Sometimes people ask which president will be better for the stock market and their money. If you take out the extreme outlier of the 20th century (Herbert Hoover) Democrat and Republican administrations have on average, about the same returns from the stock market at around 10% annually.
People don’t stop googling, stop using their cloud services or stop drinking Coke for that matter, just because the president is Democrat or Republican.
There are other areas of government and political decisions that can affect your money big time. Who runs the Federal Reserve for example, whether to go to war, deciding how much to spend, to tax and the state regulation of certain industries. The chairperson of the Fed and the board of governors will determine inflation and employment in the short term and can affect expectations for inflation in the long term. These decisions can pretty much outweigh most decisions economically that any one president can make so it’s no wonder that the markets digest every word of the fed minutes and often make little moves in relation to grand proclamations on Twitter or CNN from politicians.
I found it a bit entertaining that Rupert Murdoch, the billionaire founder of Newscorp, is reported in the book Fire and Fury, to have advised Trump after he was elected, that presidents only get 1 or 2 major policy achievements during their tenure. I had been saying the same for many years. Presidents tend to be more symbolic figures who can achieve one or two major changes (tax cuts, healthcare reform, welfare reform etc.) only with the consent of Congress. They tend to have more influence over foreign policy, but here again their hands are tied to a certain extent because they don’t control the purse strings, Congress does. Most of the time they spend their time making executive orders that get overturned in the next administration and fighting with the opposition party.
We Don’t Need a President
I once was given an astute observation on US politics from a friend who is an African diplomat. When discussing politics one day, he explained “You know, you don’t really need a president here in the US. You have the city government, the state government and the federal government. Then you have all these other agencies. The government is just too big for any one person to control. You could just easily have Congress and get things done with them. This isn’t the case in many parts of Africa, if you have a president in some places, he controls everything, the police, the army the courts etc.”
It was a fair point, and it often takes an outsider’s viewpoint to expose our own system which we assume makes sense but may look odd to a newcomer.
There happen to be plenty of areas besides the Fed and the president where the government has a big say in terms of corporate America and its money. Much of it is through regulation such as environmental or industry specific such as with banks or insurance companies.
One area that often goes unnoticed where millions of people’s money and politics comes to a head is their pension. State agencies like the California Public Employees Retirement System, or CalPERS often make headlines as the largest municipal retirement system but the third largest pension system in the world is quietly in the hands of the federal government and barely gets a mention despite over $550 billion in assets.
The grossly understated name for this pension system is the Thrift Savings Plan, which is the retirement plan for about 5.5 million current and former federal employees. It’s is the equivalent to the company 401(k) for civil servants and military, all of which are federal employees.
Source: Tower Willis
The only pension funds that are larger are the Government Pension Fund of Norway which famously manages that country’s offshore oil revenue windfall for future generations and Japan’s Government Pension Investment Fund (GPIF) which is the largest retirement savings fund in the world. GPIF owns 1% of all equities worldwide, a tenth of Japanese equities and a significant portion of Japanese Government bonds. It’s an example of mature power that rich countries still have in relation to those up and comer nations with rapidly growing GDP.
Even the state systems are no slouches. CalPERS is 6th in the world at $376 billion in assets with other states not far behind. The California State Teachers’ Retirement System or CalSTERS is second at over $200 billion. Behind that comes the New York State Common Retirement Fund as well and then the New York City Retirement Fund.
Source: Pension and Investments, as of 2016
The clout of just these few states begs the question, why have we not seen these states and the US government join forces yet and take advantage of the economies of scale that can come with a large investment pool as well as the soft power over large international corporations and economies by combining the pension power of federal and state governments?
In theory, there is nothing stopping CalSTERS and CalPERS from merging to achieve greater economies of scale (costs decrease as size grows and money managers trip over themselves to serve them). Or even the New York State funds merging with each other and partnering with those in like minded states like California to press their influence nationally if not globally.
No Place for Politics
If you think the reason this has not happened has to do with the pensions being neutral, serving employees and not involved in politics then you would be wrong when it comes to the Federal Retirement Thrift. The Trump administration has already attempted to stop the Thrift from investing in a fund tracking the MSCI all world ex-US index, which invests in 22 countries outside the US including China. The investments in China are what caught the administration’s eye and they are attempting to use it as leverage with the Chinese.
In fact, this is where many pensions and funds could be headed in the future. Large banks and asset managers have come under pressure to flex their muscles in terms of their ownership of large polluters, gun manufacturers and those who do not do enough for minorities. The current administration has started to realize it has a potential tool in the Thrift for political gain and they likely won’t be the last, either Democrat or Republican to utilize this tool.
One glaring example is the level of federal debt. There is a camp emerging that says the government need not worry about the level of debt because the US itself can handle ever greater issuance. How so? With the passage of a new law, Congress could force banks to buy more US bonds, they could force the social security administration to buy more and they could pressure these same pension funds, both federal and state to purchase these.
On the flip side, imagine that scenario where two like minded states like New York and California teamed up. They then could push their own domestic policy agenda which could counter the current or future presidential administration. Imagine the NewCal (what I will call my hypothetical New York and California combined public pension fund) fund defunding public companies that take contracts to build the border wall, or defense companies that sell to police departments. All of the sudden, politicians could realize that pensions can have massive political effects way beyond their state borders.
Sovereign wealth funds have realized this clout and been using it for some time. The UAE and Saudi Arabia have sovereign wealth funds that have helped corporations and even governments look the other way when they act undemocratic or even commit atrocities like in the case of Jamal Khashoggi.
Lucky for pensioners in these states, their politicians haven’t resorted to this tool either by ignorance or by good stewardship of public assets. Time and time again in other countries though we have seen assets like these become lighting rods for political maneuvering. Argentina famously nationalized its pension system and forced it to buy risky government debt after the last financial crisis. If you think this can’t happen in rich countries or in the US I would say you aren’t being realistic given the events of the past 4 years.
Despite all the complaints about the US, it does tend to do some things right. The Federal government once owed my money and paid it back late but with the interest tabulated and paid to me down to the day it was late, I have to say I was impressed. Politicians seem to have protected these large pension funds from meddling for much of their history but the debt los of the pandemic may force their hand. Keep a look out for this as the fallout fro. The pandemic forces states and the US government to become more creative with their debt.
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