- The Election
- What could that mean for markets?
- And finally, to AI
The Election
I have to say I was very impressed with Vice President Harris’ debate performance. She conducted herself very well.
What could that mean for markets?
Well, clearly we should expect higher taxes, both in terms of personal and corporate income, and likely, for capital gains too. Having said that, I also think she would listen to other voices of reason, and that some of the touted increases and measures would not be as extreme in practice as some currently fear. For example, I think that taxing unrealized capital gains would be an operational nightmare, could unfairly punish public versus private markets, and might raise problems for ownership dilution and control – I think it would be challenged constitutionally. Corporate tax on the other hand would likely go up, as would personal taxes, although possibly with higher bracket thresholds. The fact is though that she seems to have moderated on many of these issues, and don’t forget that budgets and tax legislation only need a simple majority to pass, so there’s likely no filibuster or safety valve. Bottom line, I think that a Harris win may represent the path to a more conventional outcome. One where, when you have a fiscal problem – and we do – the simple solution is to raise taxes.
In terms of a Trump win, then I think much of the economic focus will be on tariffs, and his plans there. And, again, the president has plenty of power in that regard. In fact with the Trump tax cuts set to expire next year, investors need to be mindful that everything is on the table. Now, with my training in economics and finance, I don’t love tariffs. I think they are fine to wield as a short-term geopolitical tool, but not as a long run solution to shoring up a country’s finances. And even though I suspect Harris is a 55-60% favorite at this point, consider this very subtle, but very important point – all things equal, tariffs are inflationary, they increase the cost of imported goods for Americans. This is despite the assertion that it’s the exporting country that pays them. What would that mean? It would mean that a Trump administration would want a stronger dollar to combat that inflation, and this at a time of more dovish monetary policy which, again all things equal, should lead to a weaker dollar! It’s potentially a big problem and yet the U.S. Federal Reserve (Fed) is starting a cutting cycle just before the election despite this uncertainty.
And finally to AI
It’s conference season at the moment, and this is where the title of this blog comes into play. As a firm we watch these gatherings very carefully indeed, and, if you listen to some of the tech participants, you’d better believe that the future is very bright indeed – in fact, forget sunglasses, I think we need welding glasses instead! Some of the sentiment being voiced is just extraordinarily bullish with chip price sensitivity seemingly taking a back step to insatiable, and borderline indiscriminate, demand. Put simply, there seems to be a thirst for graphics processing unit (GPU) chips at any price. And, alongside chips, there’s a growing recognition of the energy demands from AI data centers. We are talking an unprecedented leap in electricity generation with huge repercussions. Firstly, our energy bills will increase, I wouldn’t be surprised by around 5% per annum given that around 20% of the growth in energy demand likely will come from the data centers alone. Secondly, it will mean a much more diverse set of energy sources – think wind turbines, think natural gas, and think nuclear. I wouldn’t be at all surprised to see seismic shifts in energy infrastructure provision (we have the natural gas, but we need to extract and transport it), perhaps fewer nuclear plants being decommissioned, and possibly renewed interest in the creation of a U.S.-wide carbon market. I’m bullish on Utilities because of all this, but aware that there are major risks with infrastructure build outs which reliably take longer and cost more than forecast. This is a very important space to watch as we digest, and understand, not just the AI revolution itself, but it’s equally influential knock-on effects.
– David
