fearmongering can have real (negative) impacts on financial decision-making, so we suggest a level of caution when it comes to making major financial decisions during this period. There's a lot of emotion and political campaigning that are getting people to overvalue what's happening today and maybe undervalue what's happening tomorrow. According to a study from CFRA Research, which analyzed stock market performance going back to 1944, September is typically the worst month for the stock market in presidential-election years.

So how should investors handle this situation? UBS Global Research suggests that “investors should diversify portfolios to hedge against risk into [the] election.” They still expect a stock market rally by the end of the year, but they argue that the presidential election brings with it a lot of stock market volatility and unknowns about the future. They’re not wrong about the volatility; but let’s remember that UBS is built on creating financial transactions, and the more of those transactions they can manufacture, the better they perform. It’s important to understand the incentives behind some investment advice.

The real key is to maintain focus and stay level-headed. Our own liquidity decisions right now are based more on the fact that there's an absence of ideas that are high quality and discounted enough to fit into our value-based investment framework. It’s also important to remember none of us are prophets. The prevailing economic belief in 2016 was that, if Trump got elected, the market would crash. True, the markets fell immediately after his election, but they also then rallied almost immediately. The expected economic disaster never materialized. None of us knows what’s going to happen this month, next month, or for the rest of the year.

In short, the best thing we can do is not let the constant barrage of ads and 24/7 news make us so afraid of the future that we make poorly considered, panicked decisions in the present. Good companies work in multiple environments; if we’ve chosen our investments wisely, they’ll weather the volatility of the election season without us having to constantly second-guess ourselves.

Speaking of volatility, we’d also like to return to another topic we haven’t addressed in a while: crypto. The last time we directly addressed the world of cryptocurrency was over three years ago. At that time, we recommended caution. More recently (last year), we mentioned cryptocurrency as a good example of a “narrative-driven investment.” Since then, however, we’ve seen significant developments, so it may be time to revisit the subject, at least briefly.

Specifically, crypto seems to be making serious inroads into mainstream financial spaces. For example, Morgan Stanley is becoming the first major bank willing for its financial advisers to “actively sell Bitcoin exchange-traded funds (ETFs) to select clients.” Why? Well, one study suggests that nearly half (45%) of Baby Boomers now prefer Bitcoin over gold in their investment portfolios. In other words, there’s an expanding appetite for crypto products even among mainstream investors. Earlier this year, Google even relaxed ad guidelines that once severely limited the promotion of cryptocurrency-related products.

On the political front, Trump, who once called Bitcoin a “scam,” now extols the virtues of cryptocurrency. Not to be left out, some political watchers believe (correctly or incorrectly) that Harris has been hinting at a “pro-crypto pivot.” To be fair, such a move isn’t outside the realm of possibility. President Biden signed an executive order directing the government to explore the possible creation and use of a “U.S. Central Bank Digital Currency,” or CBDC. Some countries—El Salvador stands out as an example—have even adopted Bitcoin on a national level as a currency.

With so much movement seemingly favoring cryptocurrency, has our thinking about it as a financial or investment vehicle changed?

In short, no.

If we go back to Warren Buffett’s first principles of investing, it’s key that we understand something before investing in it. And we just don’t quite understand the value proposition behind Bitcoin specifically or cryptocurrency more broadly. We’d put it in a similar vein as owning art; there’s an intangible, immeasurable quality to it that works for many investors but, in general, not value investors. We need to be able to see the intrinsic value to understand if it has a long-term horizon.

Many of the pro-crypto moves noted above are sort of risk-free. For Google relaxing ad guidelines, they realize that cryptocurrency is gaining wider adoption, but allowing more ads doesn’t mean they’re getting into the business themselves. What do they have to lose by allowing a few more ads? Whereas they do have an opportunity to gain new ad revenue. Similarly, Biden’s executive order doesn’t commit his administration or the federal government to anything; directing the government to research some initiative is as anodyne and noncommittal as a President can get. And let’s be realistic here: the U.S. is extremely unlikely to introduce a competitor currency to the U.S. dollar, which continues to serve as the world’s reserve currency.

Politicians like Trump or Harris can hint at or say anything they want; it’s campaign season. Of course they’re not going to want to alienate potential voters; statements of support today don’t commit them to any specific actions in the future. Even Morgan Stanley’s new offering isn’t as much of an investment into crypto itself as it might appear. Wall Street is in the business of putting products out there not necessarily based on merit but based on their ability to sell it and make money.

At GDS Investments, we have never transacted in crypto. On a purely theoretical level, we understand the arguments behind it. We just don’t understand the underlying value proposition well enough—if, indeed, there is any underlying value prop—to put our clients’ money into it. Billionaire investor Charlie Munger even goes so far as to describe crypto as “absolutely crazy, stupid gambling.”

Our thinking: If a client were to call and ask, why do we own XYZ, we should be able to articulate the value argument in five to ten minutes: something like good management, decent quality core business, little financial risk (e.g., leverage), discounted relative to fair value. We cannot do that with cryptocurrency. To us, most pro-crypto arguments boil down to selling excitement when the argument needs to be able to stand on merit alone. So, we have something where hype is substituting for essential valuation.

Perhaps that will change, and the current (highly volatile) cryptocurrency market will mature and resolve into clear use-cases and value props. Until then, we are not willing to make a bet with our money and certainly not with our clients’ money.

Indeed, GDS Investments has always been committed to owning proven businesses with clear arguments behind their value, like high unleveraged return on capital, industry leading market share, and shareholder-friendly leadership which manages for the long-term. Together, we will continue to focus solely on identifying, understanding, and acquiring companies that offer the best combination of quality and value.

With warm regards,

Glenn