Debating the implications of Kamala Harris

We’ve got to that point in life where we have to start thinking about secondary schools for our eldest, which leads to healthy debates between my wife and I about what we want and what is best for our daughter. Inevitably in these debates there is only one winner, and the better half prevails!

Kamala Harris put up a good performance in the debate this week, but wasn’t she always the likely winner of such a format, being a former DA and member of the debate team at Howard? I am not sure that gave us much of a steer on what to expect from her should she emerge ultimately victorious. While plenty of notes have been written on the implications of a Trump victory, there has been minimal research around the policy implications of Kamala Harris coming to power, despite her current lead.

To be fair to the sell-side, there are valid reasons for the lack of ink on the topic.

• Presumably as VP she has endorsed a lot of the current administration’s policies
• Her background is not in economics or the world of business, so a lot of her more vocal policy intentions have revolved around social policy rather than economic policy
• Over the last decade or so, the Democrats have put into place a lot of their big landmark legislation around healthcare, infrastructure, green energy, and there is nothing obvious of significance that still needs to be pushed through
• A Republican presidency will bring much greater obvious change to the status quo and more significant change around areas like trade, immigration and fiscal policy
• Until recently she has not been forthcoming on her agenda in writing

The latter point has finally changed, at the margin, as her campaign website was updated on Sunday night to include a section on “Issues” where they outline topics around “Building an Opportunity Economy and lower costs for families”, “Safeguard our Fundamental Freedoms”, “Ensure Safety and Justice for all” and “Keep America safe, secure and prosperous”.

Let’s look at this in more detail and then consider some sector and market potential implications.

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“Build an Opportunity Economy and lower costs for families”

?From a markets perspective it is this section we care about the most, and there are several noteworthy things mentioned here.

• Cut taxes for middle class families; she highlights restoring two tax cuts designed to help middle class and working Americans: the Child Tax Credit and the Earned Income Tax credit. The latter is a tax credit for low to moderate income households and the former would expand to provide a $6,000 tax cut to families with newborn children. Harris is ?“committed to ensuring no one earning less than $400,000 a year will pay more in taxes” and suggests funding this by rolling back Trump’s tax cuts for the wealthiest Americans, enacting a billionaire minimum tax, and quadrupling the tax on stock buybacks. The tax rate on long-term capital gains will be 28%, lower than the 39.6% under Biden.
• Make rent more affordable and home ownership more attainable; provide first-time homebuyers with up to $25,000 to help with down payments and put forward a comprehensive plan to build three million more rental units and homes that are affordable.
• Grow small businesses and invest in entrepreneurs; expand startup expense tax deduction for new businesses from $5,000 to $50,000, and increase the share of federal contract dollars going to small businesses.
• Take on bad actors and bring down costs; here she talks about going after big corporations who jack up prices, calling for the first ever federal ban on corporate price gouging on food and groceries, and talks of taking on Big Pharma to lower drug prices and bring down prescription drug costs by taking on pharmacy middlemen.
• Strengthen and bring down the cost of health care; among other things she suggests working to cancel more medical debt.
• Protect and strengthen social security and medicare; again she talks about making millionaires and billionaires pay their fair share in taxes to help fund this.
• Support American innovation and workers; she’ll fight for unions, sign landmark pro-union legislation, will fight to raise the minimum wage, and eliminate taxes on tips for service and hospitality workers.
• Provide a pathway to the middle class through quality, affordable education.
• Invest in affordable child care and long term care.
• Lower energy costs and tackle the climate crisis; given my article last weekend, I’d highlight she specifically talks here about fighting for the freedom to breathe clean air, drink clean water, and live free from the pollution that fuels the climate crisis.

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Potential sector implications

Jefferies had a good note identifying the ten most actionable policies if Harris wins, considering the 2024 Democratic Platform and thinking about proposals that would require minimal legislative action.

• Restore top individual income tax rate to 39.6% on income above $400,000 for single filers and $450,000 for joint filers; potentially negative for companies more reliant on higher income demographics
• Set new rules and penalties to prohibit food and grocery companies from expanding profit margins more than warranted; snack makers and grocery retailers potentially at risk
• Continue antitrust enforcement and reduce hidden fees; expect scrutiny on bank/fintech partnerships, and unfriendly policy towards bank and healthcare related M&A
• Lower drug costs by requiring pricing transparency from Pharmacy Benefit Managers
• Develop AI guidelines via the AI Safety Institute; potentially helpful for cybersecurity names and unhelpful for certain AI use cases
• Use American made steel and other building materials for every federally funded infrastructure project; supportive for US materials producers, but a negative for container shippers
• Reshore supply chains for critical materials and technologies against China; certain capital goods providers would benefit, and it would also be supportive for areas like trucking
• Limit exports of advanced technologies that are deemed harmful for national security; semis most in the firing line
• Electrify federal fleet and other heavy-duty vehicles, including school buses and transit buses; could help several players in the EV supply chain
• Require low carbon materials and clean power to be used in all new federal buildings by 2030; some building material companies have products which are well positioned to help

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Why markets shouldn’t be concerned about a Harris presidency

She represents the status quo and won’t bring transformational economic and fiscal policy. Many current advisers for this administration which includes the likes of Lael Brainard, will likely be retained. Kamala Harris will need to lean on these economic advisers given her background discussed earlier.?

Recent commentary suggest she is shifting in a more moderate direction on economic policy than her prior positions. While she reiterated her support for Biden’s proposal to increase the corporate tax rate to 28% and to impose a tax on unrealized gains for wealthy taxpayers, she has embraced a more modest increase in the cap gains rate than Biden and is trying to focus on tax relief for small businesses.

Many legislative proposals are unlikely to pass unless there is a Democrat sweep, which is a low probability event. Several of the tax increases as well as various measures around housing and healthcare would require legislation.

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Why markets shouldn’t be complacent about a Harris presidency

Legislation might be hard to pass, but Trump showed us that when there is a will there is a way, and Harris sounds much more left leaning than her predecessors. Talking about taking on bad actors and then immediately highlighting big corporations who jack up prices maybe a bit of political bluster, but it makes for uncomfortable reading as an investor who has seen margins continue to rise at most companies on the back of strong pricing. She can make appointments who can make things difficult for certain industries.

The US stock market has been supported by positive wealth effects from higher income cohorts – less disposable income here, or the perception of needing to be more prudent in the face of greater uncertainty around new policies could be an incremental headwind.

Measures like giving out cash for first time home buyers, cancelling medical debt, increasing the child tax credit and raising minimum wages are all inflationary in nature. If some of the proposals on the revenue raising side don’t get passed through legislation as is likely, Kamala Harris would also add to the US budget deficit.

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Conclusion????????????????????????????????????????????????????????????????????

Obviously, who wins the Senate and the House are key and I agree with consensus that the bear case with Harris only really materialises with a Democrat sweep. Yet I am reluctant to just assume a Harris win and dividend Congress equals status quo for markets and think there will be more investment ramifications than are currently being discussed. We’ll revisit elections more widely again nearer the time.

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Bernie’s weekend eats – République, Los Angeles

This week’s recommendation is inspired by Kamala’s long stint in California, a place where I have many good food memories from over the years, though few better than a visit last year to République. Located in a historic building which Charlie Chaplin turned into his studio in the 1920s, this is a French inspired bakery and restaurant which serves some of the best breakfast and brunch dishes I have ever eaten. And everyone knows how hard it is to get amazing brunch dishes which show some flair.

Not the case here - skipping over the many delicious pastries on offer, there is still a very wide selection of dishes to choose from and I don’t remember having any duds. Maine lobster omelet, BLT benedict sandwich, potato pancake with smoked salmon and salmon roe, short rib burrito, kimchi fried rice, shrimp and grits, and fried chicken and waffle were all consumed over two visits. I actually wouldn’t pass over those pastries either – Chef Margarita Manzke won the James Beard Award for Outstanding Pastry Chef last year. It’s worth the queue.

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