The Blog

FBI: Full Ballot Impact?

Nervous markets

Some foreign investors are ignoring polls predicting a Hillary Clinton election win and are being very cautious when it comes to US stocks. They have been burned by the British referendum on leaving the EU when all the polls and betting offices indicated the Remain camp would win, but British voters in the end decided to vote for Brexit.

To be fair, polls have been tightening and markets clearly do not like it. The VIX index, a measure of expected US stock market volatility, is close to levels last seen in the aftermath of the Brexit vote. The Mexican peso has been losing ground because of Trump's promises of building a wall along the Mexican border and curbing free trade. Another sign that markets are getting anxious about Trump is the rise of the price of gold; the metal is regarded as the ultimate safe haven.....

Despite all the fuss about this latest turn in the email saga, the story will have little effect on the presidential race. Clinton's inbox has already been debated ad nauseam in living rooms, restaurants, bars and on the internet.

FBI director Comey's announcement of renewed investigation is just confirmation for those who already distrusted Clinton, but will probably not add many new voters to the Trump camp. The same applies to the new stories - some of them clearly put out in a hurry without much checking - on Trump's tax dodging practices, his ties with Russia and his views about and actions regarding women.

October blow to cause Clinton KO?

Still, there are a couple of reasons why Trump could surprise the world and financial markets next week:

> A completely new issue, so a real November surprise, that would hurt Clinton could maybe rock the polls and have a deciding effect on the outcome.

> Polling bureaus and prediction markets have some embarrassing forecasting experiences lately.

> Some people may be uncomfortable with admitting that they will vote for Trump. We have seen the same with populists in European elections.

> I could be wrong about the impact of the Clinton emails. Maybe they will dominate all the talk shows and headlines in the coming days in such a manner that many swing voters will eventually decide that Clinton really is untrustworthy and reluctantly opt for Trump. In fact, Clinton's chances have already slipped 15 percentage points within two weeks.

Yet, Clinton is still my pick to emerge victorious after coming Tuesday. The electoral map clearly favors her: at the moment of writing, Clinton leads with 246 likely or certain Democratic electors as opposed to Trump's 164 with 128 toss up electoral votes. In other words, Trump would have to pick up swing states representing at least 106 electoral votes or he would have to win over clearly democratic states.

Moreover, the so-called October surprises often do not have a deciding influence on the race, because most voters have already made up their mind so late in the race. Political analyst Henry Enten had a look at a handful of so-called October surprises in previous presidential races and they show at most only a modest effect on the polls.

Gridlock inevitable

Therefore the most likely scenario still is a Clinton White House from January 2017 onwards. But that doesn't mean all will be well. The House of Representatives will almost certainly remain in Republican hands and the Senate is too close to call. It still looks like the Democrats have a good chance of flipping the Senate with Republicans having to defend 24 of the 34 seats up for grabs. It would take only four wins by Democrats in swing states (plus a Clinton victory since the VP casts the deciding vote) to put control of the Senate back in Democrats' hands.

Even when the Democrats succeed, they will only enjoy the slightest majority and together with a GOP House it means that Clinton will have a hard time accomplishing major goals like enacting large infrastructure spending, reforming education financing, providing a path towards legal citizenship for illegal migrants and making Obamacare more sustainable and efficient.

What's more, Clinton will only have less than two years to make her mark since the Democrats' extremely favorable Senate map in 2016 will be reversed in the 2018 midterm elections. Republicans will be defending just 8 out of the 33 seats that will be up for re-election. And usually midterm voters flock towards the party that has lost the previous election.

So, divided government looks guaranteed in the coming years. That does not bode well for economic stimulus from the government's side as history shows heightened partisanship reduces the likelihood of fiscal stimulus packages.

It's the hard knock White House life

Apart from fiscal stimulus, I have my doubts about Clinton handling free trade. During the campaign she has spoken out against the Trans-Pacific Partnership (TPP) free trade agreement, but many observers thought that to be mainly campaign rhetoric since Clinton has always been in favour of free trade and globalisation in general. Yet, we should take notice of the powerful left wing of the Democratic Party with Bernie Sanders and Elizabeth Warren. They will make sure that Clinton cannot get too cozy with Wall Street and international businesses otherwise she is bound to face a revolt within her own party. A Democratic equivalent of the Tea Party will not emerge anytime soon, but it will not be as easy as some assume for Clinton to revert back to her pro-Wall Street and pro-free trade stances after entering the White House.

Therefore with the polls tightening and investors getting more nervous about a Trump victory, it is to be expected that markets will stage a relief rally on Wednesday when Clinton emerges as the next president. But that rally could prove to be short-lived as reality sinks in and markets realize that the presidency will be far from a walk in the park for Clinton. She will have to deal with a majority of Americans who do not trust her and with a Congress that will jump on any chance to make life difficult for the most hated Democrat in recent memory.

It is unlikely that Clinton will face impeachment (for starters, presidents can only be impeached for actions committed during their presidency), but there are plenty of indications that Republicans will pursue multiple investigations into Clinton once she enters the Oval Office, including perjury, obstruction of justice, bribery, fraud, corruption, and illegal use of a non-profit (the Clinton foundation). Few will envy a President Clinton. Maybe not even Trump.