What will Democrats do with the U.S. and what should investors do?
Based on the Georgia Senate races, in which my friends who call themselves “feminist” cheered for the idea of someone identifying as a “woman” losing her important job, it looks as though the Democrats will be in charge of the U.S. (Regarding today’s events at the Capitol, an immigrant friend said “it’s like BLM just with white people.”)
Now that elite insiders are ruling again, what should we do as investors? To answer that question, first we have to try to figure out what the Democrats will do.
Let’s assume the first priority for the Democrats is to stay in power forever. The simplest way for that to happen is by ramping up low-skill immigration, which has been at the rate of more than 1 million low-skill migrants/year for more than 50 years (Pew). A migrant single mom in public housing is not going to vote for a white male Republican empty suit! A 70-year-old chain migrant parent who consumes $40,000/year in Medicare is not going to vote to trim the Federal budget. The procedure for becoming a citizen is not frozen into the Constitution, right? The Democrat-controlled Congress can streamline citizenship into a 1-year web-based process. That will guarantee a ton of new loyal Democrats for the 2022 elections. Ramp up low-skill immigration to 2 million/year to ensure continued power indefinitely.
(How can we be sure that this is the right strategy for Democrats? The Republicans thought it was, which is why they sought to curtail immigration during the dictatorship of the Trumpenfuhrer.)
The American working class will be the biggest losers (Harvard study), paying higher rents and receiving lower wages, with a massive transfer of wealth to upper-income Americans (the transfer was already at $500 billion/year 10 years ago, according to the Harvard eggheads). Life will be good for the rich, who will pay the same prices for Ubers, restaurant meals, etc. that they would pay if they went to some of the world’s poorest countries. The rich will receive higher rents for the urban real estate that they own and pay lower wages to the workers they employ (either directly or through corporations whose shares they own).
Can one trade on this expectation? We can’t short working class people or go long rich people, though.
Similarly, Bigger Government means the biggest enterprises will thrive. Many of the small businesses that accidentally survived 2020 will be destroyed going forward as increased regulation requires companies to “Go Big or Go Home.” But small businesses are not publicly traded, so there is no obvious way to short them.
How about buying a REIT that holds urban apartment houses? My theory for why urban Americans vote for Democrats while rural/suburban Americans vote for Republicans is that Big Government spends most tax dollars in cities: public housing, hospitals, government jobs, etc. In 2016 for example, Donald Trump won only 4 percent of votes in Washington, D.C., the ultimate example of a city that gets richer when government expands. The low-skill migrants will migrate primarily to cities where taxpayers will fund their housing for the next 100+ years (“means-tested” public housing programs of various kinds, not “welfare” when you pay $125/month, including utilities, for a 3BR in Manhattan or San Francisco!). Increased demand and the river of federal cash will drive up rents even for apartments not occupied by migrants.
Bigger Government is good for cronies. Here in Maskachusetts, for example, we are floated on a tide of federal cash subsidizing Big Pharma Big Higher Ed, and Big Health Care. (Where does the money come from? Medicare/Medicaid and tax subsidies for health insurance, $66 billion for the federal Department of Education, most of which ends up subsidizing student loans and grants) We can’t buy stock in universities or hospitals, though, as they are nominally non-profit. How about the companies that give money personally to Democrats, just before and just after they are in office? “Biden’s treasury secretary pick Janet Yellen earned more than $7 MILLION in speaking fees in 2 years from financial firms and tech giants including Goldman Sachs and Google” (Daily Mail) gives some insight into which publicly traded companies might look forward to favorable treatment.
(A neighbor’s house, photographed from the helicopter by my friend Tony, part of my poorly received #InThisTogether series on Facebook:
Note the solar panels that will be funded by middle-class taxpayers in Maskachusetts.)
One of the best features of the U.S., from the point of view of folks in New York, California, and other high-tax states, was that residents of lower-income lower-tax states had to subsidize rich Democrats in higher-tax states via the deductibility of state and local taxes. This program was cruelly ended for 2018 with the Trump tax law. It seems reasonable to expect that one of the first things a Democrat-controlled Congress will do is restore unlimited deductibility for state and local taxes. How to trade based on that expectation, though? Buy the Case-Shiller Index for houses in New York and San Francisco and short the South Florida sub-index? A house in New York should have a higher value if property tax and personal income tax associated with living in that house become deductible once more.
The Democrats are the party of the American rich. From the NYT:
Joe Biden has outraised President Trump on the strength of some of the wealthiest and most educated ZIP codes in the United States, … In ZIP codes with a median household income of at least $100,000, Mr. Biden smashed Mr. Trump in fund-raising, $486 million to only $167 million — accounting for almost his entire financial edge.
(see also “Biden is vastly outspending Trump in the final week of the 2020 race” and “Trump spent about half of what Clinton did on his way to the presidency”)
If the Democrats are funded by the rich, presumably the rich will be getting much richer in the coming years under Democratic rule. We can’t short the middle class and buy the rich. But maybe we can buy companies that make the things that the rich want. Let’s consider American cities. They’re on track to have Chinese levels of population density (with all of the new low-skill migrants) combined with Nigerian levels of infrastructure quality. Rich people will be happy to pay to escape these crowded virus breeding grounds. We already saw this to some extent in 2020. Luxury oceanfront real estate boomed. My friend who runs a Gulfstream charter operation had his best year ever. Could we trade on this expectation by purchasing shares in General Dynamics, Gulfstream’s parent company, and in luxury hotel chains?
How about Bitcoin? I personally think that Democrats’ stress on LGBTQIA+ issues is a way of delivering social justice without having to reduce personal spending. What if I’m wrong as usual, though, and President Harris does raise tax rates dramatically? We should expect a big rise in Bitcoin (but maybe this is already priced in via the recent lift? BTC is 3X what it was in October) as Americans try to move money offshore and/or out of reach of the IRS. (I personally know a fair number of folks who have big unrealized gains in BTC that are inherently hidden from government and financial institutions.)
One of my savvier friends (he doubled his wealth during coronashutdown, for example, by betting (with public equities) that Americans would be champions at cowering in place)):
If you hold cash, it’s about 3% value loss per year, accounting for inflation. I want to take out a huge mortgage to lock in a 2.5% 30 year rate. No way inflation stays below 3%.
Maybe this will be an even better strategy if Democrats lift limits on mortgage interest deductibility, which is a question of basic fairness. The current mortgage interest deduction limit is $750,000, which is a 1,200 square-foot apartment in a righteous area and a 4,000 square-foot single-family house among the Deplorables.
How about a simpler strategy of investing in Asia and selling off stocks that are mostly dependent on the U.S. economy. Kids in China spend 2020 in school; kids in the U.S. spent 2020 on Xbox and will probably stick with Xbox/Netflix for 2021. If education drives wealth, we have to expect Asia to perform better than the U.S.
Very loosely related… a 2008 photo of one of the whale sharks at the Georgia Aquarium, funded by Trump supporter and Home Depot co-founder Bernie Marcus.
Readers: What are your best ideas to profit from the return to rule by elites?
Related:
- Programs to raise female wages will secure a voting majority for Democrats? quotes the Economist: “unmarried women are spectacularly loyal to the Democrats … The ‘marriage gap’ dwarfs the sex gap, by which women as a whole have long favoured Democrats.” (if women can earn a lot in the labor market they won’t bother getting married; another way Democrats can benefit is by making divorce lawsuits more lucrative; if more women are divorced that means more votes for Democrats, but this depends on state-by-state initiatives)
