- In finance, leverage is a way to increase the possible return on a relatively pedestrian trade.=, but it also carries much higher risk.
- Similarly, President Trump used a high-leverage strategy built on racial anxiety, wild rallies, and a dark campaign message in 2016. The high-risk, high-reward strategy ended up working out.
- But this time around, the same highly-leveraged strategy has Trump trailing Joe Biden by a large margin and is on course to blow up in the president’s face.
- George Pearkes is the Global Macro Strategist for Bespoke Investment Group.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider’s homepage for more stories.
The President is famous for his use of leverage, with borrowed money (as well as bankruptcies) fueling his real estate and casino investments since the 1970s. The use of leverage also works well as an analogy for his electoral strategy, but the risky strategy that worked in 2016 is looking like a disaster in 2020.
In finance, leverage is often used as a tool to turn relatively stable cashflows into big returns.
For example, if an investor can earn 5% on an investment over a year, without leverage she can make $5 for every $100 she invests. But if she borrows $90 at 1% and earns $5 on her investment, she’s now earned $4.10 net of interest…41% returns on her initial investment!
Of course, this cuts both ways. If the hypothetical investment ends up losing 4%… she’s now closing the trade with a $4.90 loss. That’s just about half of her initial stake, versus a 4% loss without leverage.
In other words, leverage makes it easier to do something that would take a long time or a lot of luck, but it creates a much larger downside.
Trump’s levered political strategy
Headed into 2016, the conventional wisdom was a “Blue Wall” of states in the upper Midwest would create an insurmountable hurdle for Trump in the Electoral College. The odds of Pennsylvania, Michigan, and Wisconsin all lurching Republican were seen quite low.
For a conventional campaign, it wouldn’t have mattered. But the combination of strategies pursued by the President were effectively leverage: they allowed him to do something that was otherwise untenable, and achieve a narrow victory of about 107,000 votes across three states which put him over the top.
The specific strategies in question are too lengthy to list here, and are of course the subject of controversy. Targeting voters with negative advertising to reduce turnout, general themes of racial anxiety, and a rally-focused campaign style aimed at personal connection with his fans are all high-risk, high-reward strategies and examples of the “leverage” Trump deployed four years ago.
A conventional campaign probably would not have used that approach, and also probably would have lost due to the structural headwinds of the Electoral College. Instead, a 46%-48% national popular vote deficit was converted to a 57%-42% Electoral College win.
2020 is shaping up to be a very different story. After large gains in the House in 2018 and a series of upset victories in smaller races across the country over the last four years, the Democratic Party’s candidate — former Vice President Joe Biden — is leading national polls by just shy of 8 points, and modeling approaches that seek to avoid the modest polling errors of 2016 currently have the President losing badly.
Obviously, polls change, but the current data suggest a roughly 8 percentage point advantage in the national popular vote and a 28 percentage point advantage in the Electoral College for Biden.
So instead of eking out a slight win in the face of structural difficulties as in 2016, those same high risk, high reward strategies that served Trump so well are setting the president up for a sizable bust in 2020.
The reasons are myriad but a key one has been the very attributes that led him to the White House in 2016: hyperbolic rhetoric and his personal style. Recent efforts to defend Confederate monuments and his Independence Day speech at Mount Rushmore ring very similar to the formula that worked in 2016.
But like our hypothetical trader, the very strengths from last time are creating weakness.
Social media companies that were venues for negative advertising in 2016 have been dragged before Congress to explain how they handle elections. Voter turnout, which collapsed to 20 year lows in 2016, exploded during the midterms to 50 year highs.
Relatively moderate suburban voters who formed the base of the Republican Party during the Bush years and the 2010s successes in Congress appear to be fleeing the party, rejecting the rhetoric and policy platform which cracked the Blue Wall in 2016.
There’s also little evidence that racial anxiety has stoked a broad backlash to massive protests against police violence experienced by Black people. Polling in mid-June from a number of sources showed roughly two-thirds of the country supported protesters, including 72% support among suburbanites that will likely decide the November election.
Contrary to the moralizing tradition that informs so much of our discourse about debt in general, leverage is simply a tool. But importantly, it’s a tool that works both for and against the person using it, depending on circumstances.
For the President, the current political backdrop has turned his high-risk, high-reward leverage strategy into a potential walloping in November’s election.
George Pearkes is the Global Macro Strategist for Bespoke Investment Group. He covers markets and economies around the world and across assets, relying on economic data and models, policy analysis, and behavioral factors to guide asset allocation, idea generation, and analytical background for clients of ranging from individual investors to large institutions.