First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Ep 61 | Bob Stein | What Surprises Are Ahead for the US Economy in 2026? | ROI Podcast
At the precipice of a new year, Bob Stein discusses the implications of a probable new Fed Chair, the possibility of a Supreme Court ruling against tariff policies, and the odds for mid-term elections.
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Believe it or not, 2025 is almost in the books. As we look forward to 2026, we have midterm elections on the horizon. We've got a Fed that's probably going to reduce interest rates, but we will see. And we wonder what the implications of all of those things will be on the U.S. economy. Joining me today on the First Trust ROI podcast is Bob Stein, Deputy Chief Economist at First Trust. Thanks for joining us. This is the final episode of 2025. I feel like the whole year has been building to this episode of the ROI podcast.
Bob:I think that's the correct characterization, Ryan.
Ryan:So we're very excited. Welcome. Thank you for uh for being a part of this final episode of the year. And uh, you know, all the viewers of the podcast, Merry Christmas. It's gonna air just before Christmas. Merry Christmas to you as well. Thank you, Ryan. Happy Hanukkah to you. All right. Very good. Um so the year has kind of flown by. Is that uh is that true? Oh, it definitely has. It's it's been a meaningful, eventful year, but um it has, I mean, all of a sudden I blink and we're at the end of the year. Um and looking at next year, it's gonna go just as quickly, but there are midterm elections on the horizon. And you know, we don't have to cover the uh at the outset of our conversation. We can go into other topics first. But uh any uh any thoughts or feelings on generally how those are gonna go?
Bob:Yeah, I think the House elections are gonna go well with the for the Democrats, and the Senate elections will go just well enough for the Republicans where they keep control of the Senate. So um I'll let each individual viewer decide for themselves whether that's good or bad. Um but there will never be a dull moment with Trump in office. I think there's going to be a new precedent set this year uh when the Republicans have kind of a mid-cycle, if you will, um convention. Usually the political conventions are only every four years. But I think Trump will want to draw attention to the Republican Party mid-cycle, and I think they're planning on something probably in Nevada this summer. Um I believe it's Las Vegas, um, to try to highlight what he believes the accomplishments of the Republicans have been so far.
Ryan:Is there another city in Nevada where they would have a convention besides Las Vegas? Well, I mean potentially Reno. Don't diss on Reno, Ryan. I didn't mean to, but um it just seems like I love Reno. There are a lot of conventions and a lot of space for conventions in Las Vegas. Absolutely. And you know, I'm I'm sure you would be averse going to uh Las Vegas because that whole you know gambling thing is not your That would be horrible. That would be terrible for you. Okay, so before we dive into too much detail of what's coming ahead, I want to retrospectively get your take on kind of where we've there there's a lot of talk early in the year on what would happen in the first year of the Trump presidency. And I think probably some did and some didn't, but that's my question for you. Were there any really meaningful changes to policy that you saw implemented this year? Um I know there's a big tax bill, so maybe maybe that's it. But um anything that you think was, you know, a really important thing as we look forward? So it's kind of interesting.
Bob:Uh uh I was taken by surprise at the speed with which President Trump was able to get his um one big, beautiful bill, as he called it, passed. And I guess as it was ended up being officially called. Um however, in terms of the policy direction, it's not that much different from what anybody could have anticipated um when he was elected, at least on tax policy. Um what was not anticipated, and what the president has been very aggressive about is taking as much control, seizing as much control, many people would say, um, of the executive branch as any president has in multiple generations, and trying to put his stamp on policy making from the from the bottom up. And he did that in the very first days by basically shutting down uh USAID by going after the Department of Education, shrinking um small business loans, um as well as uh you know during the federal shutdown, threatening to fire certain government workers, and what in what he described publicly as kind of uh uh left-wing, what he described, I want to emphasize that as like left-wing coded agencies where the federal workers are almost all opposed to his agenda and almost all politically hostile to him, at least by his perception. Um it's kind of interesting. If you look at total federal spending, fiscal year that ended in Sept on September 30th, right before the shutdown, um i i i i if you look at discretionary spending at least, it was down from discretionary spending the previous year. I mean, there's certain things that a president cannot affect in the short term.
Ryan:Is it down in absolute spending or down beyond, down below what was budgeted spending?
Bob:No, no, no. So if you look at if you take out I'll be precise in my language here. If you take out the things that a president cannot immediately directly affect entitlement, Social Security, Medicare, Medicaid, net interest on the national debt, which is basically early on baked in the cake based on previous policies from previous presidents. What you're left with is discretionary spending, which has to be annually appropriated. Well, the amount of discretionary spending in fiscal year 2025 looks like it was lower in absolute dollar terms than it was in the previous fiscal year, the last full fiscal year under President Biden. And that doesn't happen very frequently, at least at this stage of a business cycle, where you're deep in the business cycle, you're not adjusting things based that much on COVID or anything like that, to have an outright dollar reduction in the amount of spending. And so because of that, the federal budget deficit, which was I think 6.3 percent of GDP in the prior fiscal year, the last full fiscal year under Biden, came in at 5.9 percent of GDP in the fiscal year that just ended. Now, that's still way too high, totally unsustainable, but it is lower than it was the previous year. And so a lot of people are talking about all this um all the fiscal measures taken to stimulate the economy, but when you look at the overall budget deficit, we've gone from expansionary to contractionary very quickly. And so um I think there is still an outside chance of feeling a little bit of that burden in the short run in the coming calendar year in terms of economic growth. I do not expect um a recession next year. I think it's possible, but let much less likely than 50 percent at this point. But I also feel as if there's not going to be an overall economic boom. I do not see consistent three percent plus real GDP growth, much less four percent, like some uh wild-eyed optimists might say. I I think two to two and a half percent economic growth, kind of pedestrian over the next year.
Ryan:Over the next year. Do you have any uh early thoughts on how we're gonna end up Q4? Q4?
Bob:Well, Q3 isn't even out yet. So let's talk about that for a second. I think Q3 will end up coming in somewhere in the vicinity of three percent economic growth. Okay. Solid quarter. I think Q4 will come in somewhere in the vicinity of one and a half percent economic growth. Um I think that there may be a little temporary weakness related to the government shutdown. Not that the government shutdown is going to cause a recession. We should never be concerned about that. But it will temporarily slow real GDP growth or measured GDP growth, if you will, the way the government accountants keep track of that. Um and but remember, that number won't be out until the earliest late January.
Ryan:So I noticed one of the things that you didn't mention, and maybe because it was um expected, um it was tariff policies. You talked about uh you know some of the other policy impacts and USAID getting cut and some other spending cuts, but um it seems like tariffs had certainly a big impact on markets, um, probably on some decision making. Um do you have any sense of where the future lies, especially as we head into another election year? And you know, it's not that much longer before uh a potentially a new party takes power, and if these are, you know, just uh non-legislated tariffs, it seems like it'd be easy to reverse. So uh what's your what's your view?
Bob:Okay, I think I've said this previously on your program, Ryan, that I'm a I'm a trained economist, and so I'm gonna take professional privilege and speak out of both sides of my mouth. Okay? So bear with me for a second. Beautiful. Okay, number one, um I think tariff policy has been roughly on par in Trump's first year with what any reasonable person should have been anticipating had he won the election, which he obviously did. So I don't think there's anything crazy there about what he's done so far in terms of what was expected once he got elected. Um in terms of like the biggest thing investors should be focusing on right now, it's the case that was heard before the Supreme Court over the last couple of months about whether much, not all, but much of the Trump tariff regime um will remain in place legally. And I think the Supreme Court early next year is gonna come out with a ruling striking down much of those Trump tariffs. Not all of them, but I think the 10 percent global tariff, as well as certain individual uh tariff extra tariffs on certain countries are gonna be struck down because he used um this is what the Supreme Court is gonna say. Okay, and I could be wrong about this, but this is my base case for what they're gonna say early next year. They're gonna say he exceeded that not that they're unconstitutional, but that the tariffs exceeded the statutory mandate of the law that Trump was using. Um emergency powers. He will, I think, respond to that case by imposing similar, not completely the same, but similar tariffs based on other legal authorities, other statutes that Congress has passed, that gives the President the authority to impose tariffs based on unfair trade practices as well as uh running trade imbalances with those specific countries. So he'll he'll have a chance to resuscitate, if you will, these tariffs. The other big issue, and this goes to fiscal policy, and I'm gonna go out on a limb, because the prediction markets say I'm gonna be wrong about this, but I'm gonna go out on a limb anyhow. I I think the prediction markets are wrong about this, is that the prediction markets say that not only is the Supreme Court gonna strike down a lot of those tariffs, they're gonna make the Treasury Department repay the tariffs that have been collected already. Okay? The ones that they strike down. If there's money collected based on that, that's gonna be like well more than $100 billion. Okay. I don't think the f I don't think the Supreme Court goes that far. I think what they're gonna say is we're gonna strike down these tariffs, but we don't but but the government, the Treasury Department, does not have to repay the ones that have been collected already. And the reason I believe is twofold. Number one, um, I think the idea of issuing an order requiring the Treasury Department to issue checks totaling more than $100 billion, which would be unprecedented in U.S. history. I mean, they've struck down a lot of laws, but not a fiscal law like this or a fiscal regulation like this. I think it it it would make Supreme Court Justice John Roberts like like like he might puke before he says it. Like I it's just it's something that it it seems well out of bounds for what he the role that he envisions for the Supreme Court as part of the federal government to issue an order requiring the Treasury Department to regurgitate more than $100 billion. I just think Okay. And I think the justification, the legal justification will be that, yes, we know exactly who wrote these checks to the Treasury Department in the first place. So in theory, we could just send that money back. But just because you wrote the check to the government doesn't mean you felt the actual burden of the tariff. So, you know, the the analogy will be you know, if if if uh if a if a city slaps a sales tax on steak, um the owner of the restaurant cuts the check to Chicago or New York City or wherever, right? It's the owner of the restaurant. You don't buy a steak and then as the patron pay the government, the the steakhouse pays the government, right? But ultimately the burden is felt not by the steakhouse, but by the person who bought the stake, right? So um I think the Supreme Court will say, yes, you know, we have the list of entities that have paid this tax, but if we order a refund, the entities that paid the tax are gonna have a windfall gain. You know, if the city refunds the the to the stakehouse owners the sales tax on those stakes because they find it was illegal or something to impose that tax in the first place, the guy who bought the stake ain't getting that refund, right? It's a windfall gain for the stakehouse owners. Okay, I think that's the Supreme Court's reasoning. They're gonna say we don't have to order the refund because it's not gonna get to the indiv the entities that actually felt the burden of the tariff itself. And so they're gonna strike them down. Uh Trump, over the ensuing couple of months, will reimpose similar, not completely the same, similar tariffs using separate powers.
Ryan:So do you think the Trump administration will follow through with their I don't know if it's a promise or or what, but they said that they were gonna send out checks to taxpayers, something like $2,000 in checks coming from tariff revenue. Trevor Burrus, Jr.
Bob:I don't see how they can do that without passing another tax bill, and as well without uh which would have to go through the reconciliation process because they're probably not gonna get enough Democratic votes in order to do that. And so I think it's gonna be tough for them to do that. I don't think I don't see that happening. I see the President talking about it but it not getting done, because every dollar they send out will be a dollar added to the deficit.
Ryan:Right.
Bob:Which brings up another question. Because, like, what's the point of imposing the tariffs if you're then just gonna stimulate demand, much of it, which will go to uh going to purchase imported products? It just doesn't make a lot of sense. So uh m my best guess is that those extra checks are not gonna go out. Some Republicans want to do it simply because it's an election year, frankly. Let's be blunt about it. Um the other problem that I see um uh for getting rid of these tariffs or offsetting the costs is let's say the next president is Gavin Newsom. And no promises here. Okay, I'm just making something up. Let's say the next president is Gavin Newsome. Um he takes over in uh in January 2029. And let's say, even though he wins and the Democrats control the House of Representatives, that the Republicans still have a narrow majority in the U.S. Senate, which is entirely possible. If they do, then Gavin Newsome doesn't get to pass an income tax increase. And so if he simply issues executive orders reversing the tariff tariffs imposed by the Trump administration, he's gonna blow a massive hole in the Federal deficit, right? So um I think a future Democratic administration, unless they sweep, unless they have the House and Senate, will be politically penned in to accept many of the Trump tariffs or something similar to them over the course of the next several years. Again, even if tr even if the Republicans don't win the next election cycle.
Ryan:Okay. Um shifting gears a little bit. The Fed is going to appoint, most likely appoint, a new chair in, I believe, May. Um what is your what's your take? Who's is it going to be the odds-on favorite or is it going to be some dark horse?
Bob:Um so the odds-on favorite is now NEC head Kevin Hassett. Um I've worked with Kevin Hassett in the past, or maybe not worked, right, but we've interacted in the past in Washington, D.C., back when I was with the Treasury Department and perhaps before. Kevin is a brilliant guy. He would be an effective Fed chairman. He he knows the job, he knows what to do. Um he could um he could take the staff recommendations with a grain of salt. He knows monetary policy better than Jerome Powell. Um but I think he would also be perceived not correctly, but perceived by many in the investment community as kind of um a proxy for the Trump administration at the Fed. And so if he were nominated, and he is the favorite, both the prediction markets say that, and I believe it, okay, at this point. Um I I think I think you might see a little bit of a run-up in the tenure, um, in the tenure yield. I don't think that's a big problem. I think he would do his job well. Um the the the dark horse at this point is Kevin Warsh. If you look at the prediction markets, he has something like a 12 percent chance of being the the next Fed chair. I think his odds are significantly higher than 12 percent. I think they're more like 30 percent or so. Okay. I I think um he would also be an very effective Fed chairman. He would not be perceived by the financial markets as as much of a proxy for the Trump administration or um um or associated with the Trump administration as Kevin Hassett. And um I'm probably a little more telegenic, not as much of a monetary expert as I think Kevin Hassett would be, but knows financial markets extraordinarily well. So uh both of them would be very good Fed chairmen.
Ryan:So the Fed chair kind of gets the credit or the blame for setting monetary policy, for raising and lowering interest rates, but there's a committee there, right? And and so how much whoever the next chair is let's say they're perceived to be more favorable to the Trump administration and more dovish than they should be. Do they get to make the decisions or do they need to actually move the committee and and how does that work?
Bob:That's actually quite interesting, Ryan, because there's a little bit of intrigue here. Okay, and I hate to get deep in the weeds and how the Fed operates. So monetary policy is not made by the Fed Board of Governors itself, it's made by the Federal Open Market Committee, Federal Open the FOMC. The FOMC consists of all the seven governors, plus a rotating group of uh Federal Reserve, regional Federal Reserve Bank presidents. Always includes the New York Bank President and several others. I forget who's on it this year, but you know, it it it's bigger than just the governors. Um theoretically, the majority on the board of governors, and once Trump appoints and has that person confirmed as the new chairman, he will have a four to three majority. The majority of the board of governors itself, that's seven, they can they can fire bank presidents. Now, legally, it says uh they have to have cause. Okay, that's why, for example, um President Trump, who wanted Federal Reserve Governor Lisa Cook fired, couldn't yet, because she's arguing in court. There's no cause here. Um he hasn't proven it, and so uh uh you can't fire me yet, and that's going through litigation. Um and probably won't be decided for quite some time. Um but what if there's a 4-3 majority on the board itself? Not the president, the board itself saying, no, we want this person fired. That's a little bit more of a gray area than the president trying to remove a specific member of the board of governors, who the president himself theoretically is in charge of appointing. That was a biting appointee, but some president was in charge of appointing. So there's a little bit of a gray area here. Um I'm not sure how the courts would come out, but in theory, the four-three majority on the board of governors that Trump will have starting in May could run roughshod over the bank presidents and say, oh, you're not gonna play ball. Well, we're gonna remove you. And so you better play ball. And so some of them are probably ideologically inclined to play ball and vote with the chairman anyhow. But if they aren't, they might run into trouble. Um and we'll see, we might see that go to the court system, the federal court system, and the courts will might have to get involved in telling the board of governors no at a Federal Reserve meeting, you're gonna have to count this bank president's vote, even though you didn't let them park at the Fed that day and didn't let them into the building. Like, you know, you little minutiae like that.
Ryan:Yeah.
Bob:I mean, in theory, uh they could do that. Um, so so um uh uh bottom line is that a 4-3, a board of governors majority has more power than a simple 4-3 vote.
Ryan:Has there ever been any uh sort of rebellion like that?
Bob:So there were there have been stories about, you know, the the I think it was in the mid-1980s when some of the members of the Board of Governors and I don't want to name name names because I've forgotten this. This is like I I knew this story better 30 years ago, back in the 90s. So um uh in the mid-1980s, where there was more pressure um coming from individual members of the Board of Governors on the chairman to shift monetary policy this way or that. Not in the past 30 years, though. That really hasn't happened.
Ryan:Okay, so let's uh I want to get your more granular views on the midterms. Um in terms of, you know, let's first talk about the House and then the Senate. You you mentioned that you think that the Democrats are maybe a better than 50 percent chance to take the House?
Bob:Well better than 50 percent. Well better than 50 percent. So um let's put it this way. Uh historically speaking, the outparty, and I define out party by the party not occupying the White House, like this cycle would be the Democrats, but in some cycles uh it's the Republicans. Okay, the outparty tends to do extremely well in midterm cycles. Um not always. Sometimes they lose seats, like in 1998 and 2002, unique situations with the Monica Lewinsky-related impeachment in 98, and in 2002, right after 9-11. Well, not right after, or a year after in the shadow of 9-11. So it doesn't always happen this way, but the Out Party tends to win seats, um, sometimes substantially. The Republicans were only ahead after the end of the last cycle, 2024, 220 to 215. So all the Democrats have to do is go plus three in the House, plus just plus three, and they're gonna win. Okay. That's all they have to do, plus three, then Hakeem Jeffries becomes Speaker of the House. Um you look at the results of the elections last year, and in the national House vote, the Republicans won by 2.7 percentage points. Okay. 2.7 nationwide in the House vote. Um right now the polls show the Democrats ahead by five points. And I give them an additional half point because I think the Democrats will probably outperform the polls. The nature of the Republican coalition has changed. They turn out more intensively than anticipated in presidential cycles, less so for special elections and midterm cycles. Okay. So if you go from plus 2.7 to minus 5, and then another half point, because that's a that's a turnaround of about 8 percentage points, so slightly more than 8 percentage points in the popular vote. So what does 8 percentage points look like in terms of the number of seats? Okay, I can go into more granular explanations here, but I estimate 8 percentage points of the popular vote for the House is worth about 24 seats, three seats per percentage point. And so if we were using the maps from 2024, which we're not completely, the district maps from 2024, I would expect that if the polls stay where they are, or the polls are where they are today, um, 11 months from now, that the Republicans will pick will win 24 fewer seats than they won last time. That'll take them down to 196. Okay? So um you need 218 to have a majority, and Republicans are short. Now the Republicans have an ace up their sleeves, and they've been playing it, but so are the Democrats. Uh you know, so the Republicans started redistricting in certain states like Texas, they're talking about it in maybe Indiana, maybe Florida, elsewhere. Um, but the Democrats have aces up their sleeve, they're playing that card in California. They're probably going to play that card in my home state of Virginia. There might be other states as well. So, net net of all this, the Republicans should pick up a few seats. But picking up a few seats from 196 still doesn't get you to 218. Maybe it gets you to 200.
Ryan:Okay.
Bob:But there's another thing going on. And this is something that I have trouble quantifying, which is that it is possible that early next year, at least by June, but possibly early next year, the Supreme Court may have reinterpreted the Voting Rights Act to give certain Southern states, Southeast United States in particular, more leeway in how they draw the district lines. And if they allow those states more flexibility in where they draw the district lines, that could add to a much larger bonanza for the Republicans in terms of the number of seats. Now, I have a lot of trouble. It's a very ambiguous situation. I can't statistically tell you what are the odds of the Supreme Court making this decision in the Republicans' favor, what are the odds of them doing it early enough, and what are the odds of each of these states acting on this greater leeway before the 2026 election cycle uh um is through. Okay, uh that's too much ambiguity. Um I'm not an expert on that. I don't think anybody's an expert on that, because it's a one-time scenario. Yeah. Okay, you can't model that. Um so I'm assuming they pick up maybe five more from that as well. So my best guess right now, in terms of the number of seats that the Republicans are going to win, um would be something like 206. If you hold a gun to my head today, 206. Okay, because I'm assuming that both the Voting Rights Act case and the other redistricting, non-ro not related to the voting rights act case, adds a total of 10. But it could end up being 25. Like if if all the Voting Rights Act redistricting goes totally the Republicans' way. So, net of all this, I think the Democrats have about an 80 percent chance of taking back the House. The one thing I know for sure is that number is liable to change significantly in the first half of next year as we see what the states do and what we see uh how we see the Supreme Court um reacting to the case that was heard last year.
Ryan:So you just said that this could happen early in the year next year, but as late as June. So do you mean to say that the lines for the congressional districts could be changing? So if I live somewhere, the uh race that I'm actually voting in could change as late as well.
Bob:Well, you live in upstate New York. So that's not going to be a Voting Rights Act state. Right. But it could happen in some of those states. It also depends on what state law says about when they have to finalize their district lines. And I I am not an expert on a state-by-state basis of what those say. Yeah. Um so it's such an ambiguous one-off situation that I'm I'm reluctant to completely commit to how many seats the Republicans are going to gain. It could be zero in this cycle, and then maybe fifteen or twenty in the following cycle in 2028. Um but it could end up being a bonanza in this cycle, and I don't think um it should be written off completely. Okay. A lot of variants there.
Ryan:Trevor Burrus, Jr. So you said that the Democrats are likely to take the House, but the Senate is likely to stay with the Republicans. Of course, Senators only go up for election once every six years, right? So the every third cycle. Yeah. So is that why the difference exists in this cycle?
Bob:Uh in part, yes. Okay. But it's also like which state which states are up for election in this particular cycle. Yeah. So there are a lot more Republicans that have to defend their seats than Democrats in this cycle in 2026. So superficially, if you hear that, you're thinking, oh, there's a lot more downside risk for the Republicans than the Democrats. They can easily lose the three, um, or actually four, so that the Democrats would take control. Right now, the Republicans have 53 seats in the U.S. Senate. If it's 50-50, if they only lose three, J.D. Vance breaks ties, right? Right. So assuming nobody dies in the interim, J.D. Vance breaks the ties, the Republicans would still would still have nominal control. And so the Democrats have to gain four to take control. I don't think they're going to gain four. Because even though the de the Republicans have to defend more seats, of the 22 seats they have to defend, 20 of them are in what I would describe as red or Republican states. States that are highly likely to go for a Republican in a presidential cycle. And if you look back historically, there are wave elections that include the Senate, big swings and Senate races. They usually occur in midterms within the purple states. Not always, okay, but generally within per whatever the purple states were at the time. Okay, and what what is a purple state has changed over time, which are red, which West Virginia used to be a blue state, now it's a red state, uh, et cetera. But it's usually the the generally centrist states where uh if it's a Republican wave, then like you'd see a lot of losses among Democrats in purple states. And if it's a Democratic wave, you'll see a lot of losses by Republicans running for re-election in purple states. It wouldn't really affect the blue and the red states that much. So of the 22 seats that are up for grabs that the Republicans have to defend, 20 of them are in red Republican states. And I think probably at most, um the Democrats will gain one of them. Unnet. One of them. Okay, just uh maybe zero, even if they have a good year. So they're gonna train most of their fire on two states, the Democrats will, Maine and North Carolina. Um in North Carolina, I think they're gonna win. Tom Tillis, the incumbent Republican, decided not to run for re-election. That's good for the Democrats. And number two, it looks like Roy Cooper, the former governor of the state, popular two-term governor, is gonna run for re-election. He has a relatively moderate image, and because of that, I think he probably wins. So that's a pickup for the Democrats. Um Maine is also a state they'll target. Uh that has a Republican senator. It's a purple state. Susan Collins, however, is running for re-election, and she has a proven track record of winning, even in years that are hostile to the Republican Party in general. So, for example, she won that seat back in 2008. John McCain was getting the floor wiped with him by Barack Obama by seven and a half, seven or eight percentage points, national popular vote. Susan Collins wins easily in the state of Maine. 2020 rolls around. That was the last time she was up for re-election. Um, Joe Biden beats Donald Trump by four and a half points in the in the national popular vote. Susan Collins was behind in every single statewide poll in the state of Maine in October and early November, every single one. She ended up winning easily that year. So I think in the end, she'll win. Democrats have some problems of their own. John Ossoff, state of Georgia, not particularly popular. If they're if the Republicans have enough common sense to nominate a non-mega Republican, in the state of Georgia, they have a fighting chance. Minnesota, Tina Smith, um uh Michigan, Gary Peters, and Gene Shaheen and New Hampshire all retiring for the Democrats. So those would those would be states where the Democrats would win if they had the incumbents, but because they're retiring, Republicans have a fighting chance. I think of those three, the Republicans probably have their best chance in Michigan. Um I'd give the Democrats a slight edge, but only slightly. Uh whether or not they keep that state may hinge on who they nominate. If they nominate somebody who's um uh strongly supported by Dearborn, Michigan, they'll probably lose. Okay. If they nominate somebody outside of Dearborn, um I give them a slight edge. So I I think that in the end, uh net net, Republicans today are 53, they probably lose one on net and end up with 52 seats in the U.S. Senate. So lose the House, um, keep the Senate, but lose uh on net a seat in the Senate.
Ryan:Okay, so let's say things play out in the midterm elections, kind of as your expectations um say, and we've got a Republican uh Senate, Democrat uh House, and of course Donald Trump in the presidency. What are the implications for policy kind of going forward for the last two years of the Trump administration?
Bob:Okay, so if I'm right, then Donald Trump has four years to be our foreign foreign policy president, including on the issue of tariffs to some extent. Um he's got four years to appoint people to the federal courts, including should there be a vacancy to the Supreme Court. He's got four years to run roughshod over the executive agencies and departments and hire and fire whomever he darn well pleases, because the Supreme Court looks like it's ready after the hearing today to give the president um additional powers to hire and fire and overturn something that the a court case from 90 years ago called Humphrey's Executor that was came out during the uh FDR administration. Um so he's gonna have all those powers, but he's only got two years to legislate, and the first year is almost done. So starting in in my belief my belief is that starting in January 2027, every piece of legislation that gets to his desk is gonna have to be at least a little bit bipartisan to get there. So what does that mean? They're gonna pass the appropriations bills in the last if I'm right about the outcome of the election, they'll pass the appropriations bills, and then Trump is gonna push his executive power to the hilt and refuse to spend all the money on the priorities the Democrats negotiate up on Capitol Hill, which is gonna make the negotiation process even tougher, right? Because the Republicans on Capitol Hill will say, Oh, we'll compromise with you, Democrats, and they'll compromise, and Trump will say, Well, they compromised with you. I didn't compromise with you. So the Republicans were okay with spending money on these programs, but I'm not good with that, and so I'm just gonna impound the funds. And there's gonna be an impoundment case that goes to the Supreme Court. My best guess is that the Supreme Court finds that there's more inherent authority by the President to unilaterally refuse to spend money, not on entitlement, but on uh on annually appropriated funds, than uh any president has exercised since Dick Nixon in the early 1970s. And if that happens, it does give presidents of both parties a little more authority and responsibility for renting and spending.
Ryan:Okay, so here's the uh the the other curveball outlier that I think most people would say are is relatively low odds, but I'm curious on your take. Um we see at some point in the next few years, probably not in the midterms, but maybe by the next presidential cycle, uh a third party try to some sort of new third party. I I know you know Elon Musk's is Elon Musk has kind of talked a little bit about the possibility or at least alluded to it. Um, splintering on that a little bit. Yeah, he has. He has. Once you realized he had all those SpaceX contracts. Um But there is still some I think the coalition that came together around Donald Trump has kind of splintered a bit. And it just makes me wonder where what's the likelihood that the Republican side kind of comes back together by the next presidential cycle?
Bob:Um that's a great question. Like uh I mean, my view is that we're probably gonna see JD Vance nominated on the Republican side. He'll probably pick Marco Rubio as his running mate. On the Democratic side, we have absolute chaos. Uh Gavin Newsom's the front runner. Prediction markets say he has maybe a 35% chance of getting nominated. I think that's too high.
Ryan:Yeah.
Bob:I think he is the front runner, but 35% is too high because I think he has a big target on his back the entire race, and there are a lot of other people who are going to be competing, and you really don't know what's going to happen. Um if you were to tell me that it ends up being Vance versus Newsom, give me some grace on this, because we're almost three years away. I'd make Newsom a slight favorite, just a slight favorite over over over Vance. Okay. Um but the Democrats have a so much higher chance of nominating a dud who can't win or is less likely to win than Newsome, that I think the Republicans have more than a 50% chance of winning the election. Because J.D. Vance has such a high odd the odds of getting that nomination in the first place. So Vance Newsom, Newsom favorite. Okay, conditional on the Democrats nominated Newsom. If Vance versus generic Democrat, I Vance is the favorite. Okay. Uh Vance versus non-Newsome, uh the f probably the favorite as well. Um so uh in terms of a third party, very unlikely our political system just pushes against it. Yeah. Um as we saw in the 1960s and early 1970s with George Wallace, as we saw with Ross Perot in the The 1990s, as we saw with Strom Thurman in the 1940s, that our political system, right or wrong, tends to suppress third parties and forces um voters and politicians with idiosyncratic views that do not fit neatly into one party or another to pick a party and try to work through that party to try to take that party over, if you will, to forward its agenda. So I I don't think we see a big third party, and by big I mean um 10 percent plus of the vote.
Ryan:Yeah.
Bob:I don't even think if the odds were like, you know, w w what are you my odds that some that any other candidate besides the Republican or Democrat is gonna get more than five percent of the national popular vote? Any one candidate, I'm not talking about all the third party candidates combined, but is there gonna be any one candidate who's gonna get a five percent or more, like John Anderson did, I believe, in 1980? Um uh Well, and Ross Perot did more recently than that. Yeah, yeah. Yeah. No, but he's he's above the 10 percent threshold. Oh, yeah, yeah.
Ryan:Yeah, so he was like he was a real player. He had an impact on the winner that also. Oh, totally. Yeah.
Bob:Well, yeah. Most likely. Yeah. Well, I actually think Clinton would have won without it. Yeah.
Ryan:Okay.
Bob:Uh a lot of the Ross Perot voters, I don't think, would have voted. About a third of them would not have voted. And even though the many of the people who voted for Perot um uh think they know why other people voted for Perot, they really only know why they voted for Perot. And I think the vote would have split more like 60-40 in Bush's favor. And so let's say uh a pro got what, like 70% of the vote? It it's you know, 33 years ago, so my memory's a little fall. If he got seven seventeen percent of the vote, a third of his voters would not have voted. So that's 11 percentage points now. Uh-huh. And and Bush would have won 60-40, those 11. Yeah, that only would have gained him two to two and a half percentage points of the popular vote. He lost by five, something, four and a half, five. So he still loses the popular vote. And probably the Electoral College. So I I know like there are people who do it differently, but I do it the right way. So here's the is there going to be somebody who gets by himself five percent, like in the five to nine and a half percent range? I would say unlikely. Maybe you get somebody in 2032. I do think there is I do think there is a developing possible coalition, like an anti-Israel coalition, like you could have like the Tucker Carlson, Nick Fuentes wing of the Republican Party, and on the other side, the like the dearborn pro-Hamas side of the Democratic Party, combining and like if you if you look at these groups, they're kind of like the prohibitionists were like a hundred years ago in the sense that they only care about one issue, only one issue. So higher taxes, lower taxes, bigger government, smaller government, more regulation, less regulation, foreign policy, tariffs. They don't care. As long as you're anti-Israel, they're on your side, right? So that's that's a group that might carve out a right-left niche, and they could get some significant portion of the vote. Um, probably not enough to tilt an election, but possibly. Interesting.
Ryan:All right. Well, we are uh closing in on uh the end of our time together, but I always have uh a final plea for a book recommendation. So um, you know, for those that are uh thinking about doing some reading over the holiday breaks, um what uh what book recommendation would you have for us this time?
Bob:Okay, so I'm gonna recommend a book that I'm reading right now called Um Capital Losses. Okay. Okay, by a guy named Rick Spears. I think his spelling is S-P E E R S. And I should know the spelling because I'm reading his book right now. But so this guy wrote a book a few years ago and it reads so quickly. It's like a 200, I don't know, 250-page book, fiction, like it just reads so quickly, no flowerly language, very direct. And basically it's it's a fictional character that's loosely based on on Rick Spears. Okay, but without all the corruption and stuff like that, or at least hopefully. So he wrote a book a few years ago called Capital Gains. Okay, and that is kind of a period plea piece that took put took place in the mid-1990s during the Clinton administration. And it was really interesting. It gives you a good view of what's happening, like how Washington works, how the presidential, how the executive branch works, how the how the legislature or Congress works, how lobbying works, and all like the swamp in Washington, D.C. And it was just such an interesting read and interesting story. I loved it. Like if you if you're going to uh sit under a palapa somewhere in Aruba or Dominican Republic for a week and don't know what else to read, get capital gains, read that first, and then buy capital losses, which is the book I'm reading right now. Trevor Burrus, Jr. Are they related to each other? Um is one a sequel to the other? Well, kind of. But it um it's written a few years later. Yeah. Um it's fiction or it's fiction. Okay. Totally fiction. Yeah. Okay. Or fiction all.
Ryan:Okay.
Bob:Um and it was kind of funny. After reading the first book, because he's an older gentleman. Uh the uh Rick Spears is a little bit older than me. I'm 60. I th it felt like you're reading a great piece of fiction by somebody who had one book in them their entire life. Just one. And that then he retired as a lobbyist and finally got to write his book. Okay. Okay, without embarrassing his co-workers and colleagues and all that stuff. Okay. Um and I always thought, oh, it's too bad he's he didn't start young enough. He could have written a whole series of books. And lo and behold, uh, you know, he sent me this book in the mail like a uh a few weeks ago. I l I love that first book. And he is basing the whole thing off of um uh like you know, the Bitcoin exchange guy uh uh that I won't say the actual name of, and and becoming a lobbyist for him. The guy who has three-letter initials that uh it it's fascinating and it's very well done. And like I can't wait to like like we have a Christmas party tonight, right? So this is December 8th, Monday, December 8th, as we speak. That's right. Um even though we're not airing for a couple more weeks. And we have a Christmas party tonight, but I can't wait till tomorrow. I'm I'm traveling back home and I get to read more of more of the book. But read capital gains and then read Rick Spears Capital Losses. You can't go wrong.
Ryan:Excellent read. Okay. Well, as always, thank you for uh joining us on the podcast, and uh we look forward to a good 2026 and having you right back on. My pleasure, Ryan. All right. And thanks to all of you as well for joining us on this episode of the First Trust ROI podcast. We'll see you next time and have a happy Christmas, Hanukkah, or whatever holiday you celebrate.
