As ‘The Base Comes Home’ For Trump, Here’s A Handy Pocket Guide To The Midterm Elections

There has been some method to his madness. The base is coming home.

That’s from Republican pollster Bill McInturff, who, along with Democrat Peter Hart, runs the NBC News/Wall Street Journal poll, the latest edition of which shows Democrats’ edge heading into the midterms narrowing to seven percentage points from nine last month.

Apparently, Trump has had some measure of success in rallying his base around the idea that Honduras is invading Texas at the direction George Soros.

And yes, that’s just as funny as it sounds.

There is no “invasion” and the Soros story is an anti-Semitic canard that, while new to Trump’s base, is a mainstay in conspiracy theory circles and is racist to the core.

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“That slightly narrowing reflects rising interest in the election from the foundation of Trump’s support: White men, especially older, less educated, less affluent ones in small towns and rural areas”, CNBC writes on Sunday, describing the erosion of the Democrat edge noted here at the outset.

That’s no surprise. Trump has always relied on a strategy that centers around playing on the fears and prejudices of uneducated Americans who, to speak freely, simply don’t know any better. It’s a truly sad tale – Americans with little in the way of education and even less in the way of money have been duped into believing that a narcissistic, billionaire, tax cheat with a long history of rubbing his riches in the face of the poor is somehow the savior of Flyover America.

The stakes are obviously high and while there’s an endless amount of commentary available on what exactly will transpire if the base case comes to fruition (the base case being the House flips to Democrats while Republicans keep the Senate), the whole thing was summed up nicely by Steve Elmendorf, who served as Chief of Staff to House Democratic Leader Richard Gephardt and as a senior advisor to the Gephardt, Kerry, and Clinton presidential campaigns, earlier this week in an interview with Goldman’s Allison Nathan. It’s a long interview, but here’s the bottom line:

Allison Nathan: If Democrats take the House but not the Senate, as most polls predict, what will their priorities be?

Steve Elmendorf:  To be clear, the Democrats have a good chance of winning the House, but it isn’t guaranteed. The 2016 presidential election should be a reminder of the risks around these projections. But if Democrats do win the House, healthcare will be at the top of their agenda. The debate over “repeal and replace” of the Affordable Care Act (ACA) will be dead, and Democrats will likely attempt a bipartisan agreement to stabilize the ACA. They’re also likely to take action on prescription drug prices, which they see as a potential area for cooperation with President Trump. Infrastructure will be another priority. Trump said he is in favor of a trillion-dollar infrastructure plan; Democrats would love that, and I think they will make a serious attempt to cooperate with him. Whether anything actually gets done will depend on two factors: Trump’s willingness to work with the Democrats, and reaching some agreement on how to pay for it all.

House committees would also aggressively investigate the Trump administration for alleged corruption. That said, I don’t think an attempt to impeach the president is likely. House minority leader Nancy Pelosi and Jerry Nadler, the ranking member of the House Judiciary Committee, said they won’t pursue it without the support of at least some Republicans; even if Democrats also controlled the Senate, the best-case scenario would be a very slim majority, short of the 67 votes required to impeach the president. So the only impeachment scenario is one in which Republicans desert Trump. Beyond that, trade will clearly be a big issue. Cybersecurity and privacy will be too, given the potential for bipartisan support. Many other issues that would appeal to the Democratic base– immigration, gun safety, voting rights–will also be on the list but probably won’t get anywhere.

There you go. If brevity is your thing, that’s about as straightforward as it gets.

Speaking of straightforward, here are some “fast facts” from the same Goldman note:

(Goldman)

As far as the tax cuts go, repealing what the GOP passed last year isn’t going to happen, which harkens back to something BofAML wrote a couple of months ago. When it comes to markets, divided government might actually be the best-case scenario. The market-friendly aspects of Trump’s agenda are already in the books and stand little chance of being reversed. If Democrats retake the House, some of the more market unfriendly outcomes – for instance, a material ratcheting up of the trade war – could potentially be mitigated or otherwise stymied.

The good news about gridlock is that, at least in BofAML’s mind, it would be positive for stocks. The rationale behind that assessment is that a Republican sweep could open the door to an even more combative trade stance from the Trump administration and while the gains from late-cycle stimulus are already in the books, the potential downside from the trade frictions has yet to be realized.

“Many of the positives expected from the 2016 election outcome have materialized (tax reform, pro-business agenda) and the next policy hurdle under the current administration is trade, which has puts and takes for US equities”, BofAML cautioned in early September, adding that “whereas the key positive of tougher trade negotiation is striking better deals for US manufacturers, the risks are manifold, from margin pressure to stagflation”.

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As far as the fiscal impulse goes, it will obviously wane no matter what outcome the midterms produce. It’s at least possible that Democrats would support infrastructure spending and a tax cut for the middle class, as (disingenuously) proposed by Trump late last month in what amounted to a last ditch effort to improve the optics around the initial tax cuts which primarily benefited corporations and the wealthy.

“We see an outside chance for additional fiscal stimulus under a split Congress [with the] latest news reports suggesting President Trump is eyeing a middle income tax cut while the Democrats would look to pass an infrastructure bill in the House if they gain control”, BofAML writes, in a new note dated October 31.

“It’s possible both policies could garner bipartisan support”, the bank continues, adding that “one major sticking point would be funding [as] Democrats would likely propose to offset tax cuts and/or spending with higher taxes on high income households or an increase to the corporate tax rate.”

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When BofAML says funding would be “a sticking point”, they of course mean the deficit is going to come up over and over again when it comes to further fiscal stimulus.

Contrary to the GOP’s purported commitment to fiscal rectitude, Trump presided over the largest deficit since 2012 during his first year in office and he now holds the all-time record for most interest paid in a single year. While nobody should be surprised about those outcomes given that Trump once proclaimed himself “the king of debt”, a lack of budget breathing room clearly lowers the odds of further stimulus.

Here, for what it’s worth, is BofAML’s complete midterm scenario/equity market impact table:

(BofAML)

The unknown risk in all of this is obviously the Mueller probe and, relatedly, the future of the Justice Department following the midterms.

It’s pretty clear that Trump is going to get rid of Jeff Sessions and likely Rod Rosenstein, which means the Mueller investigation will be handed off to somebody else, presumably someone friendly to the White House.

By the numbers, impeachment seems impossible, even if the Democrats manage to retake both the House and Senate, but if Trump gets too aggressive with the DoJ or otherwise does something egregious enough to turn a large number of Republicans against him, well then, all bets are off.

Oh, and then there’s the black swan risk: Mueller decides to indict a sitting President.

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