- In finance, leverage is one way to increase the possible return of a relatively pedestrian trade. =, But it also carries a much higher risk.
- Similarly, President Trump used a high-leverage strategy based on racial anxiety, savage protests, and a dark campaign message in 2016. The high-risk, high-reward strategy ended up working.
- But this time, the same highly leveraged strategy has Trump chasing Joe Biden by a wide margin and is on its way to explode 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 the Business Insider home page for more stories.
The president is famous for his use of leverage, with borrowed money (as well as bankruptcies) fueling his investments in real estate and casinos 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 looks like a disaster in 2020.
In finance, leverage is often used as a tool to convert relatively stable cash flows into large returns.
For example, if an investor can earn 5% on an investment for a year, without leverage he can earn $ 5 for every $ 100 he invests. But if you borrow $ 90 at 1% and earn $ 5 on your investment, you now earn $ 4.10 net of interest … 41% return on your initial investment!
Of course, this cuts both ways. If the hypothetical investment ends losing 4% … you are now closing the trade with a loss of $ 4.90. That’s almost half of their initial stake, versus a loss of 4% 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 bigger inconvenience.
Trump’s Leveraged Political Strategy
In 2016, the conventional wisdom was that a “Blue Wall” of states in the upper Midwest would create an insurmountable hurdle for Trump at Election College. The odds that Pennsylvania, Michigan, and Wisconsin, all of the teetering Republicans, looked pretty low.
For a conventional campaign, it wouldn’t have mattered. But the combination of strategies applied by the president was effectively leveraged: they allowed him to do something that would otherwise be unsustainable and achieve a limited victory of approximately 107,000 votes in three states that placed him at the top.
The specific strategies in question are too long to list here and, of course, are controversial. Targeting voters with negative publicity to reduce turnout, general issues of racial anxiety, and a concentration-focused campaign style aimed at personal connection with their fans are high-risk, high-reward strategies and examples of “leverage” that Trump deployed four years ago.
A conventional campaign probably would not have used that approach, and would also likely have lost due to the Electoral College’s structural headwinds. Instead, a deficit of 46% -48% national popular vote turned into a victory of 57% -42% of the Electoral College.
2020 is shaping up to be a very different story. After big gains in the House in 2018 and a series of smaller race wins across the country in the past four years, Democratic Party candidate former Vice President Joe Biden leads the national polls with just 8 points and modeling Today, approaches that seek to avoid the modest 2016 voting mistakes are causing the president to lose a great deal.
Obviously, polls change, but the current data suggests an advantage of about 8 percentage points in the national popular vote and an advantage of 28 percentage points in the Biden Electoral College.
So instead of getting a small victory over structural difficulties like in 2016, those same high-risk, high-reward strategies that served Trump so well are preparing the president for a sizable drop in 2020.
The reasons are countless, but one key has been the attributes that brought him to the White House in 2016: hyperbolic rhetoric and his personal style. Recent efforts to defend Confederate monuments and his Independence Day speech on Mount Rushmore sound very similar to the formula that worked in 2016.
But like our hypothetical trader, last time’s strengths are creating weakness.
The social media companies that were places of negative publicity in 2016 were dragged into Congress to explain how they handle the elections. Voter turnout, which collapsed to 20-year lows in 2016, exploded during interim periods to 50-year highs.
The relatively moderate suburban voters who formed the base of the Republican Party during the Bush years and the 2010 successes in Congress appear to be fleeing the party, rejecting the rhetoric and political platform that broke the Blue Wall in 2016.
There is also little evidence that racial anxiety has sparked a backlash to mass protests against police violence experienced by blacks. Surveys conducted in mid-June by various sources showed that about two-thirds of the country supported the protesters, including 72% support among suburban people who are likely to decide the November elections.
Contrary to the moralizing tradition that informs much of our discourse on debt in general, leverage is simply a tool. But more importantly, it is a tool that works both for and against the person using it, depending on the circumstances.
For the President, the current political context has turned his high-risk, high-reward leverage strategy into a potential coup in the November elections.
George Pearkes is the Global Macro Strategist for Bespoke Investment Group. Covers markets and economies around the world and across all assets, drawing on economic data and models, policy analysis, and behavioral factors to guide asset allocation, brainstorming, and analytical background for clients ranging from individual investors to large institutions.
