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Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, as well as two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays).
Welcome to the Confluence Investment Management biweekly geopolitical report for October 7, 2024. I'm Phil Adler. As election day nears, this week's report explores foreign policy differences between the 2 US presidential candidates, which could have investment implications. Our guests are Confluence associate market strategists, Daniel Ortworth and Thomas Wash. Gentlemen, you've studied the candidate's statements on foreign policy as as well as their records on these issues while in public office.
Phil Adler:Are you confident that you have enough for accurate predictions?
Daniel Ortwerth:Hi, Phil. I'll take that one. We really should steer clear of the idea that we can accurately predict the specific foreign policy actions of a president. There are just too many variables concerning unfolding global events and the domestic pressures that a president experiences. Rather, we focus on understanding a candidate's core philosophies and stated top priorities to give us a sense of the direction each one will try to take on foreign policy if circumstances permit.
Daniel Ortwerth:As we have discussed in previous reports on US foreign policy, we agree with renowned scholar Walter Russell Mead's framework for 4 US foreign policy archetypes, Jeffersonians who prefer a minimalist and non interventionist foreign policy. Hamiltonians who seek a strong relationship between government and business as well as a strong emphasis on international trade. Jacksonians, who prioritize the fundamental security of the American homeland, the basic needs of the working class, and the avoidance of foreign wars. And finally, the Wilsonians, who see it as a moral obligation for America to promote liberal political values and governance systems in the rest of the world. To gain a sense of what any candidate will do, we try to understand him or her with respect to those 4 types and combine that with their stated priorities as opposed to promises they might make on specific issues.
Phil Adler:Well, Daniel, you've been focusing on the Trump side of the equation, and you place former president Trump in the Jacksonian tradition. Can you explain that a little bit more?
Daniel Ortwerth:Sure, Phil. Trump's rhetoric in office and on the campaign trail has consistently communicated a populist theme, voicing strong support for the basic needs of working people such as jobs and wages while railing against the interests of traditional American elites. He has also claimed to oppose American involvement in, as he puts it, endless foreign wars. It all comes together in his motto, America first, and we are not at all surprised that the core of his political support is blue collar America.
Phil Adler:As you look at mister Trump's previous term as president, which policies in the foreign policy arena stand out to you as Jacksonian?
Daniel Ortwerth:Probably the most striking example was his strong anti immigration stance. Calls to build a wall along the Mexican border and deport illegal aliens went together with claims that immigrants threaten American jobs and in the case of supposed criminal elements the safety and security of American communities. 2nd, Trump justified his introduction of tariffs against Chinese imports with the claim that the Chinese were using unfair trade practices and artificially low prices to undercut American products, which in turn cost American jobs. He demanded the renegotiation of the North American free trade agreement with Canada and Mexico for similar reasons. Finally, as evidence of his aversion to foreign military involvement, we point to Trump's threats to withdraw from the North Atlantic Treaty Organization and to reduce US troop presence in Korea under the pretense that our allies have been free riding on American security guarantees.
Phil Adler:Now broadly speaking, what foreign policy avenue can we expect if former president Trump wins the election?
Daniel Ortwerth:We expect a full resumption of the kinds of policies that I just mentioned. He has continued to express the same views on the campaign trail this time around, including a hard line on immigration and economic conflicts with China. And he has said that he would direct a complete reassessment of the level and type of US commitment to European defense. Addressing some of the main issues that have emerged since he left office, Trump has called for a quick, if not immediate, end to the Ukraine war. He does not see our involvement as serving American interests.
Daniel Ortwerth:We should reduce or eliminate our material support of Ukraine and shift the burden to Europe. As concerns the Middle East, Trump sees little if any value in involving the US and the Palestinian issue, and we would not expect him to take a direct hand in trying to solve the current conflicts in Gaza or Lebanon. Rather, we would expect him to resume efforts to facilitate normalization between Israel and other regional countries, especially Saudi Arabia.
Phil Adler:Well, we'll look at some more specific foreign policy issues in greater depth in a moment. But first, turning to vice president Harris, your report suggests that she seems to fall into the Hamiltonian category of foreign policy. Now, Thomas, you're focusing on vice president Harris's policies in this discussion. What are the characteristics of a Hamiltonian president?
Thomas Wash:Great question. So let me start off by saying it was very difficult to label Harris because there's just limited information about her. While we settled on Hamiltonian, some on the team viewed her as more of a Jeffersonian and others as a Wilsonian. To resolve this issue and eliminate bias, we relied on the adage, personnel is policy. So one of her key advisors, Rebecca Listener, coauthored a book called An Open World, which outlined foreign policy strategies for a fractured world.
Thomas Wash:Now this book is probably the closest thing we have to a so called Harris doctrine. While we cannot definitively ascertain Harris's exact thought process, we are confident that the principles outlined in the book will significantly shape her decision making. That said, here are the reasons why we felt confident in eliminating the other two archetypes. While Wilsonians would argue for US intervention to protect democratic principle, Listener suggests a more pragmatic approach, advocating that the country prioritizes its own interests in the face of global instability. Moreover, while Jeffersonians often favor a minimalist or even isolationist foreign policy, listener champions a more active role for the US involving working with allies to achieve certain shared objectives.
Phil Adler:Well, as you look at the Harris record, what policies stand out as Hamiltonian?
Thomas Wash:Well, you know, although she hasn't explicitly opposed tariffs, her decision to label them as a Trump sales tax during the debate with the former president offers some type of insight on her stance on global trade. While tariffs are viewed favorably by the American public, taxes are not. Therefore, her strategic lumping of the 2 together suggests that she may personally have a negative view on tariffs, particularly as a tool to drive trade policy. Furthermore, Listener, in her book, an open world, advocated for public private partnerships where government and business collaborate to achieve foreign policy objectives, and she frequently mentions that the US needs to keep the world open to protect American interests. This approach echoes Hamilton's vision of a need to use US foreign policy to protect US commerce.
Phil Adler:And and again, continuing along this line, broadly speaking, what foreign policy avenue can we expect if vice president Harris wins?
Thomas Wash:Despite this often being overlooked, she may be slightly more hawkish than people realize. In her acceptance speech for the Democratic nomination, she emphasized the need for a stronger, more lethal US military, which is a notable choice of words as lethal typically implies deadly force, signaling a possibly more aggressive foreign policy stance compared to the previous administration. Her emphasis on military strength likely reflects a desire to reinforce US global dominance, ensuring that other nations prioritize maintaining ties with the US. Additionally, this approach may be intended to reassure allies that the US is prepared to defend them if necessary. Moreover, listeners' book focuses heavily on the need for increased research and development, which could come in the form of more collaborative projects with allies.
Phil Adler:Now as promised, let's focus in on a couple of the key issues. First, China. Thomas, what are the similarities and differences between the two candidates?
Thomas Wash:Both candidates view China as an enemy and believes it poses a significant threat to US interests. This shared perspective shapes their foreign policy approaches. President Trump has come out in favor of imposing strong tariffs, while Biden and Harris administration has preferred the use of export controls. Now regardless of who wins the presidency in November, it is unlikely that steps taken toward China will be undone. However, there are stark differences in their approach.
Thomas Wash:Donald Trump is likely to push for a decoupling as he views Chinese manufacturing as a threat to US industrial prowess, while Kamala Harris appears to be less committed to an outright split between the two countries. While we do see these 2 presidential candidates moving in the same direction regarding China trade, the pace of progress is likely to be faster under Trump than under Harris. Regarding military strategy, neither Trump nor Harris is likely to favor direct confrontation with China if it can be avoided. However, Trump may be more inclined to respond aggressively if US soldiers are harmed, while Harris might take a broader approach, including situations where American companies or strategically important allies face serious threats.
Phil Adler:Daniel, I'll direct the Ukraine question to you. Similarities and differences between the two candidates on Ukraine?
Daniel Ortwerth:Well, Phil, I mentioned earlier that Trump does not view the Ukrainian conflict as being central to US core interests, but this might be the foreign policy issue concerning which the two candidates are furthest apart in their positions. Trump has stated that Ukraine needs to strike a deal with Russia essentially immediately, and that this deal would probably require the Ukraine to make hard concessions, maybe even the potential loss of territory. Meanwhile, Harris has stated full support for Ukrainian victory, continued US support, and we really think that she would probably continue the Biden administration's approach to this conflict.
Phil Adler:Are there other issues where you can identify stark differences between the two candidates?
Daniel Ortwerth:Phil, I think that the obvious one other than the war in Ukraine is probably the war in Gaza and the broader Palestinian issue. We would expect Harris to try to directly engage the US in the effort to resolve the conflict, and that could include restrictions on assistance and support of Israel. Whereas, as I mentioned earlier, Trump would probably minimize direct US involvement and provide very strong support for Israel.
Phil Adler:Your report this week identifies personnel who may be named to key positions in each administration. It is it's interesting reading, and our listeners can peruse the list in the written report available on the Confluence Investment Management webpage. But I'd like to move on right now in our remaining time to investment implications. What investment opportunities, Daniel, do you see if former president Trump wins?
Daniel Ortwerth:Phil, all indications point toward a potentially dramatic acceleration of the ongoing trend of global fracturing and the formation of competing US and China blocks in a second Trump presidency, the investable world would shrink along the lines of the emerging blocks. For US investors, access to the Chinese and China aligned markets would not be the same as it was in the post Cold War world. Supply chains and manufacturing bases would become less globally integrated as companies adjust the locations of their operations and sources of supply to maximize availability instead of minimizing cost. We often hear this called reshoring or friend shoring. Inflation is likely to be higher and more volatile than in the past if Trump wins, which will likely weigh on stock valuations and hurt bond values.
Daniel Ortwerth:This would normally also lead to higher interest rates, but a second Trump administration might try to dampen this effect by undermining the independence of the Federal Reserve and artificially hold rates down. Finally, the US block will continue to reindustrialize, providing opportunities in related sectors such as manufacturing, energy, defense, and artificial intelligence.
Phil Adler:And, Thomas, what are potential investment opportunities if vice president Harris wins?
Thomas Wash:Although it may come as a surprise to many, I expect a pro market foreign policy under her leadership. Her integration of business and diplomacy could drive a surge in government contracts for outsourced resource and development, especially in cybersecurity and AI. Tech companies specializing in these fields may experience significant growth as the administration aims to integrate advanced technologies into military applications. Uranium could also benefit from her administration's anticipated push for nuclear power to increase electricity output and support chip manufacturing, resource intensive industries, such as automotive, may face challenges due to stricter regulation as he pushes a climate change agenda.
Phil Adler:Thank you, Thomas and Daniel. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security. Our audio engineer is Dane Stoll.
Phil Adler:I'm Phil Adler.