The Blue Wave Made History. What’s in Store for the Future?

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Greg Hall: Hey, everybody, welcome to another episode of Accrued Interest, PIMCO's podcast dedicated to serving financial advisors, their clients and the wealth management community. As usual, I'm your host, Greg Hall. I lead our wealth management business here in the United States. And today we are going to talk about the election. I am so fortunate to be joined in the room by Libby Cantrill.

Libby is our head of public policy. Libby has lived and breathed the midterm elections, what, for months.

Libby Cantrill: I'm here to talk about it, though. I have survived.

Greg Hall: Yeah, that's true. So we're recording this Thursday afternoon. Libby has been nonstop watching the results, interpreting them, helping our investment committee interpret what's going on and what the implications might be for markets and for policy going forward. And we, of course, appreciate this. You've been spending a lot of time with our clients, helping them do the same thing.

So, Libby, thanks for carving out a few minutes here to talk to us on the podcast.

Libby Cantrill: Always happy to be on the pod.

Greg Hall: All right. I'm so excited to get into this because I really want to hear your take on this stuff. Why don't... let's just start with a level set. In your words, in your analysis, what happened? And we'll talk about some of the, you know, the things underneath the surface that you think are interesting, and the results themselves.

Libby Cantrill: Yeah. I mean, this was, you know, a generational, you know, rejection of, referendum on, rebuke of the administration. You know, as you know, the midterm elections are always a referendum on the party in power. So Democrat, Republican, oftentimes the party in power loses seats. And that was our expectation. We were looking at some two kind of wonky indicators: the generic congressional ballot, the sort of preference of one party over another among voters.

Democrats were leading that by about ten points. And then also the enthusiasm gap. You know, how excited is one group of voters over another? Democrats were leading that by 11 points. The reason why I focus on those indicators is because they have been suggesting waves in other wave elections. For instance, in 2022, when everyone was talking about the red wave,

those indicators were not in wave territory. So these were suggesting that we would see a very good night for Democrats and a bad night for Republicans. But what ended up unfolding was really the sort of blue... blue-sami, or the blue-back, or however you want to talk about it.

Greg Hall: The blue-nami. The...

Libby Cantrill: The blue-nami, or "nami"? Yes. My fatigue is showing here. It was just a, you know, a Republican wipeout. And what you saw is that Democrats were competitive in places that they didn't even know that they were going to be competitive in, right? They won House seats that they've actually never won before. House congressional districts that were created, you know, 40 years ago, that had been long held by, or only held by, Republicans.

And then, of...

Greg Hall: Of course, one of the late-night guys that I pick up on YouTube, usually the morning after, because I can't stay up until midnight or 12:30 anymore. I'm not that cool. He joked that the last time Kansas sent a Democrat to Congress was before they sent Dorothy to Oz.

Libby Cantrill: I mean, 1932. It is. Yeah, that is. Yeah. And the same thing, you're seeing this in the South, right? The fact that Democrats were even competitive in places like South Carolina and Mississippi. And now, in South Carolina's case, they have won that seat. They probably will win in Mississippi as well. So again, I think we were expecting a good-to-great night.

What, you know, for Democrats, it's kind of a great-to-fantastic night. I think there are a couple of observations that are worth noting for investors, because I do think, and, you know, we've seen this before, where a party wins a mandate and then they over-interpret that mandate. And I think what we saw on Tuesday night was really just indicative of what we've really seen over the last few cycles, which is sort of this thermostatic nature of politics.

We kind of, you know, you kind of go, you get too cold, and then so you go, you know, you turn up the thermostat, and then you get too hot, and then you go cold again. It's kind of the same way with the left, right and left. And so we saw independents breaking for Democrats disproportionately. They're mad about affordability, they're mad about the Iran war. We can talk about those things. We saw young people, again, breaking for Democrats. We saw Hispanics breaking for Democrats. These are... these three cohorts had really helped to get President Trump elected, and now, of course, helped with this blue-nami or what have you. But, and this is a big but, you know, these folks are still shopping, right?

They are, you know, we're renting politicians in this country. We do not own them. We are dating them, we do not marry them. And so the point here is, even though this was just, again, I think, a pretty unequivocal message to the administration, to Republicans in Congress, I think it's sort of foolhardy to make too many conclusions based on our projections about 2028, based on what we've seen.

Greg Hall: Right. So if you were advising Democratic strategists right now, it sounds like your advice would be kind of like, don't overplay your hand. This was more about frustration with the current administration than it was a wholehearted embrace of Democratic values by... Tell me, actually, tell me, I'm curious about this. Who... what were the big demographic cohorts that swung Democrat in this election? And did any of that get your attention?

Libby Cantrill: Yeah. So this was, again, much more, exactly as you said, a protest vote, not necessarily an endorsement. And it was just those groups I was just talking about. It's independents, right, who had broken for Trump in 2024, went back to Democrats again. Probably shopping, not owning necessarily the Democrats. Hispanics, I think that some of the immigration issues absolutely galvanized a lot of folks to vote, particularly in places like Texas.

You also saw Black Americans turn out in a disproportionate way, part of this so-called Blacklash, which has been a sort of... been writing about in DC for the last couple of months, just in terms of the rebuke of the Voting Rights Act decision from the Supreme Court. And then the young people, which, again, young men in particular had broken for President Trump, and they went back to Democrats.

But this is where, as a, you know, as a sort of a strategist, you would... the advice for Democrats would be meet voters where they are, and meet the median voter where they are, which is really around affordability and around checks and balances. Those are the two things and two themes that really emerged in the exit polls that I do think were sort of a common theme across voters.

Greg Hall: So I'm curious. Yeah, I was going to... I remember when we were talking about the midterms, you know, ages ago, right? March, April time frame. And the war was fresh, and we didn't really understand its kind of full implications. I think there was probably a supposition that it would be relatively brief at the time. And people were talking about the TACO trade, you know, it was that time, right? And as you usually do, you were warning us like, hey, it's way too early to predict where the midterms are going to come out in our climate. Just too many things change in weeks versus months. And it was going to be, you know, according to your analysis, the House seemed pretty likely to go Democrat, and the Senate was kind of a toss-up.

What changed, you know, in your mind over the course of those five or six months? And then how confident are you that we actually know what changed hearts and minds? Because I think that narrative gets rewritten a few times, usually, in most election cycles.

Libby Cantrill: Yeah. No, that's absolutely right. So just as a reminder, you know, 435 seats in the House, all of those seats were up for reelection. Democrats only needed to win three seats in the House. So, you know, we were saying to clients, Democrats just need to have a good night in order to take back the House. On average, again, the party out of power actually typically wins about 25 seats.

So really, they just needed to kind of show up and not mess up in order to take back the House. So we were highly confident that the House would flip. The Senate did feel more like a toss-up. At one point, it felt like, actually, Republicans would likely keep the Senate because the Senate map was so difficult. Democrats needed to win net four seats.

That might sound easy, but it was actually quite difficult because they needed to defend some states that were in kind of swinging territory, Michigan and Georgia in particular. But then they'd also need to win net four of deep Trump territory, in places like Texas and North Carolina, Kansas, Iowa, Alaska. And of course, not only did they win some of those, they won all of them.

And then they actually expanded the map. They won places like South Carolina and probably Mississippi. So I think what... I mean, the votes are still being counted. Difficult to say for sure. But as a reminder, you need 218 to pass things in the House. It looks like Democrats probably will have anywhere between 250, 255. I mean, that is, again, just a blockbuster of a night. In the Senate, you need 51 to pass things by a simple majority. Usually you need 60, though, so that is something that's going to be a constraint on Democrats. They're probably going to have 56 seats in the Senate. So again, this is something... It looked like it was going to be a good night for Democrats. It ended up being a terrific night.

But I think that affordability issue really was the driver for many voters. The Iran war obviously was, you know, kind of part of that. Gas and groceries, health care and housing: GGHH. And then also, I think, this sort of sense that the administration wasn't necessarily totally playing by the rules. In exit polls, this idea that there might be conflicts of interest for the families and sort of folks in the administration enriching themselves. Those things will be litigated, for better or for worse, over the next two years, but I do think that was also an animating issue for voters.

Greg Hall: Yeah, that surprised me a little bit because, you know, it's not like those accusations are new to this administration or the sort of the principals of it. But when it started to play a larger role in the exit polling, I was surprised. I guess maybe against the backdrop of higher prices and people feeling like the economy wasn't working for them, and maybe it took on a more meaningful value to those swing voters.

Libby Cantrill: Yeah. And I think that, you know, the president has been so effective in understanding sort of the zeitgeist of the voters, and of his base in particular, historically. And this was a little bit of a departure from that. I mean, voters were concerned about affordability. And yet he wasn't kind of in their face talking about all the things that the administration was doing. And they passed this One Big Beautiful Bill. He didn't really talk about it as much as I think a lot of Republicans had wanted him to sort of lean into. I mean, what we see from the economic data is that that bill absolutely has provided a floor to many folks in this country this year. It's provided... it's put about a half a percent of stimulus into, from a percentage of GDP, into the economy.

But, you know, he wasn't talking about it. They passed a huge housing bill. I mean, huge for Congress's standards. I mean, kind of low bar. President Trump didn't want to have a public signing ceremony. So there were things that I think that, you know, probably in retrospect, he should have leaned into more, just given these concerns around affordability.

And then at the same time, of course, talking about the ballroom and whatever. I mean, I think that the media, there's a little bit more hysteria around that than sort of what is justified. But I do think that for some voters that didn't sit well, that they did feel like they were left behind: gas and groceries, health care and housing, and at the same time, President Trump was sort of talking about things that did feel pretty remote and not necessarily applicable to the average voter.

Greg Hall: Yeah, he's been immune from the out-of-touch argument that has sunk... You know, when George Bush didn't know the price of milk in the debate, right? I mean, those have...

Libby Cantrill: ... President Biden, right? Yeah. Who was talking about how everything's fine, and then inflation is at 9%. Yeah.

Greg Hall: So, yeah. Yeah, exactly. Exactly. All right. Well, that's... I mean, so, yeah. So gravity sometimes takes hold, and we've seen...

Libby Cantrill: Water finds its level.

Greg Hall: Yeah. We've seen some of those results. What do you think of the Democrats who won? Obviously a much broader slate of winners. There was... well, I guess, depending on who you are, there was this fairly... you know, there's a lot of talk, and maybe even a little bit of fear, that this would be a resurgence of the far left of the Democrat Party, that you would see the DSA faction, you know, use this as a way to kind of take more power, more control in the party. Is that what we saw in the actual results?

Libby Cantrill: Yeah. So this is... and we hear a lot from our clients, particularly overseas, actually, about the DSA, the Democratic Socialists of America. Which actually, if you look at the numbers, if it's about 250 or 255, again, you need 218 in the House to pass any legislation. Maybe there are ten who are kind of DSA or DSA sympathizers.

Right. That's a very small percentage of the... Now, there is a progressive, kind of populist progressive caucus, but that is also going to be smaller than what are the more moderate folks on the Democratic side, which are the New Democrats. And then, if you're kind of a dinosaur like I am, the Blue Dogs, the Blue Dog Democrats, where I was on the Hill 25 years ago, they were a very effective and powerful faction.

They're sort of the Southern Democrats who are more fiscally conservative. It's going to be kind of the rise of the Blue Dogs, if you will. So this just... the center of gravity among this Democratic caucus in the House is going to be more moderate. And then the Senate, it's going to be way more moderate, because you do have Democrats representing deep, deep Trump states, right? Kansas, South Carolina. I mean, President Trump won South Carolina something like 20 points, you know, thereabouts. He won Kansas by 14 points. So those folks are going to be knowing that they're representing a pretty conservative state. And as a result, they're going to vote that way as well. So I do think there's going to be a singular focus, at least in the beginning, on affordability. I think that's going to be sort of demanded by some of these kind of majority makers, if you will, the more moderate folks who have won in deep Trump territory.

Greg Hall: Maybe we'll see a healthy development where the debates come a little bit closer into the more centrist issues that the parties feel, you know, both parties feel should be important, right? And the extremes maybe get a little bit less airtime.

Libby Cantrill: Yeah. And that's actually... I mean, if you look, and I have a chart in my chart book that some of our clients may have seen, I think a lot of people are always surprised to see it. It's a Gallup poll that shows that almost 50% of Americans self-identify these days as independents. And I think that sort of speaks to two things.

One, it's sort of the disillusionment of the two parties, right? The sort of sense that the two parties don't really represent, kind of, again, the median voter. But I also think it's in the sense that, like, there's actually a lot more centrism and moderation. Yes, of course, you can be sort of center-right or center-left, but that is actually, you know, almost the majority of Americans these days.

And so I think a lot of Americans would welcome more compromise and also just government working for them. There is a sense that... and you saw this in the primaries, and I think we saw this in the election results, the sort of anti-establishment, anti-incumbent, you know, sensibility. So it was partly affordability and kind of some of these concerns around the administration's overreach.

But it was also just like, get these folks out. We want to try something new. And again, Democrats will be vulnerable to that, too, if they don't address these affordability concerns in particular.

Greg Hall: So we're talking a lot about affordability, and the market's trying to figure out right now... It was interesting when the results came in, or started to come in, yesterday, markets saw it as a great thing. Equity markets up. Bond market was up. Today is a little bit of a different story. We see particularly tech trading off pretty aggressively, bond market rallying again.

The market will sort itself out over a long period of time. We don't have to necessarily prognosticate on that. But what do you think, from a policy perspective, we can look forward to with the new Congress? And maybe let's center on affordability and inflation first, and then we can talk about, you know, other policies as well.

Libby Cantrill: Yeah. So, as, you know, maybe dramatic as election night was and the results were, I mean, there are still going to be some pretty significant constraints on the Democrats. And of course, President Trump is in the White House. He... and he's already said...

Greg Hall: He's still an important guy.

Libby Cantrill: He's still very important. And he does have the ability to veto any legislation that comes to his desk. And he has said that he will use that freely. Well, you know, we'll sort of see. There is a mechanism, of course, to override a veto. And just as a reminder, it requires two-thirds of each chamber, so 290 in the House and 67 votes in the Senate.

I do think there are some things that could actually get past both chambers with a veto-proof majority, meaning that if Trump vetoes them, then they could override the veto. And I do think they will be on affordability, pretty specific things. Tariffs on Canada, for instance, I think will likely be one of the issues that Democrats put forward.

I think a lot of Republicans will go along with that. They want to repeal those tariffs. Whether they repeal the ability for President Trump to put those tariffs on, we'll see. I mean, it's... he has a wide authority around tariffs. So we'll kind of see how that goes.

Greg Hall: Just Canada? Does it go to Mexico? Does it go to Europe, or...

Libby Cantrill: I think there's just a lot of unanimity around Canada, because Canada, for the majority of the United States, is the biggest export market, sort of, you know, trading partner for exports, which really do affect, of course, all the states. So, you know, we'll see. It could be more broad-based. But I think that... I would suspect that Democrats kind of try to start out narrow,

see what they can do, get some points on the board, for instance. And then I think there's going to be a real push to reinstate some of the health care subsidies that expired over the past few years. These are the Obamacare ACA enhanced subsidies, something Democrats really want to run on in 2028. So I think they will use all sources of leverage in order to kind of force President Trump to sign those into law.

Not sure if they can get Republicans to sign on to that, but there is a mechanism through the debt ceiling negotiations, which are coming up next year, where I think that President Trump will want more spending for the Pentagon. Democrats are going to want more spending for health care. I think you could see sort of a compromise coming together, which, of course, ironically means more spending, not less spending.

Also an increase in the debt ceiling. Of course, the debt ceiling was supposed to be a constraint on spending, not necessarily lead to more spending, but it's a source of leverage that the party out of the White House has typically used to extract concessions from the president. I think Democrats will be no different.

So I think it's tariffs, at least, you know, claw back some authorities from the president, particularly targeted towards Canada. And we'll see, maybe more expansive. I think that, again, health care subsidies are going to be super important for the Democrats. And then the Iran conflict, as you said, that's a little bit of an open question in my mind.

I think that the price of gas obviously has been driven by, as we know, the price of diesel, which is, by the way, one of the reasons why Democrats did so well in the Plains states, in Iowa, in Kansas.

Greg Hall: Equipment, trucking.

Libby Cantrill: Just... and it's planting time, right? And then you also have the tariffs on Canada that have increased the price of potash, of fertilizer. So this has really meant something for, you know, obviously these voters. So I think the Democrats will try to do something on, again, the tariff front. The Iran funding is really where the Democrats can actually use their leverage over the president.

I mean, not to get too wonky, but the Constitution is pretty ambiguous about who actually, which branch of government really should be the tip of the spear in terms of foreign policy conflicts. The Congress gives, or the Constitution gives, the Congress the ability to declare war. But of course, the president is the commander in chief. He's the head of the military.

So it's a little bit ambiguous, but what it's not ambiguous is around funding. And that is really where Congress has the power of the purse. President Trump is going to need more funding on Iran. This will be a channel where they can constrain the president on this conflict. So I think it's obviously an open question where it is when the new Congress is seated in January, and kind of how they, you know, how they sort of, you know, pursue that.

I mean, as we were talking about before, politically difficult to sort of not pay the troops, or not necessarily replenish the munitions that we know have been depleted through the Ukraine conflict and then also through Iran. So it's going to be a bit tricky, I think, for Democrats to really lean into that issue. But again, if you really are talking about affordability, you're talking about gas and groceries and diesel. I do think that they will try to do what they can there.

Greg Hall: Yeah. The headlines are certainly, at least today, suggesting that, you know, people are interpreting this as either a slowdown or a faster ceasing, cessation of hostilities in Iran. That, you and I were talking before, the politics of that feel very tricky, regardless of how the Democrats may feel about the fundamental reason for the war or the execution of the war.

It seems like it's just very hard to pull out of a hot military conflict once it's begun.

Libby Cantrill: No, exactly. And I mean, we were talking about 2006, right? Another wave election where Democrats did well. You know, shortly thereafter, they passed a $100 billion supplemental for the Iraq war that was deeply unpopular in the country. It was deeply unpopular among Democrats, but also a very difficult thing to message to your constituents, that you are not going to be paying the troops or you're going to leave kind of, you know, folks stranded or what have you.

So I do think that it is going to be tricky. One thing, though, Greg, I think the market may... well, we'll see. I mean, you know, open question about how all of this, you know, ends up unfolding. But I do think people are underestimating, you know, how much of a legacy issue this is for President Trump as it relates to Iran.

I mean...

Greg Hall: His personal legacy.

Libby Cantrill: Yeah, his personal legacy. And I think that he... and I've heard this from folks who advise him. Now, of course, would you say, like, would he have still done this knowing all the things? I'm not sure. But I think people, again, underestimate that this is, like, is an ideology for him. He has been thinking about Iran not only since Trump 1.0, but really since the early 1980s, sort of like tariffs.

Honestly, Venezuela was also another legacy issue. So he came to Trump 2.0 with, I think, much less sensitivity to public approval and to the politics of these issues than I think what the market was... I mean, there's sort of this TACO thing, but, like, you know, he has put tariffs on. We have gone into Venezuela. We have gone into Iran.

So I think that, again, there's sort of this underestimation of how much he is focused on some of these issues for his legacy. People may agree with it, disagree with it. But again, I think he really is viewing this in that context, with more of the longer arc of history. And I think thinking that history will look back on this much more positively than certainly how voters view it right now.

Greg Hall: How do you think, operating with a Democratic majority in Congress, and the sort of aftereffects of this historical rebuke, as you aptly put it, how do you think that changes his behavior? And I know that that's sort of an unfair question to ask, because he's famously hard to predict. But I'm just curious how you're...

Libby Cantrill: Well, I think it's been sort of, you know, I think just from a... as a US citizen, regardless of your politics, you know, you do want people to govern. And I think that, you know, you've seen Democrats who are saying they're going to... sounds like they're more focused on affordability issues. President Trump has opened the window to compromising with Democrats.

I think that all could be, you know, a positive. You know, what does that mean? I mean, you know, this is where, you know, Trump and, say, Elizabeth Warren are kind of strange bedfellows. I mean, there is a populism that runs through the kind of the progressive left that also runs through the kind of the MAGA right.

And President Trump has talked about capping drug prices. He's talking about capping credit cards. He has sort of talked about, obviously, state-run capitalism, investing in companies, that's sort of anathema to a conventional Republican. So I think that there could be some areas of commonality, of common ground. I do think drug pricing is one of those. We've sort of seen fits and starts with President Biden and with President Trump trying to allow for the government to negotiate more with pharmaceutical companies to bring down the costs of drug prices, and for Medicare, and for just in general. I think you could see that that could be one area of compromise.

I think housing could be another. There's some dark horses that I've talked about in the media, which probably sound a little bit like real dark horses, but Social Security reform. I mean, that is something that we know needs to happen. What... you know, President Trump is in a position where he isn't running for reelection. He's not, by the way, which is one of the top questions I get from our foreign clients. Is he running? No, he's not running again. He can't, nor is he acting like it. But the 22nd Amendment is very clear on that. But he...

Greg Hall: Is the... the acceptance, again, so far, the acceptance of the results this time around seems to have been comparatively graceful and without objection or comment. I mean...

Libby Cantrill: Yeah, so we'll see, right? I mean, things can... There isn't necessarily a ton of love lost between Hakeem Jeffries, who's going to be the next Speaker of the House, and President Trump. So, but these are all New Yorkers, you know: Hakeem Jeffries, Chuck Schumer and President Trump.

Greg Hall: And we famously get along with each other.

Libby Cantrill: We all love each other. Obviously, New York is such an easy place to navigate.

Greg Hall: Well, we're loud, but...

Libby Cantrill: We... No, I know. There is actually, I think, more civility in New York than maybe people think. So I do think there are these areas of potential kind of compromise. And again, where, you know, Trump would feel like he's sort of serving his own legacy by kind of compromising with the Democrats.

Greg Hall: All right. Well, that's... I mean, that's a hopeful note. I like that, I like that. I mean, not everything...

Libby Cantrill: Springs eternal. You know.

Greg Hall: Yeah, yeah. But I'm curious. It sounded like we were about to get into kind of spending and a little bit of horse trading. It sounds like maybe Democrats allowing defense spending to continue at a pace they wouldn't otherwise be excited about, in exchange for some of the programs that they'll be focused on.

So obviously, the question that springs to mind is the deficit. And what our listeners hear, of course, you know, we're constantly talking to them about value available in the debt markets, and they're very concerned about the fiscal path that the country is on. So what are your thoughts there?

Libby Cantrill: Yeah, I think I have a nuanced message, in that, you know, the deficit, I mean...

Greg Hall: Obviously, never let it be...

Libby Cantrill: No, I know, I appreciate that. You know, I mean, we've been saying this since 2024, that the deficit is the biggest loser in all of these elections. We were saying that whether it was going to be a Trump presidency or a Harris presidency, that the deficit would likely go up. That has come to bear.

We haven't seen sort of the fiscal consolidation that I think the DOGE-ers had wanted to see. And this election, I think, is sort of no exception to that, that it was going to be the biggest loser regardless of who won. And I do think this is regardless of who won. Meaning, if Republicans had kept both majorities in Congress, they would have demanded more defense spending.

So you'd have seen higher deficits from defense spending. A split Congress, again, more of this defense and health care. You know, now, a pretty dramatic Democratic sweep, you know, more health care and then some defense as well. So it's more the composition of spending than the level of spending. But I do think spending will go up. It's not going to be a budget buster like the One Big Beautiful Bill, right?

So we're not going to see trillions of dollars of new spending or new tax cuts hitting the deficit and the debt outlook. But you could see, you know, whether it's 50 basis points on GDP. So, you know, right now the deficit is running at kind of 6.2% of GDP. Maybe it edges up to 6.5, 6.7. You know, who knows?

These are all just guesstimates. Obviously, that is a problem, right? If you just look at the average deficit over the last 30 years, it's around 3.5%. So this does feel like there will be a reckoning. I'm skeptical that the market will impose that discipline on Washington, DC. I mean, if you just talk to the average member of Congress, they don't necessarily know what the 10-year is, let alone where the 10-year is trading.

So the sort of feedback loop between rates and spending, I just don't think, for the average member of Congress... You know, these guys are lawyers or they're farmers, they're small business people. They're not markets people. So I don't think, unless you have failed auctions, which, of course, we don't think is going to happen, or a real run-up in rates, which we also don't think is going to happen...

I do think, and I alluded to it before, I do think there will be a catalyst for some sort of fiscal consolidation. That's when the Social Security Trust Fund is supposed to go bankrupt in 2032, but that's not within the next two years. And again, maybe there's this dark horse situation where he kind of pivots and wants to do something that's legacy-making, and Democrats go along with it.

Again, there's a lot of ifs that would kind of have to get there, to get to that result. But I think probably the base case is this is not dealt with. And as a result, the deficit goes up. I think importantly, though, Greg, and this is important for our clients, you know, the US is not France.

And so while the US's fiscal situation doesn't look great, 6% deficits, what have you, deficit being the biggest loser, we're not also seeing... we have a lot more flexibility in terms of the balance sheet, if you will. And that's because our tax base is very low. People are not going to like me here saying this.

Greg Hall: But nobody likes to hear it. But it's an important point.

Libby Cantrill: But it's an important point because, you know, when push comes to shove, if we need to, the US has a lot more levers to pull in order to sort of shore up its fiscal situation than, say, France does. And I'm not trying to pick on France, but of course, they have been in the news. You've also seen the sort of sell-off in France have, you know, higher rates plus, you know, a lower currency, where the currency has also sold off. We haven't seen that in the United States. I mean, you saw that briefly over Liberation Day, but you haven't really seen that stick. You've actually seen a strengthening dollar even as rates have sold off. And that's just because real yields are high, which, you know, we like real yields.

We like higher real yields. The journeys may be a little bit trickier, but the destination is really attractive. And you've also seen sort of this repricing for both growth and inflation. So I, you know, I just think that this is... it's an important point, because the US is not France. Again, the dollar has rallied even as rates have been selling off.

And that's sort of, I think, a tell that this is not a fiscally driven... fiscal-driven concerns.

Greg Hall: Do you think... are there policy agendas out there that are now just DOA, that we might have been pricing in or counting on coming in over the next few years, that you think are just off the table at this point?

Libby Cantrill: Well, I think the $5,000 checks are off the table. I'm sorry. So if you were holding your breath for those...

Greg Hall: Well, it was... that was an explicit promise.

Libby Cantrill: I'm sorry if... I'm sorry that...

Greg Hall: Yeah…

Libby Cantrill: And I think the sort of the... I think a lot, the market hasn't priced in for gridlock, right? Because even this is... and this was sort of the point that we were making, even though it has been the sort of historic backlash or what have you. You know, what you... or, you know, from modern times, what we were expecting is, even in a split Congress, you were going to see, you know, basically gridlock.

And so, yeah, you do double the gridlock in a Democratic sweep. I do think, again, there's probably more onus for Democrats, on Democrats, to govern than there probably was if they had just won one chamber. Then they can just be the opposition party, no responsibility for it. Now they have these massive majorities. Now they kind of have to show voters, yes, they are actually capable of governing. But I don't think there's really anything that was sort of priced in. You know, obviously, I'm sure we'll talk about this, the AI risk...

Greg Hall: Yeah. Well, let's talk...

Libby Cantrill: Has been... I think it has... those risks have gone up, but not necessarily because of the Democratic sweep, much more because of what's happened at the state level.

Greg Hall: That's interesting. I do want to talk about that, because, I mean, obviously that has been what's moving in markets over the last 48 hours, and some real unwinding of confidence in that space over the last... at least today in the trading day. What is the outlook in your mind, or how has it changed, at least on the data center front, on maybe federal stance on chips and technological... the technological supply chain? Like, how is this all going to sort of unfold over the next few months?

So many of our clients, you know, we just did a podcast with Liz Ann Sonders, who's Schwab's senior strategist. Fantastic.

Libby Cantrill: Yes. We love her.

Greg Hall: We spent the entire pod talking about the way that AI, that specific theme, has become the most concentrated position in equity indices, in fixed income indices, not the way that PIMCO invests, but in the passive indices. And then has also begun to infect some of the private strategies as well.

Real estate strategies bent entirely toward data center buildout, or infrastructure strategies built entirely on that theme. And so a lot of the advisors listening are almost certainly wondering how this affects their equity portfolio, but also other pieces of what they do.

Libby Cantrill: Yeah. And not only does it obviously have implications for valuations in the markets, but it also has implications for the economy. I mean, the US economy is, for all intents and purposes, an AI economy. So you start to kind of pull on that string a little bit. And if the CapEx slows down, that, you know, affects the equity markets, which then affect the wealth effect, which, you know, reins in some of the high-end consumption that we have seen, because that K-shaped economy, which I think is what people, by the way, are voting on.

I think that's like... we have heard from the lower K, if you... I mean, I think it's sort of the majority of... or whatever. But, yeah, the sort of two-speed economy. I think we just heard from the lower speed, the slower speed of the economy, right? That they are mad. Yeah. And that they want change.

And so, you know, that they've... there's obviously been a lot of fragility on that end of the K. But, you know, the wealth effect has been driving a lot of this higher-end consumption. And if that slows, then I do think you could see a retrenchment in growth, just in general. So it has very wide implications.

I mean, I think that, you know, the best that I can do is sort of use a framework for this, which is, you know, we were looking... we came into this election thinking that AI risk was really at the state level, not the federal level. I don't think that's changed. I think maybe the only nuance there is that if, say, an Elizabeth Warren takes the mantle of Senate Banking chairwoman and Maxine Waters is the Financial Services chair, they will use their bully pulpit to really drive a point about Big Tech.

And I think they are going to be looking at these companies, you know, using their subpoena authority, you know, requiring them to come to Capitol Hill, and just making them more kind of headline risk around technology companies, and then also potentially investors. So I think there's maybe a little bit more reputational risk, more headline risk now, with the Democratic sweep, than maybe was sort of priced in.

But again, that's a little bit more sizzle than steak, if you will. Makes for sort of sexy headlines. Doesn't actually really do anything, right? It maybe sets up the platform for what Democrats want to run on in 2028, but outside of that, doesn't have any sort of real near-term policy implications. The near-term policy implications is that, again, at the state level.

And what we were watching were many of these governor races, where there is a lot of compute that has been planned to be built in terms of data centers. So you have some of them permitted, but a lot of them just sort of in the hopper, kind of planned but not permitted. The construction has not begun on them, and what have you. And those, I do think, are... were vulnerable going into Tuesday night. But now, if you've looked at how these governor races have turned out, they're pretty vulnerable. And the reason is because...

Greg Hall: So talk about the governors for a second, just because I, you know, we didn't spend time on it at the outset. But, I mean, equally surprising, in many cases, of what we saw.

Libby Cantrill: Yeah, I mean, this, you know, the Democratic sort of tidal wave did not discriminate, right? It did not discriminate between the House, the Senate or the governor's mansion. And I think what you saw was a lot of governors' races that were close flip, but then you saw some that weren't really necessarily close also flip. And Texas, I think, is an example.

Sure. And Texas, of course, is very relevant to this, because there's just so many existing data centers in Texas, and there are a lot that are planned. So Texas was what we were looking at. One of the states, Ohio, I mean, I would argue that sort of ground zero for this debate is, you actually... Ohio, I think, had 10 or 15 measures directly on the ballot that were all anti-data center, all easily passed.

You also have now a Democratic governor-elect who has run on a platform of a conditional moratorium in Ohio. Ohio, sort of the second most, you know, state that has the most planned compute kind of in the works. And then Georgia is also another state with a lot of kind of planned compute. And that also flipped to Keisha Lance Bottoms, who also ran on a platform of a moratorium.

I think they're all sort of... I mean, there's nuance around what they mean by a moratorium. Does that apply to just new projects? Will they actually follow through on the moratorium? I think they will. And I don't mean to be the Debbie Downer here, but I just hear a lot of folks on the sell side, in particular on television, who are saying, oh, this is just election-year rhetoric. Maybe, but this is such a politically toxic issue that I think we should... it's sort of misplaced, this optimism that you don't have some politician sort of follow through on the rhetoric and actually impose, if not more restrictions around the edges, a full-on moratorium. And I do think that's the easiest thing for a lot of these governors to do: use executive authority, a little bit like what Kathy Hochul did here.

Right. And it wasn't super politically... popular among sort of industry, but it was politically popular. She just rode to, you know, to reelection very easily here.

Greg Hall: She just made a blanket prohibition, right?

Libby Cantrill: Like, she basically just said, hey, we're going to press pause on all of this. Now, New York has not been kind of ground zero for a lot of this data center buildout. So in terms of actually affecting a lot of the projects, it was pretty minimal. But what she said was like, hey, I'm going to try to get in front of the state legislature, which was going to go for an even more draconian prohibition, and more permanent, and I'm going to get in front of it.

I'm going to press pause. I'm going to work with the state legislature to kind of come up together with some guidelines for what these data centers need to adhere to in order to invest. And that is the nature of what I think this prohibition could look like, if you see one in Ohio or Georgia or Texas, where it would be pressing the pause button, not the stop button.

And I think that is a distinction with a difference. It's worth, you know, reinforcing that. But it does mean, in the short term, that you could see a meaningful slowdown in, you know, some of this CapEx buildout. Not sure, if you just look at the GDP growth estimates, that they're really factoring that. And as you know, we've had sort of active debates around this, around kind of how important are the politics on this.

I just think on this particular issue, it is tapping into a lot of voter discontent, affordability, you know, the sort of this David and Goliath setup, and then also real suspicion around Big Tech.

Greg Hall: Yeah. It's... I don't know what the analog would be. You probably have thought about this, you know, whether it's fracking or nuclear or, you know, because it... Yeah, it doesn't feel like a one-sided issue. Again, I don't... I live in New York City. I don't think they're going to build a data center on my block. It would probably be difficult and expensive, but...

Libby Cantrill: Pretty expensive, I think, at the very least.

Yeah.

Greg Hall: But I think, you know, in these kind of, like, semi-rural, exurban spots, it's economically... it can, obviously, it adds a lot of jobs. It can be valuable to the local economy, the local tax base. But then there's the environmental impacts and power impacts, the water impacts and all that stuff. And, you know...

Libby Cantrill: And the interesting thing... Sorry to interrupt you. I think the interesting thing is that It does add a lot of jobs on a... and I'm not trying to be endorsing one view or another, but I think this is part of the... why this politically has more problems than people think, is because those jobs, yes, it absolutely helps the local economy, the, you know, the deli and the, you know, however, whatever. That... All of that sort of the surrounding...

Greg Hall: temporary housing, those... Construction and...

Libby Cantrill: Yeah, exactly. Yeah, absolutely. But, you know, those jobs are relatively short-lived. They're construction jobs, they're HVAC jobs or what have you. And what a lot of these towns are finding is that they don't have the labor. And so they're having to bring folks from out of town into town. And that has its own kind of political implications.

This is not like the GM plant, right? That's then built, and then your, like, sister works at the GM plant, your father-in-law works at the plant. This isn't like the sort of local, kind of community-oriented place. This is a place that is... a lot of folks are coming from out of town. They're building that. Yes, there's some generating some local activity, and then they're leaving.

Now, of course, you said, you know, the taxes, the property taxes in particular, are very attractive to a lot of these mayors and what have you. But to the voters, they're not necessarily. And, you know, I think it all means is that just there's going to be more friction in this buildout. It's going to cost a lot more.

So even if these moratoriums don't come to pass, these governors are going to put some pretty high price concessions or requirements in place. Obviously, tax incentives are just going to be completely rolled back. But then what are they going to demand from these hyperscalers and data center developers to build locally? You know, we've obviously invested in some of these data centers, you know, Project Beignet in particular, in Louisiana.

I think Meta did do a nice job of some of making sure that, A, it was a community that really wanted these data centers, and also that there were some very clear benefits to the populace in terms of teacher salaries and what have you. So it's not to say this is impossible, and that, you know, they don't have some practice doing it.

But I do think that just the bar to build all of this, because of the politics... Again, politics leads policy. Policy is downstream from politics. And the politics of this are just so bad. The nuclear stuff is so interesting, because if you look at the surveys, this is more unpopular than a nuclear reactor. So you're like, you'd rather have a... a nuclear reactor in your backyard than a data center? The voters are saying yes.

Greg Hall: I mean, I'm not sure it's what I would do.

Libby Cantrill: But, and there is a... there's obviously some emotional... I mean, this is sort of a reflexive kind of emotional issue, and it's kind of captured the imagination. I mean, maybe the Keystone pipeline was a little bit like this, but this was... it was nothing... It was much more kind of localized, and it wasn't as broad-based. But I, talking to our energy analyst, you know, John Devir, who's head of credit research, I mean, he sort of has likened this.

He's like, yeah. And that was, you know, that had a lot of... the politics led the policy on that one. And the policy were, obviously, that, you know, we had to stop the building of Keystone. So...

Greg Hall: Well... Look, it's... I think for those of us who live in the city, right, like, it's eye-opening. My mom lives in Potomac, Maryland. And of course, Loudoun County is right across the river, and sort of ground zero for some of this stuff. And that gave me a real sense of just the pitched community resistance. And I've been fortunate enough to have gone to a number of kind of community meetings and civic meetings and smaller towns over the course of, you know, not always living in New York City.

And these are passionate and engaged. It's actually... it's a wonderful testament to the power of the civic fabric.

Libby Cantrill: Again, like David and Goliath. I mean, my dad's family is from Kansas and they own farmland, and there's a data center developer that wants to go in there. And it is just... to see the resistance in rural Kansas.

Greg Hall: Yeah.

Libby Cantrill: I mean, it's really been pretty striking.

Greg Hall: All right. Well, it'll be obviously, it'll be fascinating to see how that plays out. The, you know, one of the things that we've been, you know, just mentioning to advisors as often as we can is that, you know, for markets, it's not necessarily always just the direction of how something works fundamentally, but it's what's priced in, of course, the expectations. And with stocks having, you know, sort of resided at peak valuations, peak, you know, P/E, depending on how you measure it, for a little bit of time now, it's probably not surprising to sort of see some violent adjustments to valuations in the marketplace as they sort of digest the uncertainty that's been injected into this trade. And we'll just have to see where it goes from here, and do what we always do, which is adjust to the facts as they develop.

Libby Cantrill: Absolutely. And just make sure that we are being as selective, and always with our fiduciary hat on, which, of course, is the hat that we always wear.

Greg Hall: And with your advice, I'm sure our investment committee will be well steered through these churning waters. All right, Libby, we've gone for 45 minutes.

Libby Cantrill: Sorry about that.

Greg Hall: No, No,

Libby Cantrill: never short of... You know, no one has ever accused me of being...

Greg Hall: We haven't even talked about…

Libby Cantrill: 2028.

Greg Hall: We haven't...

Libby Cantrill: It's too early. That's kind of the, you know, the headline.

Greg Hall: When should we talk to you again? When are we going to know more?

Libby Cantrill: I mean, I always enjoy talking to you, Greg, but I think probably next summer is really when you're going to really start seeing... You'll see people declare probably, you know, maybe in the next month, but next summer we should have a good sense of what the field looks like. And then we may even be having some debates, and I apologize.

And, you know, for those people who are not signed up to Washington Watch, they can sign up if they want to, because I will be writing, most likely, about some of those debates, because we probably... I mean, it's going to be an open primary on the left, but probably on the right too, it looks like. I think this is one of the read-throughs for 2028, is that, you know, JD Vance is not going to be coronated. It probably will be a competitive and likely crowded primary on the right too.

Greg Hall: Okay, lot to unpack here. One, Washington Watch is Libby's newsletter that she sends out. And if you're interested in being on that newsletter, you can contact your PIMCO representative, and we can get you on that list. It's a terrific read. I read it every time it comes out. Secondly, we're not waiting until summer to talk to you again, so you can just put that out of your head. We will be speaking at some time or, you know, earlier in the year. I'm sure something will happen, between now and then. And then, you know, it's funny, because when you said debates, I thought, surely she must mean internal debates at PIMCO about the direction of things. And you mean full...

Libby Cantrill: I mean full-on, like, primary debates. And we remember the Trump debates with 17 people on the stage, and Little Marco, and all of that. So, yeah, I mean, I really, you know, this is going to, I think, probably good for democracy, maybe bad for headline risk and maybe some volatility for markets. But I think good for democracy on both sides.

Greg Hall: Everybody enjoy your six or seven months off then. And then get the popcorn for next summer. With that, thank you for being with us, as always. Thank you, everybody, for listening. Please do, if you enjoyed today's podcast, if you want to learn more, you can visit us at PIMCO.com in the US, or your local PIMCO website

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