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Can Anxiety Beat Depression in November? DR. RAJEEV DHAWAN DIRECTOR Presented at the Global Interdependence Center’s Central Banking Series meeting at Fundación Rafael del Pino in Madrid, Spain • October 3, 2016

Experts on Their Anxietes Mario Gabelli

There is uncertainty among corporations about U.S. leadership, and coming tax and regulatory changes. This is creating an air pocket in capital spending. p p p g

Founder and CEO of Gabelli Asset Management Company Investors If you combine weakening employment data with poor corporate

earnings, a Fed rate hike, and a barrage of scary headlines about Trump, the stage could be set for a global growth scare. Jeffrey Gundlach Co-founder and CEO DoubleLine Capital (Thousands)

Real GDP and Investment Growth

(%, 3-Qtr. Growth) 4.0

(%, 3-Qtr. Growth) 15

350

Current Presidential Cycle

300

2015 Avg.

3.5 10

3.0

250 200

2.5

230

150

2.0 1.5

1.0 0.5

2016 Avg. 182

100 50

I II III IV I II III IV I II III IV I II III IV I II III IV I II 2011 2012 2013 2014 2015 2016

GDP

Business Fixed Investment

Source: Barron’s – June 13, 2016

-5

Jan‐2015

Jul‐2015

Jan‐2016

Jul‐2016

Source: EFC calculations on data from Bloomberg

Is Corporate Worried About Trump Presidency? That won’t be the main problem. Warren buffet Chairman & CEO Berkshire Hathaway

U.S. businesses will continue to adapt and thrive. We’ve operated under price controls, we’ve had 52% federal taxes applied to our earnings. But, in the end, business in this country has done extraordinarily well for a couple hundred years. It has adapted to society and society has adapted to business.

No presidential candidate or president is going to end that. Source: AJC, May 1, 2016; The Wall Street Journal, May 2, 2016

Do Election Outcomes Influence the Economy? Presidents and the US Economy: An Econometric Exploration The American Economic Review (AER) is a general-interest economics journal. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in economics.

Alan S. Blinder Princeton University

Time Period of Study (From Truman to Obama)

GDP Growth Quarters in Recession

Democrat

Republican

4.33

2.54

(0.6)

(0.3)

1.14

4.56

(0.5)

(0.8)

Mark W. Watson Princeton University

Difference 1.79

What Explains the Difference? (a) Spurious Aka Omitted Variable Bias Makeup of Congress or what presidents did before (b) Initial Conditions Democrats were elected more often when the economy was poised for growth (c) Fiscal or Monetary Policy of Presidents Who they chose as Fed Chair? (d) Luck Oil shocks; productivity shocks, foreign growth etc.

(e) Rest is Still a Mystery !

1.0%

Political Structure and Stock Market Returns

Since 1928

Length (years)

S&P 500 Returns

White House

Congress

2.1%

D/R

16.0%

14.1%

8.6%

Source: USA Today, August 26, 2016

Are Imports Good or Bad?

Donald Trump

The only power that we have with China is massive trade. I would tax China on products coming in. I would do a tariff, yes — and they do it to us. I’m a free trader, but it’s got to be reasonably fair. I would do a tax and the tax, let me tell you what the tax should be … the tax should be 45 percent. Since China joined the WTO, Americans have witnessed the closure of more than 50,000 factories and the loss of tens of millions of jobs. It was not a good deal for America then and it’s a bad deal now. It is a typical example of how politicians in Washington have failed our country. If foreigners will bring us goods cheaper than we can make them ourselves, we shall be the gainers. Trade is not invasion. To have all the ships that left each country sunk before they could reach any other country would, upon protectionist principles, be the quickest means of enriching the whole world, since all countries could then enjoy the maximum of exports with the minimum of imports.

Milton Friedman

George’s book “Protection or Free Trade” (1886) was the most rhetorically brilliant work ever written on the subject.

American Economist (1912-2006) Source: The Wall Street Journal, June 12, 2016; cnn.com; newsweek.com

Henry George American Political Economist (1839-1897)

Tariff History in Modern Times aka 1970 Onwards 1971 ‐ Richard Nixon

On 15 August 1971, President Richard Nixon closed the gold window (ending the ability of foreign central banks to convert their dollar holdings into gold) and imposed a 10% surcharge on all dutiable imports in an effort to force other countries to revalue their currencies against the dollar. These policies were designed to prevent a run on US gold reserves and reverse the deterioration in the US balance of payments by getting other countries to revalue their currencies, as well as head off Trade Act of 1974 says: “Whenever fundamental international payments problems require special import measures to protectionist pressures in Congress. restrict imports to: (1) deal with large and serious United States balance of-payments deficits; 1987 – Ronald Reagan (2) prevent an imminent and significant depreciation of the dollar in foreign exchange markets; or (3) cooperate with other countries in correcting an international balance-of-payments disequilibrium President Reagan imposed tariffs of 100% on medium-sized Japanese color televisions, powerful lap-top and desk computers and certain hand powerfor tools, to retaliate Japan's failure to allow more American products into its markets the President shall proclaim, a period not for exceeding 150 days: and totemporary halt the underpriced "dumping" ofnot Japanese semiconductor computer chips in nations. (A) a import surcharge, to exceed 15 percent ad valorem, inother the form of duties on articles imported into the U.S.; (B) temporary limitations through the use of quotas on the importation of articles into the U.S.; or 2002 ‐ George W. Bush (C) both a temporary import surcharge described in subparagraph (A) and temporary limitations described in subparagraph (B).” In March 2002, President Bush imposed an average 30% tariff on selected foreign steel entering the United States.' This trade law was ostensibly enacted to temporarily protect the domestic steel industry. 2009 ‐ Barrack Obama

The Obama administration set steep import duties of 35% on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs. Source: Wikipedia.com; http://legcounsel.house.gov/Comps/TRADE74.PDF;

Less Trade, Slower Growth Annual Percentage Growth in World Trade and World GDP, 1995 ‐ 2015 World Trade

% change

World GDP

15 10 Projections 5 0 1995

1997

1999

2001

2003

2005

2007

2009

2011

‐5

2013

2015

2017

‐5%

‐10 ‐15 Source: IMF World Economic Outlook, January 2016 & EFC Conjecture!

‐16%

Why Electoral Votes Matter WA 12 OR 7

MT 3

Clinton/Kaine

ID 4

CA 55

AZ 11

Source: RealClearPolitics.com

HI 4

ND 3

MN 10

SD California 55 (38.3) 3 WY 3 NE 4 UT CO 6 9 KS 6

NV 6

Clinton Wins: NM 70% of CA 5 49% of Rest

55 Electoral Votes TX 60.3% of popular vote 38 LOSES AK 3

VT 3

NH 4

Trump/Pence

ME1 1

NE2 1

OK 7

WI MI Iowa 6 (3.1) 10 16

ME2 1

ME 2

NY 29

PA IAMichigan 16 (9.9) 20 OH 6 IN New Hampshire 4 (1.3) IL 18 WV 11 VA 20 Pennsylvania 20 (12.8) 5 MO KY 13 10 Wisconsin 10 (5.8) 8 NC TN 11 15 Trumps Wins: SC AR 30% of CA 6 GA 9 51% of Rest DC MS AL 16 9 3 6 LA Electoral Votes 56 8 39.7% of popular vole FL 29 WINS

MA 11 RI 4 CT 7 NJ 14 DE 3 MD 10

Source: Iowa Electronic Market: http://tippie.biz.uiowa.edu/iem/

Gambit of Election Outcomes Probabilities

R,D

R,R

Congress

D,D

D,R

R White House

Congress

Prob.

Revolutionary / Anxiety

20%

Predictable/ Anxiety

10%

Status Quo / Depression

40%

Dysfunctional

R/D

Best for Corporate

25%

Gambit of Election Outcomes

Source: Iowa Electronic Market: http://tippie.biz.uiowa.edu/iem/

Stock Market and Consumption Consumption

Dow Jones Industrial Average

GDP

Recovery Period

4.1 4.3

80's

18000 16000

4.1 3.8

90's

14000

2.9 2.8

2001‐07

12000 10000

2.3 2.1

Now

(% growth) 0

Latest 18308

20000

8000

March 2013 Dow hits first record high since financial crisis.

6000

Source: EFC calculations; Bloomberg Finance

Aug ‘15 & Jan–Feb. ‘16 U.S. Stocks tumble amid China’s deval. efforts, recession fears, and Japan adopting negative interest rates.

June 2016 Brexit vote spurs sales of U.K. assets, tumbling global bond yields.

Special Thanks to the Center’s Executive Sponsors Carl R. Zwerner Chair of Family Owned Businesses