What do bond markets know about the election?

0:05Pushkin. Ten-year bond yields are up and Wall Street thinks that's because there's a rising probability of a second Trump presidency. Today on the show is the bond market telling us something about the election. This is Unhedged, the markets and finance podcast from the Financial Times. I'm Rob Armstrong, coming to you from Unhedged World headquarters in downtown New York City. And today I'm joined by Derek Brower, who is the FT's politics editor, U.S. politics editor. US political news editor. US political. Get it right. Full title. So Derek knows more about American politics than almost anyone because he has to read and edit all of the FT's coverage.

1:02I know everything. Everything about US politics ever. Okay, Derek. So here's what they're saying on Wall Street. The 10-year bond is selling off. As a reminder to listeners, when bond sell-off yields rise, we're seeing the 10-year yield rise. That may be down to that strong jobs report and growth. However, when I speak to bond managers on Wall Street, when I speak to bond analysts on Wall Street, the first thing they talk about is that this is a Trump trade. Right. And they think this is a Trump trade because we might get a red sweep, which means crazy spending. It's a Trump trade because Trump doesn't care about deficits at all.

1:41He's perfectly happy with deficits. Nobody cares about deficits. Nobody cares about deficits. I mean, that's - Yeah, yeah, yeah. But he's one of the everybody who doesn't care about deficits. Yeah. He's going to limit supply of labor by stopping illegal immigration and throwing immigrants out of the country. Yeah. And finally, he's going to put tariffs on, which are going to restrict the flow of goods. All of those last two are inflationary. And so rates have to be higher for this hotter and more inflationary economy everyone thinks Trump is going to create. So let me ask you, the first question is, has it actually become more likely, according to the polls or the betting markets or anything else, in the last couple of weeks that Trump is going to win?

2:23Is that something that's going to happen? Well, the betting markets, those are two different things, the betting markets and the polls. The betting markets are pretty sure that Trump is going to win. And we can get into the reliability of them or not. Yeah, let's do. Well, they weren't super reliable in 2016, but neither was the street or anybody you asked among pollsters or anything. They may have been a bit more reliable in 2020, but that was an exceptional election because of the pandemic. Right. So we don't know, but they're pretty convinced at the moment that Trump is going to win this. The polls have been drifting marginally in Trump's favor in the past couple of weeks.

3:02And if you looked at them all, you would see kind of a sea of red in the crucial seven swing states. Yes. Just remind us which ones those are. Michigan. So Michigan, Wisconsin, Pennsylvania. Those are the three blue wall states. Yeah. So-called because the Democrats used to be able to rely on them almost every election. Yeah. Trump kind of pierced that blue wall in 2016. Then Georgia, North Carolina. Those are two southern states and Sunbelt states that are close. And then Arizona and Nevada. Nevada. And you see a sea of red in those seven. The only one in our, like in the FT's poll tracker today, the only one where Harris is up, and these are tiny, tiny margins, but the only one of those that Harris is leading in is Michigan.

3:49And it's by like 0.5 % or something. So why isn't this sort of open and shut under those circumstances? Because the polls, I mean, it's so close. It's so close. These are all within the margin of error. That's the first thing to say. And we just don't know. There are huge pockets of each of these states where we don't know how they're going to vote. They could be decisive. And these margins are so tiny that whether it rains on election day or whether people get out of bed grumpy or not could affect them. And these are all sweet. And also, by the way, as ever in a U.S. election, the fate of America and possibly the world is going to be decided by a bunch of people who haven't been paying attention so far.

4:32These undecided voters. So it's really, really hard to tell. Yes. I want to come. I want to. I do want to get back to the financial implications of all this. but I want to dig in on the polls a little bit more. 2016, we all learned that there was something badly wrong with the polling. Yeah. Is there good reason to believe that the polling techniques and methodologies have improved in the intervening years? The pollsters would say absolutely. They're doing a bunch of things. They're doing this thing now where they ask people who they voted for last time, Which is a way that they think allows them to control for the shy Trump voter, which was a thing in the past.

5:15Whether the shy Trump voter still exists is another question. But remember, in 2022, in the midterm elections, this was after Roe versus Wade. Yes. There was a big vote that was unexpected for the Democrats. Yes. Trumpy candidates, MAGA candidates underperformed in that election. Underperformed. And the ones that Trump endorsed in particular seemed to underperform. So, I mean, frankly, who knows? What we can say is the electorate is really clear that the economy is the biggest issue for them. That comes up in all the polling, including ours. Yes. Our FT Michigan Ross poll is clear about that. The economy is the biggest issue.

5:53The next thing that they constantly complain about, the voters, is inflation. Well, not just inflation, but the legacy of inflation, i.e. high prices. Yes. How expensive everything is in this country, which everybody knows. Yeah. We've talked about that a lot on this show. Drives people crazy. And as you wrote about in that excellent piece you did a couple of weeks ago from the shopping mall in Philadelphia, that is a big deal. If you're paying$10 for ice cream in a mall, it's crazy. And everybody knows it. Everybody knows that. And they constantly complain about that in polling. And this reminds me.

6:27I mean, it has an echo of the 1980 election when it was Carter versus Reagan. And it was very similar in that inflation was coming down. You were what, in your early 20s? Yeah, I was 35 years old then. And the election was held. Inflation had fallen, but we were still operating in the shadow of inflation. Right. That's the thing. And if the economy is the decisive issue, the polling on the economy is really bad. It was terrible for Joe Biden before he dropped out. Yes. It improved a bit for Harris. and funnily enough the more people have learned about her plans it seems the less favorable they are to them and now our own poll uh this week showed that trump had retaken the lead on who americans trust most on the economy yes that's our splash in the paper today i guess that's that's right and then the journal also the waltz journal has some more polling which shows that on the economy again most important issue it's the economy stupid once again right on that issue the polling is terrible for for harris frankly the reason that we can't be certain even with those economy things is that the democrats hope and believe there is a huge swell of women who are going to decide this election and it's going to be the same thing that gave them a good showing in 2022 in their midterms, and that is concerns about Republican or Donald Trump's restrictions on abortion rights.

8:01And they think that that will overwhelm the economy side of things. And the economy is improving, et cetera, et cetera. So they think that they can neutralize, or they're hoping that that vote from women neutralizes the polling about the economy that would suggest that she's going to lose. So that's what we're kind of watching for when the results roll out. Let's turn to the policy stuff. The consensus on Wall Street, as I said, is remarkably strong that Trump will be inflationary in these various ways. From your point of view, from the point of view of the FT coverage, is that right? So again, it's, we'll get a red sweep.

8:45Anytime you have a sweep, red or blue, that leads to higher spending and higher deficits. And then on top of that, you have immigration and tariffs about which Trump is enthusiastic and are in theory inflationary. What's our coverage on that been saying? What's your feeling about those issues? Well, we have been covering the tariff thing because our readers care about that a lot. He wants to impose tariffs and we're what, 10 to 20%, somewhere in that range. Yes. Across the board, then 60%, 100%, whatever. He says different things, different times. And can he do that by himself? Well, that's a debate.

9:22Probably not. Some people think he can. So it's a legal debate about whether he needs to pass a law or can do it by executive action. Right. So which leads us back to the red sweep. We've talked about the odds of Harris versus Trump. What does our polling say about the odds of a sweep, which would, of course, make it easier for Trump to get his tariff and immigration actions through? Well, I think the safest prediction is – none of these are safe – but the safest is probably that the Senate goes Republican because it may come down to this race in Montana where the Republican is ahead. This is the race that I think is probably the most expensive per vote in the history of elections.

10:10Yes, because there's four people in Montana. Is it three now or four? Yeah, there's three or four people and six cows. Six cows and a zillion dollars being spent on their votes per person. Yeah. No, I mean, it's extremely hard to get a cow to vote Democratic, in my experience. Which is why they're bombarding them with TV ads. It is an incredible story, actually. We wrote about it. It's this Senate race between Tim Sheehy and John Testa, the Democrat. And there's a lot of money being spent on that one because it might decide the future of the Senate and the future of American democracy, et cetera, et cetera.

10:45So there's a lot being spent. But anyway. So the Senate will go Democratic but by a small margin. No, the Senate will go Republican. I'm sorry. Seems likely to go Republican. Seems likely. There are a bunch of other races that, you know, the Senate depends on the size of what they get, majority and so on. Or maybe they don't. Who knows? But that's kind of the least controversial claim. The House is different. The House, I think the Democrats are hopeful in the House, partly because they happen to be running against a bunch of swivel-eyed lunatics and some really, really weird candidates who I think by and large have disgraced the Republican caucus.

11:22Some of them are running again. George Santos is absolutely kind of - Yeah. Unbelievable story. Unbelievable story. So he's gone. He's gone. There are a lot of moderate Republican, so-called moderate Republicans in New York State, for example, who won seats in kind of marginal democratic areas who are in a bit of trouble this time, I would say. So the Democrats are more hopeful there. So it's very possible that you get a split in Congress. Okay, so that's the most likely outcome, which makes it more difficult for Trump to achieve. But there is a chance... If he's going to legislate for stuff. There is a chance that he could, by executive fiat, or whatever they call it, he could impose quite stringent tariffs.

12:14Yes. Well, I think there'll be lawsuits and there'll be challenges, but that is disputed. But yes, yes. I think that's what he thinks he can do, and he will definitely try it. The reason I press you on this is because the Wall Street consensus that Trump is the inflation candidate strikes me as a little too pat and possibly biased. I don't know if people outside of the Wall Street world know this, but Wall Street is relatively democratic. It's a New York institution. It's quite blue. And also New Yorkers, who a lot of Wall Street people are fine, Trump, vulgar and unattractive, and they don't invite him to their dinner parties.

13:01Right. So there's a certain amount of New York snobbery involved too, which would naturally incline people who work on Wall Street to like a story in which Trump screws things up and generates inflation. So I wonder if they are exaggerating the risks of a Trump presidency, of very high deficits, of stringent tariffs, and of big crackdowns on immigration. I don't have a dog in this fight, as you can tell from my accent. But what I would say is there are a bunch of surrogates out there. You know, Howard Lutnick, Cantor Fitzgerald guy, Scott Bessent, ex-Soros guy, John Paulson, hedge fund guy. So these are big donors.

13:45Big money Wall Street people. Right, of Trump. And they are, I think their message to the street is a bit more plain vanilla. He's not going to be, his bark is going to be worse than his bite on tariffs. Yeah, best since we had a piece on him in the FT. And as far as I could tell, his claim was that Donald Trump is secretly Ronald Reagan. Right, exactly. Yeah. I mean, everybody – this is the thing with Trump, by the way. Everybody kind of projects their wishes onto this. Seize the Trump they want to see. Because he doesn't really believe in anything. He doesn't – I don't think it's pretty safe to say he doesn't think deeply about these things.

14:19He just thinks instinctively. And so people project onto them what they think he's going to be like. But then on the other hand, you have J.D. Vance, who is pro-Lina Khan. He's a protectionist. So there is an argument that he will have a lot of influence in the administration. And he is a true believer, so they say, in this kind of protectionist stuff. But that's the tariffs thing. And by the way, on the inflation side and on the supply side and whether he's inflationary, let's not forget that what nobody's talking about is pumping trillions of dollars into the economy like has just happened. Yes.

14:52Which was the kind of source of the inflation. Of course. One could argue. So Trump could be held back a bit by Congress. He could be less severe. I'm just kind of making, building the case here. Yes. Not necessarily agreeing with it. He could be less severe than the language suggests. Yes. And then he also is really, really, really focused on trying to bring down energy costs, which are an expensive input and have been super expensive. Yes. For a period of time. I think gasoline prices are 40 % higher, have been 40 % higher under Joe Biden, or there are now than when he entered office. They've been coming down now.

15:26They're under$4, which is kind of the magic level now. Yeah, yeah. $3 about in New Jersey. Yeah, yeah. So that's a bit better, but they have been higher. It's better, but they're higher. I mean, they were much slower under Trump. Yeah. Energy costs were lower. He went through, I mean, he oversaw or he was president while there was a historic oil price crash. So that kind of helped with things. Oil price literally cost, like, was negative for a while, the oil price. So that helped bring down the energy costs in the economy. And there was a pandemic, et cetera, et cetera. So it's not kind of a fair comparison.

15:52But he does focus on bringing down energy costs, which he thinks have been inflationary. Yeah. And he's probably right. He's probably right. Puts and takes. Is he going to be as inflationary or not? I mean, it's debatable. So let's try to wrap up this discussion. I think we're talking about a lot of things that are kind of on a knife edge or a margin. But let's kind of go through and sum up. One, the polls have gotten a little stronger for the Republicans. A little bit. A little bit. All within the margin of error. Yes. With huge uncertainty. Yes. Anybody who calls it right now is an idiot. Yeah.

16:25Okay. That's very clear. The betting markets are strongly Trump, but we're skeptical. Yeah. Okay. That's number two. And the Wall Street consensus that Trump is the inflation candidate might be a little too simplistic. Let's go through just summarizing the reasons for that. So on the first one, do you want to go through all three of them? Yeah, yeah. On the first one, look, on the polling, I would say I'm so uncertain about it that you could see a blue sweep, i.e. Harris could sweep all of the swing states. Or you could see Trump do it. The only thing that I trust as a journalist, as an editor who's been sending people out across the country for months, is our reporting.

17:11And our reporting has felt a bit more Trumpy than Democratic. That's what I would say. I've been sending reporters into areas and they come back and say, oh, it's Trumpy. But we still might get divided government. Right. The chances of divided government are high. That's kind of the central hypothesis. That's, yep. Which softens Trump's ability to do the kind of supply restricting things he's trying to do. Yeah. Right. And he's an extremist in his language constantly, whether he lives up to that. And we're not talking about the democracy stuff. We're just talking about the financial side. Whether he lives up to that is yet to be seen.

17:49I think we need to be very cautious about believing that America is going to impose a zillion tariffs on everybody across the board. I'm throwing out 20 million immigrants or illegal immigrants. Logistically, this is going to be super, super hard. And that's not even contending with all of Wall Street and corporations up in arms and bending his ear to stop him doing this. It would be really, really hard. Again, not going into the morality or the ideology of this, just logistically moving that many people will be something that has never really been undertaken by a normal democracy before. and will be hugely controversial, not to say awful for a lot of communities and so on, but logistically very, very difficult.

18:37All right. On that note, we will be right back with Long and Short.

18:52This is Long and Short, that portion of the show where we go long things we like and short things we don't like. I'm long something today, Derek. What? I'm long Coca-Cola. So Coca-Cola is - Not McDonald's? I'm also long McDonald's, but I'm long Coca-Cola because their quarterly results came out yesterday or the day before. And once again, they got 10 % revenue bump in the United States from price. People will just pay whatever Coca-Cola asks them to pay for this bubbly, sweet liquid. It is unbelievable. Inflation may be dead in America, but it's not dead on Coca-Cola. And I just think that this is an incredible brand.

19:35Can I be like a classic long, short hedge fund and go both? I'm going to be Long John King on CNN, who's their guy who does the maps and says how Miami-Dade's vote count is coming in. Yes. Because he's going to be around for a long time over many days from November 5th. And that's the reason, that's my other short, which is that I'm sure that the election is going to be over on November 5th. Yes. Because there's, I mean, even in Pennsylvania, which is the key swing state. Yep. It's going to take a while. It's going to go on forever. And what's interesting about - We may never know. We may never know who the next president is.

20:09I was talking to a markets person the other day, you know, off the record. And he said, generally, after an election is resolved, stocks just go up. It doesn't matter who wins. It's like the uncertainty is taken out of the market. So it's good after an election is decided. It's good to be long the market for a month or so. But he was like, that's not going to happen this time because we're not going to get a resolution. And that's going to be rough for markets. He said the only thing that will make markets go up is a Kamala concession. Not because Kamala losing. Right. But it would just be certainty.

20:48It would just be certainty. And that's the only scenario in which we get certainty anytime soon. What if Trump comes out and says, oh, fair and square. You guys did it to me again. Way to go, guys. Every vote was counted. I've never seen a fairer election. On that completely fantastical idea, listeners, we will be back in your feed next week. Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. we had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler.

21:31FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.