Shifting landscape: Policy, politics, and the great-power struggle

Thomas Mucha, Geopolitical Strategist

Michael Medeiros, CFA, Macro Strategist

2022-03-08T09:01:35-05:00 | S1:E1 | 38:16

The views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.

Episode notes

Geopolitical Strategist Thomas Mucha asks Macro Strategist Mike Medeiros about his views on the Fed, inflation, his research approach, and how he believes the Russia/Ukraine crisis will shape policy and politics in 2022 and beyond.

Transcript

THOMAS: Just as the world was starting to emerge from the COVID-19 pandemic, a new crisis is upon us. Russia’s invasion of Ukraine — which, as of this recording, is just under a week old — has jolted markets, policymakers, and people around the world awake to a fresh set of horrors. While the geopolitical and foreign policy implications are likely to be massive and long-lasting, the crisis will also impact US domestic fiscal and monetary policy as well. It is from this highly complex perspective that today’s conversation takes place. My guest today is macro strategist Mike Medeiros, who has one of more interesting and difficult jobs here at Wellington: trying to make sense of Washington, D.C. and the fractured political environment across the US. If that’s not enough, he’s also a point person for understanding where the US economy is headed over the coming year or so. I’ll ask Mike for his views on Fed policy and the politics of inflation, about his evolving research process, and how he believes the Russia/Ukraine crisis will color all of this in 2022 and beyond. Lots to cover today, Mike. Thanks for being here.

MIKE: No, Thomas, thanks for having me.

THOMAS: All right. Let’s start with the Fed’s conundrum. Um, you know, a lot’s been going on obviously. In your mind, where -- what’s the Fed thinking, and how does the current situation in Ukraine and in this -- you know, more broadly this more destabilized geopolitical backdrop, how does that factor into this?

MIKE: Yeah, let me start with a regret from the Fed. And one of the regrets I think they have is using the word transitory so many times last year. Because what that did is it didn’t give them optionality with policy. There was a lot of uncertainties last year — demand was strong, supply was constrained — and uncertainties around the inflation outlook were very high. And so, from a policymaker perspective, in that type of situation you want to retain optionality. Um, now, where we are today, given the strength in the labor market, the elevated and more persistent levels of core inflation — we’ll get to a little more in depth on core inflation I’m sure later —but you know the last time the Fed’s dual mandate was here, the Fed funds rate was nine percent. And so, no matter how you cut it, looking at a metric like that or looking at something like the Taylor Rule, the Fed is very far away from where policy’s been at previous points given the stage in the cycle.

THOMAS: It’s a lot of a lot of room to go.

MIKE: A lot of room to go. And then -- but the other thing is, right, there’s a consequence of running policy loose relative to the economic backdrop. And one of the consequences of that are financial stability concerns. And so, Fed funds rate at the effective lower bound with the balance sheet at 35 percent of GDP, no surprise that’s been a really important anchor and support for market valuations with the Shiller Cyclically Adjusted PE, where it’s at. I mean, it’s the second highest since the, uh, dot com bubble. Uh, and the bond market, too, is re-- is underpinned by, uh, policy support. Now, I think for the Fed going forward, right, it’s a difficult balancing act because clearly they want to put policy in a place that’s more consistent with lower and more stable inflation. But at the same time, one of the big risks they run is that tightening too quickly could undermine the recovery and lead to a recession.And so, a very difficult balancing act.I think in the near term, the Russia-Ukraine, stress adds more challenges for them.

THOMAS: What’ll they be watching then?

MIKE: So, one of the concerns they have right now is that inflation’s high and they think it’s gonna moderate. At the margin, you know, so far — and there’s a lot we don’t know about how this will develop — but their mentality would be, from a growth perspective, the U.S. is more insulated from this unless it -- we see a real, clear banking issue. But there will be direct effects on inflation. And one of the interesting elements over the last week has been near-term inflation expectations have risen, but so have medium-term inflation expectations. And with wage growth the highest since the early ’80s, core inflation the highest since the early ’80s, the upside risk on the inflation outlook is that you do see inflation expectations in the medium-term sense start to rise, become quote unquote unanchored, and that feeds back through into wage growth. That is a scenario they really want to avoid, and I think it adds to the complexity of their reaction function in the near term.

THOMAS: So, they’ll be bearing down on -- on those specific numbers week in, week out?

MIKE: I think so. Like, I think they’ll be watching inflation expectations very closely, not just market-based but survey-based. They’ll be watching financial conditions. You know, that’s a significant headwind now to the growth outlook.Now, they want financial conditions to tighten, um, that’s been achieved so far. Um, but they don’t want a recession either. And so, modest slowing in demand enough to cool demand-pull inflation but not undermine the recovery. Very difficult to achieve with the starting point on financial stability concerns and also with just increased geopolitical tension.

THOMAS: Are there any lessons from previous geopolitical crises that the Fed might be turning to right now? Clearly it was already a challenging situation. But, you know, looking at Iraq or the Iran-Iraq War or any others in the relatively recent history?

MIKE: So, it’s a really good question. So, when -- after 9/11, um, the Fed eased into that.And that was a clear, direct hit to demand that made sense. In hindsight, I think this is especially true from some of the regional presidents — they probably left policy too loose for too long and that bread significant financial stability concerns through the housing market. And so, it’s tough because in the short term, right, there’s a lot of uncertainty. You don’t know if this could spill into a world war, spill into something on U.S. soil, but at the same time, you know, what do they know? The starting point on the labor market’s tight, the economy has a lot of momentum, and inflation’s really high. And so, I think that’s the main focus. Can they tinker around those edges? You know, for example, there’s a big debate in the market about going 50 or 25 in March. I think at the margin, this probably leads them more towards 25.But that being said, the risk of a 50-basis-point increase for example hasn’t been extinguished. But, uh, that’s -- y-- you know, I think that’s the most recent example, um, of the short- versus medium-term consequences of adjusting policy in the face of geopolitical stress.

THOMAS: Gotcha. So, there’s a lot to unpack there but what are you thinking about in terms of U.S. macro performance for the rest of the year? I mean, how do you feel about where we are and what this could possibly do to those forecasts?

MIKE: Yeah. So, I think the most direct implication from this recent stress is through financial conditions. And financial conditions were tightening ahead of this shock and have tightened further since. Um, so that’s the clearest way that policy settings show up in terms -- or transmit themselves, um, into --- into the real economy. Now, taking -- taking a step back, it’s also important to look at the context of the cycle going into these shocks. And the context of the cycle is much more mixed in terms of the headwinds and tailwinds. So, you know, number one, as I mentioned, financial conditions were tightening. Number two, fiscal policy is less supportive this year, um, compared to last year. But that’s not really that unique of a statement. Last year was one of the most historic years from a fiscal policy perspective, um, in history. And so, fiscal I think still should be supportive, uh, particularly through the budget process and the China anti-competitiveness bill, um, but to a lesser degree and taking a different form than last year. On the public health side, hopefully there’s not another variant, uh, as severe as Delta or Omicron. I don’t know that, um, but one thing I do know is that the political appetite to have, you know, continuously restrictive policies --

THOMAS: That’s gone.

MIKE: -- is gone.

THOMAS: Yeah.

MIKE: So, I think it would the bar to reimplement some of those restrictive policies is a lot higher now, which should see a growth impact particularly in the short term. And so, the last piece, which is, you know, very critical, is household savings.And households are flushed with cash; there’s about 2.4 trillion in excess savings. And so, the big question of the magnitude in the speed with which households draw down those savings. Right now, we’re assuming a more modest drawdown, largely because a lot of the savings are concentrated in upper-income cohorts. But, you know, a pretty critical upside risk is there’s a faster savings drawdown, which could lead to stronger consumption growth and growth even further above trend than we’re assuming this year. And so, when we add up the pieces to the puzzle, you know, it’s still consistent with, uh, economy growing above trend, the labor market continuing to tighten. Um, I could see the unemployment rate down towards three percent by the second half of the year and more persistent wage growth and core inflation than the Fed’s expecting. Now, outside of the geopolitical concerns, um, a key risk is the consumer response to higher inflation. And so right now, spending intentions are still elevated, particularly on services.People have been cooped up inside for the winter.

THOMAS: They wanna do things.

MIKE: Wanna get out and spend money. Um, but buying conditions particularly for goods haven’t been this low since the ’70s. And so, one thing we’ve observed historically is that when inflation is more elevated, the volatility of the cycle picks up, particularly for the consumer. And so, one critical risk — now I think it’s more acute for next year, not necessarily this year, but you could certainly bring it forward — is that when do those buying conditions start to bleed into buying intentions? And that’s a material risk to the cyclical outlook in the near term. A lot of us aren’t used to high inflation periods.

THOMAS: Let’s think about the politics of inflation. I mean, first, let’s start with how damaging do you think this could be to President Biden and his agenda?

MIKE: Uh, so from a, you know -- uh, very much so.And he’s already feeling the political pressure from that. Real wage growth is negative and particularly for goods, like where has inflation been, uh, most concentrated? It’s been most concentrated in stuff, in goods where core goods prices are now over 11 percent. And so, that’s visible, that’s tangible, you feel that in the grocery store, the gas station, um, etcetera. The politics of inflation are very complex and something we really haven’t dealt with, um, in the U.S. for some time given the massive disinflationary period. I think one of the issues the Biden administration has struggled with is defining why inflation is up. They’ve talked about releasing strategic reserves for oil, which is a drop in the ocean, they’ve talked about corporate greed, um, which I think from a political perspective, if they continued with that message would help. Um, and then, you know, they’ve talked about some other factors, too, but there hasn’t been this really uniform case made to the American people, why it’s important, and what they’re gonna do about it. And particularly the latter point, what they’re gonna do about it, I don’t think there’s been enough there. Why is inflation so elevated and why is it our bias that, um, more elevated inflation will persist?Well, in the near term, call it the next six to 12 months, you still have demand growing well above supply. And so, to improve supply conditions, you know, productivity can go up.There’s some medium-term reasons for optimism, um, there, but bringing it back to the government investment point, we haven’t seen enough I think government investment which is usually a really important ingredient for sustained productivity growth. Um, and that will take some time. Second thing is on labor supply. And so, we’ve seen over three million workers leave the labor force, uh, since COVID started. I think about, you know, half of those to 40 percent, um, are due to demographic reasons and early retirements. And so, historically the probability of those workers returning to the workforce is lower than if they were prime age. But the other 50 to 60 percent, there is some scope for a return, and I think those -- you know, that’s more cyclical reasons, largely due to COVID. And so, as the public health backdrop improves, we should see some labor supply.The issue, though, is that labor demand is still so historically strong. Put some numbers around it, there are 11 million job openings in the U.S. and there’s only 7 million unemployed people. We’ve never seen a gap that -- high between, uh, labor supply and labor demand. One thing the administration could do, um, is around immigration. And so, immigration started to slow in 2017 when some policy changes were made and the cumulative gap now between the pre-2017 trend and today is about 3.2 million workers. That’s roughly the amount that have, uh, left the labor force since -- or since COVID. Um, I think in the current political backdrop, a broad-based immigration bill would be challenging to say the least.

THOMAS: But there’s the solution right there.

MIKE: But there is a very logical labor supply solution that could go a long way to reducing or at least keeping a lid on wage growth, um, in reducing some inflation pressure in the medium term.Now, the question was about the politics of inflation, and I think using a more open immigration policy to curb inflation would invite other political risk for Biden. But specifically on inflation, this gets back to the point, why it’s so complicated. Um, it’s certainly a challenge for him and at least for -- I expect it to be a challenge for him, you know, going into the midterms as well.

THOMAS: Well inflation historically is a problem for governments around the world, you know?

MIKE: It’s not just an economic issue, it’s a social issue.

THOMAS: Yeah, there’s there’s a correlation between high bread prices and revolution.

MIKE: Sure.

THOMAS: And you can track that throughout history. And so, um, you know, especially what’s happening with Ukraine and Russia right now. If that leads to a sustained spike in energy prices and inflation worldwide, we could see some, uh, additional impacts not only the United States, but globally.

MIKE: High inflation and high inequality is usually probably the best recipe you can get for social unrest to your point.

THOMAS: I wanna pick your brain a little bit about your research process. Because, you know, any way you cut it, it’s been a pretty extraordinary two years.

THOMAS: And you’ve had this global pandemic. Yeah, what do we think about that? Uh, and then on top of the pandemic, now you have the first major war in Europe really since World War II, another massive set of -- of variables.So, how are you approaching this from the research perspective? I mean, how are you coming to these conclusions, and you know, what’s surprising you about all this?

MIKE: Yeah, and it’s a really important question because as you said, you mentioned a lot of big things that are -- that are happening. And so, when I started at, uh, Wellington, I was fortunate enough to have an incredible mentor and friend named Toby Johnston and I learned an enormous amount from him. Uh, he’s since, uh, retired from Wellington. But one of the things he really drove home from a research perspective was the importance of a philosophy and process. And as part of that -- you know, we tend to think of it as a research pyramid. And so, on the bottom layer of the pyramid are structural developments. Things you and I talk a lot about and more recently have been focused a lot on demographics, inequality, and globalization. But they’re slow-moving; they take time to manifest themselves.

THOMAS: Yeah, the tectonic shifts.

MIKE: Exactly. Now, they can be sped up. You know, for example, COVID sped up a lot of these trends which were well underway anyway.Um, but they’re critical. The second layer is the business cycle. And so, trying to come up with proprietary leading indicators to get an edge on where we think growth, inflation, the labor market’s headed over the next six to 12 months. And particularly, you know, where those forecasts stack up relative to consensus expectations and increasingly important relative to policymaker expectations. The third layer is our policy settings. And so, that’s reflexive. So how does the structure and cycle influence monetary policy? How does it influence, uh, fiscal policy? And then, vice versa: How does fiscal policy and monetary policy in-- um, reflex itself back on the structure and cycle? And then the last piece i-- arguably the most important is market risk/reward. And so, trying to take all of those pieces from the structure cycle policy settings and come up with quantitative and qualitative measures of gaging what’s priced in and what’s not priced in.

THOMAS: So, have a framework.

MIKE: Have a framework.

THOMAS: Have a process and then anything -- you can throw anything against that.

MIKE: Yeah, throw anything against it but it -- at least it’s a way of, you know, framing how all these moving pieces are manifesting themselves in various outcomes. Um, now, philosophy and process, nuclear war, is that, you know, part of it? Not necessarily. But having a framework to come back to to analyze, um, how these shocks could manifest themselves in growth outcomes and inflation outcomes and market outcomes, um, I think is really important, particularly in times like this.

THOMAS: Yeah, that’s been important for me too on the geopolitics side. I also find that it’s helpful to allow you to tune out the things that don’t matter.

MIKE: Yes.

THOMAS: So, if you know what you’re looking at, really focus in on those and then you can help reduce noise in the overall picture.

MIKE: You know, your notes from the geopolitical side, one of the things I really like about them is you always bring it back to the underlying medium-term forces and how, you know, the little bits of information we get everyday increase or decrease the likelihood of those underlying forces. Now, clearly more recently from your perspective, a lot of the information we’ve received have confirmed those underlying forces and, uh, not necessarily in a -- in a positive direction. Is that fair?

THOMAS: I would say that’s definitely fair. And I think you can see that in the actions of countries, you know, all around the world. And particularly with regard to this Russia situation, you’re seeing massive changes in government behavior based on these actions that are being taken now by Russia. I think the underlying structural factor is this shifting world order and you know, a -- a bigger say for great powers. Uh, but you know, I think what we’re seeing today in Russia and Ukraine is accelerating those trends for sure.

MIKE: And what do you -- what do you think in the -- in the near term -- let’s build on that cause I think it’s really important from -- um, from a macro perspective as well. What types of changes do you think we could see in the near term related to that from a policy perspective?

THOMAS: A much stronger focus on national security. And not only in defense spending, which obviously we’re gonna see an increase in that and, you know, you know that from watching the Pentagon as well. But I think it’s more -- it’s broader than that. I think there’s a -- there’s a shift going on in policymaker minds about what constitutes a strategic sector. And when I say strategic sector, I mean what are the industries that are important in this ongoing great power competition? So, that started with advanced technology, semiconductors, advanced communications next-gen communications, space technologies, artificial intelligence, quantum, all of these sectors. So, I think what’s happening in the geopolitical world is focusing policymaker attention on what’s strategic.

MIKE: See, I think that point is so profound because if I bring it back to some of the structural drivers of the disinflation we’ve seen over the last 40 years, one of ’em, particularly in the ’90s into early 2000s, was globalization. And globalization you know, the declining goods prices we saw globally, particularly acute in the U.S., coincided with a massive increase in global trade volumes. Everything you just described is consistent with onshoring, and the umbrella it seems of national security, uh, goods continues to grow. And so, would it be fair to say that, you know, going [00:17:00] forward, the probability of a western country outsourcing something with a national security focus is lower than it was in the past? Is that fair?

THOMAS: Definitely. And we’re already seeing policymakers look at supply chain vulnerabilities. This was happening before COVID happened.

MIKE: Yep.

THOMAS: I agree with you that COVID has accelerated a lot of these trends. One of these is a focus on supply chain resilience. And not only onshoring, which I think is happening and you’ve seen that in the Chips Act and, you know, throwing money at certain industries. Uh, the term that I’m hearing a lot in Washington is friend-shoring. So, moving supply chains into countries that are, you know, friendlier, uh, than others.So, I do think the geopolitics and the shifting world order, um, is having some pretty significant impacts on the -- on the policy backdrop. And I’m wondering, like in terms of the -- the policy backdrop right now, obviously we were all focused on Build Back Better. We were focused on infrastructure.I mean, what’s the -- what -- what are your expectations on the fiscal side right now?

MIKE: Yeah. That’s a great question. And so, I think there’s three things in the, you know, short to medium term. Or -- and I’ll define that as between now and the midterms.

THOMAS: Mm-hmm.

MIKE: And so, the first is the just generic budget process. And I think before Russia and Ukraine, there was a -- already a lot of positive momentum to increase defense and non-defense spending by call it 50 to 100 billion dollars. I’d say right now, given the events over the last few days, risks around that are probably to the upside, particularly for defense. And that doesn’t preclude a supplemental defense, um, spending authorization or any subsequent legislation. And so, you know, that’s direct government spending, direct into the economy. That’s important. The second piece is a China anti-competitiveness bill. And it’s very rare in D.C. to see so much bipartisan support behind something.Now, there are disagreements between the Senate bill and the House bill, but there’s a lot more agreement than disagreement. The reason there’s disagreement is because the House included more, um, call it non-China pieces of legislation in their version. But I think, you know, there’s a good chance that will get done at some point in Q2. And in terms of numbers, it could be around 250 billion dollars over five years. A lot of that frontloaded and a lot of it incentivizing the onshoring of production of a lot of the goods you -- you mentioned. Um, so that’s really important. The third is -- is Build Back Better. And you know, I think Build Back Better at this point is tough, um, but it’s not -- I wouldn’t say it’s a zero-percent chance, but probably a little bit below 50 percent.

THOMAS: Do you think pieces of it might pass?

MIKE: Pieces -- pieces could pass, but once you try to break up legislation, right, there’s so many different factions within the Democratic Party that, you know, there’s one important faction on the progressive side that actually wants more. And then on the moderate side, they obviously want less. Um, and so it’s possibly to piece it together, but through the reconciliation instructions, you really only get one shot at this. And so, my guess, I don’t think the administration would admit this, but I think in hindsight, they probably wished they started with Build Back Better. And the reason why is because Build Back Better contains a lot of really important government investment. And so, government spending has increased significantly, um, but actually government investment as a percentage ADP hasn’t been this low since World War II. And government investment historically in the U.S. has been really critical for supply side improvement. You know, think of the number of things that have emanated, uh, as part of a implicit or explicit public/private partnership: advanced computing the internet, uh, wind power. I mean, there’s a lot of historical examples of important government investments leading to technological advancement in -- in something that has broad take-up. And so, the reason I bring that up is because you contrast that with the fiscal package from March of last year. And that -- the fiscal package from March of last year was really important, but a lot of the spending was in the form of cash transfers. And so, that did an enormous amount to reduce childhood poverty and poverty more broadly, but it also, um, was a significant lift to discretionary spending and, uh, partly lead to higher inflation. And I think the administration probably would’ve rather started off with the investment side, um, and then --

THOMAS: More long-term bang for the buck.

MIKE: Exactly. But they’re not down and out; they’re still negotiating.

THOMAS: So, two questions for you. Um, the first is, how punitive do you think the -- the coming China legislation might be? And is what’s happening in Ukraine right now likely to impact that discussion?

MIKE: So, the -- the second part of your question, I think definitely. Um, I think what’s happening in Ukraine right now accelerates the timeline, um, to pass -- to pass something. The first part, like, I think it’s interesting during call it the first 18 months of any administrations or any new Congress to look at what they change and also what they don’t change. And one of the things that the Biden administration has not changed is pretty much anything that Trump did with respect to anti-China legislation from the previous four years. And so, uh, that’s important in it of itself and is a strong statement. Now, as you’ve made the point that the relationship from a structural level is going from north to south, and that’s pretty clear. But that doesn’t mean we can’t have cycles around that and it doesn’t mean that the way an administration approaches China can change. And we’ve seen a change there; a more multilateral approach, less direct confrontation, less use of tariffs, although Biden’s clearly still kept them in place.

THOMAS: True.

MIKE: And so, how punitive could this legislation be?I think it’ll be less directly punitive in the sense that it’ll just provide grants and more funding to onshore some of these critical technologies. If you compare that with something like, uh, a tariff that is a very direct and, from the previous administration’s perspective, punitive way of attacking, um, the bilateral relationship. And so --

THOMAS: So, more -- more carrot than stick.

MIKE: I think so, yeah.

THOMAS: And then -- and then also bringing in, uh, allies wherever they can to amplify the policy. So, that’s where the Ukraine piece comes in, right? I think there’s been an awakening, among U.S. allies that yeah, the world is pretty dangerous, it does help to work together. I think that’s gonna bleed into the policy framework.

MIKE: It’s been one of the most amazing, um, elements of the, um, Ukraine issues, is how quickly the U.S. and Europe just immediately got on the same page. And so, you know, we’re -- we’re thinking about it, um, you know, more recently and one of the ways I guess to think about the recent Russia-Ukraine, um, stress is what’s likely to change or not change? Well, the escalation or de-escalation, that will change in the short term. Um, tough to say when or how quickly, but that will clearly change. What’s unlikely to change is probably two things: number one, um, the cooperation between the U.S. and Europe. Um, that’s a good sign; I think that’s moving in the right direction. And number two, we’d bring it back to a point, you know, we were previously making, the propensity for, you know, U.S. and Europe and, um, Australia, New Zealand, Japan to spend more on defense.

THOMAS: Absolutely.

MIKE: And have more, pro and countercyclical fiscal policy, too.

THOMAS: Yeah, I completely agree. I think that’s the direction of travel.

MIKE: Yep.

THOMAS: For sure.

MIKE: Definitely.

THOMAS: So, obviously it’s a complex political backdrop, inflation makes it even more complex. How does that impact your thinking about the midterms?

MIKE: Well, it’s -- so, first and foremost, you know, to bring it back to the inflation point and Biden’s approval rating, you know, historically the president’s approval rating is a pretty good indication of voters’ perception of the incumbent party. There’s also the historical example and the average loss for the incumbent party in the president’s first midyear going back to 1970 is about 23 seats. Now, the Republicans only need to gain five in the House, one in the Senate, um, and they’re leading in the generic ballot tests. And so, you look at all of those factors and it’s pretty supportive right now for the Republicans at least taking back the House and/or the Senate. I think the case for the Democrats -- right, it’s still early; there’s still, you know, primaries to happen and a few more maps to be -- to be drawn. The case for the Democrats is largely -- you know, they should actually gain seats now through the redistricting process. And to bring it back to the perception about inflation, I think marketing the Build Back Better Plan as supply improvements — and Treasury Secretary Yellen is really trying to do this now —um, and passing it could go some way to help in Biden’s approval, particularly around inflation. Especially if it coincides cyclically with, um, a peak in inflation in the second half of the year, um, which at this stage seems -- seems more likely than not although our bias is certainly it’ll be more elevated, um, than market expectations.And I will say, too, from the bond markets perspective, the bond market loves divided government. And so, going back to the midterms in ’94 and 2018, where we went from, full control to divided government, both of those midterms actually to the day marked the high in 10-year yields. Um, and so it is pretty important from a -- from a market perspective.

THOMAS: And I know it’s early, but what about the presidential election?

MIKE: Nope, it’s not early, Thomas. It’s never too early to start talking presidential politics. You know, on the democratic side, I have no reason to, uh, think or presume Biden won’t be the nominee.

THOMAS: Take him at his word for now.

MIKE: Yeah. Like, he says he’s gonna run. I’m not gonna deny it.And if he doesn’t run, he’ll announce that with plenty of time and we’ll have another primary processing go from there. Now, on the Republican side, I think that is going to be, uh, not more interesting, but interesting in a different way. And there’s a lot of internal competition right now to see who can line up the most from a policy perspective and style perspective as former president Trump. I don’t have a particular edge on whether Trump’s gonna run or not; he sure sounds like he’s going to run. I wouldn’t dismiss that. Um, but even outside of Trump, people like Ron DeSantis, Tom Cotton, Ted Cruz certainly come to the mix.

THOMAS: It’s Trump-like.

MIKE: Trump-like. Yeah, exactly. And you can see with a lot of their rhetoric and policy shifts over the last few years, right, it’s still Trump’s party. And that’s backed up by polling data, um, as well. One name I’ll throw out there and not from me, it’s from a trusted and creative source, that I’ve heard floated is Liz Cheney. And I suspect she has more shoes to drop with the January 6th commission. I think given the more recent events surrounding Russia and Ukraine, bringing back some element of neoconservatism in this type of a world wouldn’t shock me. Not necessarily boots on the ground but in the sense of, you know, there’s bad actors out there, it’s a scary place, we haven’t been tough enough, etcetera.

THOMAS: That’s a positive sell. I mean, that’s a -- that’s an easy sell to make right now.

MIKE: I think it’s an easy sell, particularly given, you know, what we’ve talked about with respect to defense spending.

THOMAS: All right. Well, Mike, you and I have taken a lot of joint trips to D.C. together, uh, including lots of chats with Democratic and Republican leaders, a host of lawmakers on both sides of the aisle, we’ve walked through the Capitol together. I’m curious about your personal reaction to the events of January 6th. I mean, what were you watching as that event unfolded and, you know, did that have any impact on your research process about how you’re trying to make sense of Washington?

MIKE: Yeah. I mean, I would say, and I was actually asked this, um, by a very, um, smart and savvy client recently who, you know, knew about our concerns ahead of the 2020 election on the peaceful transition of power and civil unrest. And they asked me how I’m thinking about, um, you know, the midterms in 2024 in that light and my response to them was, I’m five to 10 times as nervous. Because I haven’t seen any indication that the, uh, civil unrest which has been brewing for decades, um, is ebbing anytime soon. You know, if we take a step back, the technical definition of civil strife the U.S. is already meeting. And I don’t think it’s that far of a stretch to, you know, say at some point over the next 10 to 20 years, we could have a much more significant, um, civil strife moment. Civil war gets thrown out a lot, but call it whatever you want. Um, more concerns around that. And I think that’s, you know, concerningly rising in probability. Now, when I think about the reasons why that’s been happening, one of the things I look at really closely to gauge polarization is how often members of the opposing party vote together.If you think members of Congress are functions of their electorate as I do, then you know, any sort of bipartisan voting would theoretically reflect the underlying tone and sentiment of -- of their electorates. Members of the -- you know, Democrats and Republicans vote together at the lowest levels since 1860.

THOMAS: That’s an ominous year.

MIKE: Very ominous year. And what’s interesting about that is that that started to deteriorate as inequality rose.

THOMAS: Right.

MIKE: And so, I think the big underlying issue that you’re seeing in D.C. stems from inequality. And so, inequality I think will take generations, it’ll take a long time to find it on a better footing. And I think, you know, any conversation around inequality often starts with, well, what are policymakers gonna do about it? And we’ve actually seen a lot of alignment. Like, a lot of Trump’s policies were geared towards inequality, um, in a very different way, uh, than Biden’s and certainly Biden’s policies have been geared towards inequality, um, in a different way. So, they’re trying, but I think that solution over time will most likely have to come from the private sector. And we are starting to see signs of that, um, you know, with wage growth rising. A lot of that’s been concentrated in lower income cohorts. And this will take time as I said before, but there are some signs that it’s starting to ease at the margin. But the bottom line is, you know, the polarization issue in D.C. is there, it’s gotten worse over the last four years, and it’s very concerning for what happens next in terms of -- and I think like elections are a pretty important catalyst for that.

THOMAS: I’d say it’s also concerning from a foreign-policy perspective. You know, all the national security officials that I talked to were, um, not only concerned but really shocked by the depth of what happened on January 6th and they’re quite concerned about what that says about the American image abroad, particularly as the Biden administration is pushing democratic values and human rights and democracy itself as a way to push back against, uh, Russia and China. So, I think what’s happening in Ukraine now, um, may change that. We’ll see. It’ll be an interesting test to see if there’s a -- a shift in that and there’s a reminder here about the importance of democracy. But it’s certainly, uh, come up in a lot of my discussions with policymakers.

MIKE: And it’s one of those things, right, you have to focus on, you need a strong home base first before you can go out into the rest of the world. And there’s a lot -- lot more that needs to be done I think on that front here, uh, before it’s a consistent message abroad.

THOMAS: All right, Mike. Well, hey, thank you so much.

MIKE: Thanks for having me. It’s been fun.

THOMAS: A fascinating discussion. Yeah, great seeing you again.

MIKE: You, too. All right, Mike Medeiros, Macro Strategist at Wellington. Take it easy.

THOMAS: Thanks, Thomas.

-----------------------------------

Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk. Podcast proViews expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk. Podcast produced March 2022.

Wellington Management Company LLP (WMC) is an independently owned investment adviser registered with the US Securities and Exchange Commission (SEC). WMC is also registered with the US Commodity Futures Trading Commission (CFTC) as a commodity trading advisor (CTA) and serves as a CTA to certain clients including commodity pools operated by registered commodity pool operators. WMC provides commodity trading advice to all other clients in reliance on exemptions from CTA registration. WMC, along with its affiliates (collectively, Wellington Management), provides investment management and investment advisory services to institutions around the world. Located in Boston, Massachusetts, Wellington Management also has offices in Chicago, Illinois; Radnor, Pennsylvania; San Francisco, California; Frankfurt; Hong Kong; London; Luxembourg; Milan; Shanghai; Singapore; Sydney; Tokyo; Toronto; and Zurich. This material is prepared for, and authorized for internal use by, designated institutional and professional investors and their consultants or for such other use as may be authorized by Wellington Management. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. In Canada, this material is provided by Wellington Management Canada ULC, a British Columbia unlimited liability company registered in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, and Saskatchewan in the categories of Portfolio Manager and Exempt Market Dealer.

In Europe (excluding the United Kingdom and Switzerland), this material is provided by Wellington Management Europe GmbH (WME) which is authorized and regulated by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). This material may only be used in countries where WME is duly authorized to operate and is only directed at eligible counterparties or professional clients as defined under the German Securities Trading Act. This material does not constitute investment advice, a solicitation to invest in financial instruments or information recommending or suggesting an investment strategy within the meaning of Section 85 of the German Securities Trading Act (Wertpapierhandelsgesetz). In the United Kingdom, this material is provided by Wellington Management International Limited (WMIL), a firm authorized and regulated by the Financial Conduct Authority (FCA) in the UK (Reference number: 208573). This material is directed only at eligible counterparties or professional clients as defined under the rules of the FCA. In Switzerland, this material is provided by Wellington Management Switzerland GmbH, a firm registered at the commercial register of the canton of Zurich with number CH-020.4.050.857-7. This material is directed only at Qualified Investors as defined in the Swiss Collective Investment Schemes Act and its implementing ordinance. In Hong Kong, this material is provided to you by Wellington Management Hong Kong Limited (WM Hong Kong), a corporation licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), and Type 9 (asset management) regulated activities, on the basis that you are a Professional Investor as defined in the Securities and Futures Ordinance. By accepting this material you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. Wellington Investment Management (Shanghai) Limited is a wholly-owned entity and subsidiary of WM Hong Kong.

In Singapore, this material is provided for your use only by Wellington Management Singapore Pte Ltd (WM Singapore) (Registration Number 201415544E). WM Singapore is regulated by the Monetary Authority of Singapore under a Capital Markets Services Licence to conduct fund management activities and is an exempt financial adviser. By accepting this material you represent that you are a non-retail investor and that you will not copy, distribute or otherwise make this material available to any person. In Australia, Wellington Management Australia Pty Ltd (WM Australia) (ABN 19 167 091 090) has authorized the issue of this material for use solely by wholesale clients (as defined in the Corporations Act 2001). By accepting this material, you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. Wellington Management Company LLP is exempt from the requirement to hold an Australian financial services licence (AFSL) under the Corporations Act 2001 in respect of financial services provided to wholesale clients in Australia, subject to certain conditions. Financial services provided by Wellington Management Company LLP are regulated by the SEC under the laws and regulatory requirements of the United States, which are different from the laws applying in Australia. In Japan, Wellington Management Japan Pte Ltd (WM Japan) (Registration Number 199504987R) has been registered as a Financial Instruments Firm with registered number: Director General of Kanto Local Finance Bureau (Kin-Sho) Number 428. WM Japan is a member of the Japan Investment Advisers Association (JIAA), the Investment Trusts Association, Japan (ITA) and the Type II Financial Instruments Firms Association (T2FIFA). WMIL, WM Hong Kong, WM Japan, and WM Singapore are also registered as investment advisers with the SEC; however, they will comply with the substantive provisions of the US Investment Advisers Act only with respect to their US clients. ©2022 Wellington Management Company LLP. All rights reserved. ed March 2022.