Deconstructing Alpha

EP11: Will Taxes Rise in the U.S.? - Libby Cantrill of PIMCO Investments

December 15, 2021 Geremy van Arkel, CFA® and Shannen Carroll Season 1 Episode 11
Deconstructing Alpha
EP11: Will Taxes Rise in the U.S.? - Libby Cantrill of PIMCO Investments
Show Notes Transcript

What better way to end 2021 than to talk about some heavy hitters? Spending. Taxes. China. Russia. Mid-Term Elections – we discussed it all in this interview with Libby Cantrill, Head of US Policy at PIMCO. 

Tune in to hear a thought-provoking discussion on some of today's hottest U.S. policy topics and the potential impact on the markets and taxes.

Hey, thanks so much for having me, my printer has decided to join the show, too. So sorry that background noise will fade in one moment. That's wonderful to hear. Yeah, that's totally. I'm here in Manhattan, where I was gonna say we have a couple of inches of dirt on the ground, but we're also going to have a couple of inches of snow next 24 hours. 
The day it snows in New York is wonderful. The day after the snow. Well, I really miss New York, I have such affection for New York. So I'm so glad you can join us today. And so this is A our first live show. And B this is our first show that's somewhat political. So you might have to bear with me, again, every time I start one of these podcasts or shows with a guest like yourself, I asked the question, how did you get roped into this?
I should say and I if anyone's ever heard me speak, I do have a little bit of a public service. Sort of disclaimer at the beginning of all my talks, which is we really here at Pimco, you know, really do come to kind of politics and policy with the sort of the same neutrality, same dispassionate, in this case, non partisanship that we do any other sector of the economy, or in terms of our analysis. So we really don't think our clients benefit from our overlay in our own personal or normative use. So today in particular, but like always, I will be really talking about what is likely to happen not what should happen.
That was a great intro. Because we always have like in this industry, we all know, we have to start with the most important subject, is compliance. So that was very subtle. And so Shannen, I'm gonna pass it back to you for a second. And I believe that you might want to read a compliance disclosure, because this is my favorite part of the call. So can you let me know what you have to say?
I think our compliance office would like us to do that. So this podcast is for informational purposes only the material discussed does not constitute investment tax, accounting, or legal advice, or a recommendation of any specific investment mutual fund, or mutual fund company. The views and opinions expressed by each speaker are their own as of the date of the recording, please listen to further important disclosures at the end of this interview.
Well done. I'd like to hear you sing that next time. But that was pretty good. All right. So um, I do have this disclaimer, which is fairly similar to Libby's which is I don't often talk about politics. And when I do, I kind of find myself in areas that might not want to be in. And so again, this is really just trying to cut through the noise of politics and what's going on in the world, trying to shine a light on what is relevant information to investors. And I'm not trying to express any opinion here at all. So Libby, let's jump right into this. So first of all, do you want to provide just a little bit of background of what your role is at PIMCO?
Yeah, so I do have the dubious honor of analyzing political and policy risks for our Investment Committee. I also do a little bit of traditional government relations work so organizing the firm's engagement with with policymakers, but you know, I've been doing this job for about 10 years, 10-11 years, and I could totally date myself PIMCO, This is my 15th year. I'll just take myself. But I, but I did you know, when I came to the firm, I was surprised by how you know how many smart macro investors there were here at PIMCO. But honestly, I think to their own admission, how little they understood Washington. So my job really is as a translator, to cut out that, you know, to really focus on the the signal and not the noise, and how it's going to impact markets in the economy.
I'm famous for one and a half hour long podcasts. So let's just go through the list here. And we'll see where we land so. So front of mine, we have coming out of Washington, we have an infrastructure bill, we have a build back better bill. We have the deficits, we have potential tax changes, we have a fed that needs to fill some seats. We have trade policy, we have supply chain issues, big tech regulation and midterm elections. So should we talk about all those? Some of them? Oh, the debt ceiling? Yes. Okay. So I, we did build this as a tax call just to try to make sure we cover I mean, to investors, I think it taxes are pretty important, obviously to us. We do tax manage portfolios, so it's pretty important. So let's start with the infrastructure bill has already passed. Right. And that seems like a stimulatory fiscal spending bill to the tune of $1 trillion. And I like to say around here 1000 billion just to keep it in perspective. But so tell us a little bit about build back better, which has passed the House and sitting it sitting on the Senate floor, right.
Maybe on the Senate floor? And yeah, just to rewind. So you're right, the bipartisan infrastructure bill already passed and signed into law. That is a $1 trillion over 10 years, though, so it's so important to talk about sort of the timeframes, because a lot of this right, a lot of the stimulus that we've seen over the last 18 months has been very front loaded, so hasn't been over 10 years has been for 18 months. And so yes to the build back better, pass the House, that top line is about 1.8 $1.9 trillion, depending on how you're looking at it. And that is the world that includes some some tax increases, although I think as we'll talk about those tax increases are super incremental, and much less draconian than what I think the market and what many people expected just a few a few months ago, the real thrust of that the bill back better agenda is sort of on the care economy, so to speak, this is their the administration's rhetoric, but it's about the child tax credit and expansion of that for a year, child care, credit, and universal pre K, lots of pro climate provisions, affordable housing, and health care and elder care. So really kind of think about, you know, the Biff, the bipartisan infrastructure framework as that public works, Bill, roads and bridges, water broadband, this is sort of on the other side of the economy, this kind of the so called care economy, and again, this will be paid for by some tax increases.
Yeah, so the idea is a total together, we're talking about almost $3 trillion over 10 years. And, and so a, the result of that to to the economy in general is fiscal stimulus is generally stimulative. But to pay for that, I mean, we're obviously running huge deficits, right? Are we at the second highest? I believe, I'm gonna say this right, the second highest level of deficits, relative to GDP. In history, is that correct?
Yes. If you, if you think about and this is I mean, you know, Republicans, Democrats, hate him or love them. Both parties are responsible for the deficits over the past few years, because, of course, it has been kind of a wartime footing, right? I mean, this picture looks very similar to kind of the post world war two picture.
So that's exactly how I've been framing COVID. And the effects of COVID Is it feels like a war, right. There's a stress on on resources. There's a stress on people, and it's inflationary. And and so that is actually interesting. You said that, so. So we have high deficits, and but we have a very strong economy. So it I understand all the needs for the things that are in those bills, but again, it's this sort of that we do have this little timing issue, which is historically fiscal stimulus has occurred counter cyclical to the economy. And the last two occurrences the tax cuts to 2018 and and currently today, they've been on trend with the market, which is kind of interesting. You know, as the as the economy is doing very well
and both have been very partisan, right. So the the best the inflation The Public Works bill that passed out of the Senate by almost a vote of by almost 670. Senators voting for it sort of unprecedented in our hyperpolarized times. But they're using something called reconciliation, which is inherently partisan, it means that it will only be passed by Democratic votes, sort of like the Trump tax was only passed by Republican votes, like Obamacare only passed by Democratic votes. So the pendulum swinging using this very kind of partisan legislative tool called reconciliation. Yeah. And
the bill. Yeah, I think the bill feels more soft instead of hard, hard results at sort of the softer social side of things, which sometimes can be partisan. And then the the so we have 50, the Senate split 5050. And we're currently there's one Democrat not apparently voting for it. So is there a chance that it doesn't pass?
Well, he's not gonna vote for it. But so I think that the bottom line from kind of a markets perspective, so the houses passed this bill, at 1.85, yeah, high side could come down maybe to one seven, maybe to one, six. But that's it, it's either gonna come down, it's not going to go up. Right. So if anything gets smaller, again, these tax changes, which we'll talk about much less sort of severe than what we were expecting, but I think was pretty high conviction that this thing will pass and may not pass by year end, and there's no real reason for it to there's the child tax expense credit expansion expires at the year end. But that doesn't really matter. And Senator Manchin basically today said as much, but I think they will pass it honestly, they're just this is sort of, you know, to sort of, hopefully not offend anybody. They're kind of too far. They're too pregnant with this, that this is so far along. For them. Yeah. Failure really is not an option. I think all Democrats, including Florida mansion, realize that they need to pass this.
Yeah, that's kind of how it feels, it feels like a foregone conclusion that this is going to pass. So in this bill, which is interesting, they interestingly, this is where the the Biden initiative of taxes or the ability to pay for these bills are in this bill. So we started out with a lot of aggressive talk about taxes with the top, you know, top tax bracket, being over 450,000 or so rising back up to 39.6%, and then changes to capital gains tax. So far, those are both gone right.
Now, let's talk about what what's not going to be in there. So no increase in the top rate, no trend, in cap gains, no increase in the statutory corporate tax rate, very likely no increase or decrease in the state tax exemption, no changes to the IRS, various real estate provisions, no changes to carried interest. So for all intents and purposes, and again, with a caveat that unless you're making $10 million of Adjusted Gross Income AGI and congratulations, if you are that's fantastic, yeah, then your taxes aren't going up. There's gonna be a 3% surcharge up until 25 million, and then a 5%. Additional one after that after if you're making $25 million double congratulations. But for all intents and purposes, what the market was fearing, but individuals were fearing what our clients are learning is not coming to fruition. And I think this just to your point about the 5050 Senate just underscores the fact that Biden and the Democrats are trying to navigate this super narrow, Senate Majority and House majority. And they realize that taxes are just not very popular.
Yeah, there, it's not very popular on either side of the aisle is very hard thing. So we do have a we will get into this the the ability for our government to make hard decisions, we can maybe get into that a little bit here. But this does feel like a very softened down tax change. It's targeted, the people that are the for individuals, if you make more than $10 million, this is where the tax hit is going to come. There are there's another subtlety to the tax code. We have a lot of inflation. And and the brackets move with inflation. I just I forgot about this, but it's true. So so the top line, the brackets of where you fall into different categories is actually right. So that actually gives people a tax break.
Right. That's a super important point and one that is pretty nuanced. But But that's, that's right now, okay. I don't know if I can chime in about inflation. But given that we're big bond managers, we do have a strong view. And I just came from our cyclical Economic Forum, which we have every quarter debating things like inflation, I think, you know, obviously, Powell has retired the transitory the T word. But I think you know, our view is on inflation that the next few months, it's going to get worse before it gets better. The data is not going to look good. Probably going into sort of early next year, sort of February. Maybe even Marsha next year, but then we really do expect with a lot of these supply chain issues with a lot of the pivot from the demand for goods to services. I mean, just think about in your own life, right? We've, we've all bought a home furniture we've all bought, you know, cars, you're not going to go out and buy, you know, three more sets of patio furniture, right. So some of these some of this demand for goods, which is obviously, you know, stymieing some of the the good supply chains in terms of shipping and tracking, what have you is likely to normalize as the demand goes more pivots, more services. So we're not using the word transitory, and we don't have to be sanguine about the risks here. And we do think investors need to be protected from from kind of inflation risk, for sure. But I think we're probably more aligned with the Fed than many of these things are linked to COVID. And will likely normalize again, with some some risks,
we have this burst of spending, everybody wanted to buy everything all at once, it just so happens, a lot of things come from Asia. So that made a big giant bottleneck, a lot of Asian factories were shut down. They had to get those back up to speed. And now we're trying to get all the products and goods into the country. But it really is it feels like we have a supply chain, it feels like, you know, we lived in this 12 years, and I'm very much aware of PIMCO positions I on on inflation, that I read a lot of your stuff, I just think it's great. It's good leadership in the industry and everything. And and, you know, we've had this 12 years of sort of fighting deflation, and have really unbelievably positive fed. And then we switch to this explosion and supply chain problem. And I think that you know, so the three things are like deflation, kind of a constant. I think a lot of people talked about that. And then and then you have in the middle, you've got the Fed trying to manage all this. And then on the other side, you've got the to to too much money chasing too few goods. And the too much money faced chasing too few goods feels like the transitory part, right? It feels like the economy's really good stock markets up everybody wants their stuff, but like, but like you said, I mean, how many sets of patio furniture can you get? which one to buy? Which is exactly exactly what people were buying? Right? It's exactly what people were buying. Everybody wanted outdoor space. Right, which is really that was very poignant. So so the the, yeah, we kind of think there's elements to this that are deflationary. We think there's elements that are supply chain oriented. It does. I know that in the build back better, there's $5 billion, I think, earmarked for supply chain, I'm not really sure what they can do about that. Because it feels like outsourcing and our you know, offshoring was a great idea when the GDP growth was 2%. And then when you hit GDP growth of 8%, you have this explosion in buying. And you're buying a majority of this stuff from overseas, you could see how well that would create a huge bottleneck, right? Maybe Maybe offshoring was built for 2% GDP and not 8%. GDP.
Yeah, and maybe not for a more sort of protectionist, nationalistic, global landscape. Right. I mean, the US has become, you know, you know, we've emphasized globalization, less, but lots of other countries have, as well, as we were kind of looking for word. And you're right, I think outsourcing seemed even though I was on the Hill 20 years ago, and I have to say, lots of folks had a lot of concerns about China entering the WTO, in particular, you know, and, and they all sort of seen like hair on fire at the time that maybe hyperbolic but I think a lot of those concerns have actually sort of been realized now 20 years fast forward, of course, there's been a lot of prosperity and a lot of efficiency and a lot of deflation because of it. Um, but I think I think that's right, so what policymakers can do on the supply chain front, I mean, they can't do very much there is a bill that actually passed again, on a bipartisan basis. So we do need to celebrate the small victories that there are, that's called the endless frontiers or the the the open innovation Competition Act or something that basically against spending more money, but it's It authorizes about $250 billion of more of more funds, for r&d for supply chain investment and for opening fabs here in, you know, here in the United States. So it's trying to show now, these are all long lives, it's not going to, you know, impact these sort of cyclical inflationary issues. But that is sort of a recognition and in some ways, it's sort of like an industrial policy that the United States has very low have on both sides of the aisle, but sort of the closest that we've had to it and, you know, 30 years,
it really feels like we're turning a corner here and we're gonna we're gonna start on shoring, but if the inflation is transitory, and if the inflation has something to do with the supply chain, and if we're over, over allocated to offshoring, to bring things onshore to solve the problem. That sounds like a long term deal. I mean, you got it businesses that have been buying back their shares instead of building factories. And they've been reaping the rewards of cost cutting, and now they have to come and CAPEX here, build their factories and all of that. And that's going to take some time. So if the economy remains strong,
and that could also increase costs, right? I mean, yeah. So it's not like labor is super cheap here in the United States. And, you know, one thing I just wanted to touch on, and I sort of see it in the comments, or if that's okay, that I'm reading the comments, but is, of course, inflation is supply, which we think will likely normalize just in terms of, you know, working out these bottlenecks and supply chain is demand, which we also think will, you know, look a little bit more normal, less fiscal stimulus less, you know, those stimulus checks in people's pockets, less, you know, outdoor for furniture, fine. But one issue that someone brings up in the comments or questions section is about labor force participation. And it is absolutely right, that we are seeing these changes to the labor force. And I'm sure people know, you know, anecdotally things in their own lives of people who may be extended, who delayed retirement, and then in COVID, sir, decided that they would then retire because it was COVID. And so I do think that's the big question mark, honestly, and partly on the inflation story, as well. And now, if you're the Biden administration, they're trying to say build back better, we have a childcare provision, we have universal pre K, we have all these things that will, in particular, help women get back into the labor force, because if you've looked at the economic data that you know, that women have been disproportionately impacted by COVID, as have black and Hispanic Americans. Um, now, I think that is that feels pretty quixotic, like any of that maybe that helps over, you know, five years, whether that's gonna really help them a cyclical timeframe. Big question, Mark, I think that is the question, right? Is the does the labor force start kind of getting back to normal? Or was 2019 kind of peak labor force participation, because of all these kind of weird dynamics that were going on? And now we're sort of settling into something that doesn't look as as positive, honestly?
Well, well, across all across the first world, this labor force participation problem is happening. It's not just in the US. And, you know, some, sometimes I think of Japan as a leading example. And then sometimes I think of Japan is something that's just so different from us, I can't even relate to, right. You know, you probably do the same thing. But but the labor force participation, the retirees the, the, you know, I've made my wealth, I'm going to invest my wealth and asset prices, and it's a good time to retire. You know, those problems are global. It's going to be an interesting, yeah, it's going to be interesting with an infrastructure bill. And, and labor force participation being low, and then on shoring and requiring, you know, keeping the economy really strong and having to build all this stuff. So anyway, so let's segue out of that. So we somehow got through in some inflationary stuff. And then and then I did mention that kind of, you know, it creates a bit of a bottleneck. So in terms of geopolitical risks, and trade policy, do you want to touch on on any risks you see, to the US economy from our trading partners?
Yeah. Can I Can I also address another question that was asked, chat, sorry. Oh, yeah,
absolutely. I, for some reason, can't see the chat. So you're better at this.
And so I appreciate it. It's always nice to kind of know, what's top of mind for people. Um, I think that the questions are about just build back better. So before we go to geopolitical risks, sure, and bad sort of some of these benefits and these tax provisions, and they're asking whether they're, you know, how front loaded they are. And then when they do expire, will there be pressure on policymakers just to extend them? Because of course, if you extend a lot of these provisions, the bill looks much more expensive than how it does now. This is Senator mansions big right. Is that okay? Yeah, well, maybe it scores at 1.8 trillion as of now. But if you actually extend all these provisions for the next 10 years, and you don't let them expire, then it's going to cost $4 trillion. And that is a risk. And look, we've what we set off from the Trump tax cuts, it is really difficult policy inertia is real. It's really, as we all know, if you have young children, hard to take away the goodies from you know, from the kids. And so what folks have benefits, especially if you are relying on them for their votes, it is really difficult to take them back. However, with two of the biggest most expensive provisions, the expansion of the child tax credit and the Earned Income Tax Credit, those are only for one year. And at you know, I I I find it hard to believe and then they revert to still some sort of credit. So you're still getting some benefit there. It's just not as expanded. But it's really being expanded in the name of COVID. And I think people like Senator man Senator cinema, Senator Tester, he's more moderate Democrats are going to be very low to extend them. So I actually do think the score is probably more real, I could understand people's concern. But I think the score is probably more real, because I don't think I just adapt. Those provisions get extended at the end of next year, just given the whole kind of brouhaha that we've seen now, unless, of course, COVID comes back, we get another variant, we shut down, you know, all that stuff. So that sort of steady state, I don't assume those to continue. And as a result, I don't think this will be very inflationary. This is like the these provisions. Again, maybe they support growth a little bit. But they are nothing like the $5 trillion that we've seen pumped into the economy or the last 18 months, which were inflationary. Right, let me just because you're, you're putting literally cash in people's pockets. Well, this is not this is just much more incremental.
All evidence is and not just from the US, but from other countries is that is that just generally looking at the last 12 years, you've had the most stimulatory environment from either central banks or central governments across all the first world? And that did nothing to move the needle on inflation. The inflation we're seeing today is, is an explosion in demand and supply chain problems, which is this transitory thing, but how long does it last? Is the question right tie? How do you solve the supply chain? That to me, my going concern is my general thesis is that the government isn't can't do much in this environment with to move the needle on inflation.
Yeah, I mean, they can cut tariffs, right, they can help with some of the trucking and shipping issues, they can release oil from the SPR. But all this stuff to your bank is a lot more incremental. It's just, you know, job owning versus actually really do substantively.
Yeah, absolutely. So I don't think policy necessarily, or even the Fed, is that inflationary? I think that they're, they're almost they do all the stuff that they did, the amount of money they spend is astronomical. And, you know, up until COVID, it didn't move the needle on inflation. So the evidence is that it's, it's not that it's something else. So So anyway, so let's move on to geopolitical risk, because I know China has been in the news. So I'll just go straight to the point. So So what is what is Pimco, his take on on China? What's happening in China right now, with Xi Jinping, and his, I guess, stronger socialist types, Hawk regulations being pushed down? The, you know, the common, the common good, which is that capitalism is great, as long as it evenly distributes itself around the economy.
Yeah, so you know, I think as it relates to the US China relations, just take a quick step back, you know, our view had been and I think that sort of narrative in the marketplace was when Biden was elected that oh, you know, a lot of these tensions are going to ease because it's a Democratic administration. If you go back to Obama, he used more carrot and stick. I was really disabusing that with our folks here, because a the Democrats actually have been sort of the original China Hawks. If you go back to what Pelosi and Schumer were saying 20 years ago, when China was entering into the WTO. They were very hawkish, very concerned about trade practices, labor practices, human rights issues, what have you. And And also, it's a very different time from Obama to your point, Xi Jinping has revealed himself as almost a self proclaimed autocrat, right. And he is sort of embracing autocracy as the most efficient system in terms of capital allocation in terms of making sure that hit the billions, you know, 1.5 billion people are being fed or not rebelling against the government. And so he is much more of a of a threat than say who Jintao was during the Obama period of time. So we kind of faded all that, you know, that rhetoric that this would be a different, you know, nicer general regime than the Trump administration. And in fact, the tactics are different from the Biden administration, if you can call them that. But Dziedzic objective, I think is very similar to the Trump administration, which is to isolate China, both economically and politically. I think the the view of the Biden world was let's try to use our allies to do that. I think they've done that. Not sure how successful they've they've done that, but they've certainly tried a lot of the, you know, those missteps with the France submarine issue with Australia. Not help that cause but you know, they're trying to kind of get over that. So again, I think the strategic objective is very similar. So from a markets perspective, what does that mean? I think that means that you will continue to see a decoupling I think, is to is overstated is to sort of hyperbolic but will you start, you know, continue to see this incremental separating, becoming kind of less entrenched less codependent on one another. Absolutely. And of course, we're seeing that in that supply chain as you've, as you've referred to. We've seen that with tariffs with naming the companies on the Entity List here in the US United States, Gensler at the FTC is rhetoric about delisting Chinese companies. So, you know, I think the bottom line from a markets perspective is this will continue to be, I think, a source of volatility, will this relationship, this relationship continue to simmer, and if they're simmering, they have sound potential to boil over. And I think that's just a risk that folks need to keep in mind, especially if they're investing in China.
Sure. And that risk has definitely been on, you know, exposed, exposed in the marketplace, investors are very spooked about China. You know, and as China go, so doesn't emerging markets. And you know, most investors have some portion of their money in emerging markets, and not just China. But it's hard for the emerging markets being part of that index, it's hard for them to really have a great light shine shine on them for for the value to be uncovered, or for investors to really feel confident about emerging markets with China, sort of rattling at Sabre and sort of strong talk and, and it feels it feels aggressive in this very comfortable world we live in right now. And and so, you know, we think about China, we think, you know, is it a contrarian opportunity? Or is this more to come? Right? Is this going to be? Is this the beginning of worsening relations with China? Or is this the, you know, a short term opportunity? It's hard to know, right? That's the nature of any sort of any sort of value play?
Right? Yeah. I mean, my view in terms of the US chat, US China relations, this is like, the continuation by the direction of the travel is, is clear, I don't think we should expect any sort of short term pivot here, I think this is long term going to get worse before it gets better. And I'm not even sure what better looks like, at least as long as she's in power. So I, you know, I'm pretty, I'm pretty negative. And I think Taiwan enters in different risk as well, especially if you have xi moving into Taiwan, which he's indicated he wants to do over the next few years. Again, I think the US has revealed that, especially with that botched execution of the Afghanistan withdraw, that maybe they're not as strong maybe that we're not, as you know, formidable as I think we would like to sometimes think. And as a result, I think that's caused us also to be vulnerable, and also increase the likelihood of some move towards Taiwan, not in the next, you know, six months, but I think, in the next five years, I will not be surprised if we were not talking very seriously about what a military invasion or what the US response would be to a military invasion by China. Yes,
I don't really get that. That, to me sounds like a huge risk. And, you know, I've interviewed an expert on China and, and that we could probably do another whole podcast on the China Taiwan history. But, but no, it's really, that's really good insight that the, as you said, the road looks clear the direction we're going with relationship with China, and it doesn't look like we're gonna do a u turn is gonna get better. That was excellent. So, all right. So I'm gonna go to Yeah,
not Russia. Russia, just because I think that's another near term issue. And Biden that today, that I mean, you know, we, you know, I think it's February public, we own a lot of Russian sovereign debt and local debt, just because of like, our size and emerging market space. So we've been paying very close attention to this. And honestly, you know, we're reducing him, I think you've publicly said this, we're reducing some risk in Russia, because because I think this is a really, if this is not priced in the market. And, you know, Putin is unpredictable. And again, I think he sees there to be some sort of window here in terms of, you know, the US maybe not necessarily kind of matching its policy response to its rhetoric. So, you know, if we're sort of saying, you know, stop building troops on the border of Ukraine, Putin, and he's like, I'm gonna just ignore you and continue to do that. And yet, we haven't really done anything. Right. And sanctions are pretty Toothless. So I just think that is another area when you're thinking about geopolitical This is nice. That's pretty self evident given what Yeah, but but I think I don't think it's priced in necessarily. So I think there are risks there as there as well. And then Russia and China and Iran, you know, you line them up those bad guys in a bad neighborhood. It just things. Yeah.
And they're good. Yeah, we don't talk about them joining forces, but but it does, it does feel like many, many years ago, you know, like there was a in my career long enough. There has been times when people have been bullish on Russia, you know, but it's never really turned the corner, right? That's you, you've got to really, you know, you, you know, investing in Russia, that is just unheard of, right. And, and, you know, I don't want the direction of I don't know if I don't want the direction. But if the relationships with China go bad that way, and then you don't get it then you don't get global investment in China in the same way that you don't get it in Russia, right, like and so a good economy keeps everybody Tom, and if you don't get global investment into China because of the same kind of actions that Russia takes, that just makes the relationship so much worse. So totally, yeah, definitely a good economy hides a lot of problems. Right. And so and so the other point on Russia, I think is very important is that in a time when commodity semen short supply and natural gas and oil prices, just, you know, from our, you know, for historical sense have skyrocketed. Yeah, they're pretty high. And and, you know, Russia controls so much of that for Europe, right. I mean, they're the Europe is completely dependent on Russia for oil and natural gas, which creates a
big, which we saw, of course, in the the Nord Stream pipeline, and how important that was to Germany. And one of the reasons that Biden kind of laid off on that because they were trying to, he's trying to ingratiate himself with Germany on other these other geopolitical issues. So So yeah, so Europe, obviously, is just going to have a different stance on Russia because of its proximity because of its reliance to Russia, than the US Canada. Again. i Yeah. Short of something on the military side. I'm not saying that's going to happen. I just think that the the financial sanctions have proven to be pretty ineffective. I think folks in the Treasury Department would say the same thing. It's just not necessarily advancing their, their goals when they've you know, they've heard they just haven't heard as, as much.
I think Putin and Xi Jingping realize that, that in this day and age, it's going to be very hard for anybody really forcefully stand up and try to stop. They really, for what they want to do. They can almost do anything they want. Before the world stands up. I mean, this is a very peaceful time. Yeah. So okay, so midterm elections. The final point here, exciting domestic US stuff is coming up, right, we forget. It's just right around the corner. We got these midterms coming up. And, you know, midterms generally mean change. What's your take on the upcoming midterm elections?
Yeah, I mean, so I think if the election were held today, it would be very bad for the Democrats, you don't need somebody sophisticated policy analysts to be telling you this. If you get the President's approval rating, if you look at the direction of the country, which is also another barometer, super negative 75% of Americans think we're on the wrong track. That is pretty bad. Very similar to actually what it looked like when when Biden was elected. So when people were fed up with Trump, now they want to be have itchy feet and are fed up, Biden are ready and the Democrats? I think it's a question, you know, again, lots can change. Right. So let's just give that caveat. The economy can continue to improve inflation can decrease COVID, you know, whatever. But if the election were held today, I think would be a question of how many seats would the House Democrats lose in the house? Not? If right, so the question of like, how many how much did they lose their majority by? Not if and as a reminder, Democrats will have a four seat majority, on average, when the President's approval rating is below 50%. Because midterms are usually a referendum on the President's party, they usually lose a party in power 30 seats in the house. So just by the history, the Democrats are on their back, right, the Senate revolve wax, but again, and the maps a little bit better for Democrats, but still probably would go in the Republican territory as well. So bad for Democrats, good for Republicans, then Republicans have to be the governing party. And I think what we've seen with the Democrats is everyone sort of you know, everyone people were romanticizing what the Democrats would look like when they started governing and then it's like when you start dating somebody seriously and you're like they're like a normal person. Um, but
this podcast goes long as you want. We can tell all sorts of stories.
But so I think it's fair to say that then there were Hubbell contacted Edward, and then what would they govern on what their messages can be? So that those are big question marks to as they go into 2024. But if you're just looking at the midterm elections, it's probably gonna be good for the markets and markets usually, like, you know, divided government, probably when not a lot would get done, if you could see something get done on China, maybe something on tech, because there's actually sort of similar antipathy for big tech in the Republican Party as there is in the Democratic Party. So that is their issue for them. But outside of that, you know, thing on fiscal, you know, you get none of this progressive stuff, and then you don't get any of the nomination, the nominees to through the Senate. If Republicans control the Senate, that's actually a super important point that the press isn't writing about. If Democrats lose control of the Senate, you know, then Biden has to start nominating much, much more kind of conservative Democrats than he has been nominating to this point.
Yeah, that's a really good point. So the the easy follow up here would be do you think we'll have an extremely well organized well run clean just really election when this happens, or when was the last election? Sort of the new standard? Are you think about that?
Yeah, I, you know, I do. And this is actually I was gonna say the last question about what I would want to leave people with. This is something I hope, you know, just just bear with me a little bit. But again, regardless of what your partisan stripes are, try having a conversation with somebody who has a different opinion from you. Because that civil discourse, we are just losing in this country, when I worked on the Hill, you're 20 years ago, we used to go out drinks with the other side, our bosses, we're all friends. Now. None of that is happening. And I think as a result, our you know, not to sound too trite. I think our democracy is weaker because of it. So, you know, try having a conversation with someone you disagree with try to do so respectfully. And simply because, again, I just think your question about the election that like, I felt I thought 2020 was super low, you know, again, regards to what your politics are, just in terms of the rhetoric and the rancor. I just think it's getting worse on both sides of the aisle. So yes, voters.
That's the way it feels. And until if everybody polarizes into different camps, then it feels like, you know, everything feels like a winner, loser. There's no we both win. For this is a bad idea for both of us. It's winner loser. And if the other person's winning, then I must be losing, which creates this huge friction. So so the, I use this example with my kids all the time about like, you know, whenever they're upset with somebody or something that is, you know, I've done a lot of traveling, you probably have to, and you can go to different countries that people speak different languages. And you can sit down in a coffee shop or a bar with somebody in like, I don't know, I guess you can't sit down in a bar and I ran, but you could sit down in a coffee shop in our in Iran, right? And you could sit down and talk to somebody, and within five or 10 minutes you'd be on to I love my family. My wife is great. And my kids are cool. And there's this problem here. And we're all the same. Yeah, we we forget that. And, and so I don't know, that was a, that was a very soft, little ending there. So So Libby, so we did cover quite a bit of things here. And I've taken a lot of your time. And this has been fun for me. Hopefully, it was fun for you. Right? Is there is there any, I guess since we got to the final thing? Is there any final final thing that you want to leave us with?
If people are interested, I have I write a weekly policy note, I'm not sure if you're even on it. But I'm happy to copy people. It's really again, a sort of a neutral view of what's going on in Washington, how it's gonna affect the economy, how it's gonna affect markets. So very happy to offer that up. And I mean, thanks for your, you know, your faith and support, and PIMCO we really appreciate. Thanks.
Thanks. Thanks for allowing yourself to be I learned a new word to be voluntold to do this.
I like that. Right. Right. Thank you. I like it.
Yeah. So thank you so much. And I really appreciate it. And we'll let you go. That's, that's 45 minutes. That's 15 minutes longer than I told you, I would keep you on here. I so much, appreciate it. We'll be following you. We'll, we'll try to catch you on TV and all these places where you show up. And you've been super helpful here and have a great day.