You’re all motivated. You’re excited. You’re feeling great. Prepare to abandon that entire feeling because we’re going to talk about politics. Now, I’m sure you’ve been up all night. You’ve been inundated with the election results. You’re reading more material than you can possibly absorb today. So frankly I’m going to skip all that because I know you’re up to speed on it. What I want to talk about is what happens now. What’s going to happen after we know that the Republicans hold the Senate and the Democrats hold the House. And, of course, we have a Republican president. So that’s going to be my focus, and I want to start with the lame-duck session, which is the session, as you know, between now and the end of the year where the Republicans control Congress.

There are two things that I think we’re going to see happen in the lame-duck session. The first one I know about, and that is that the government has to be funded by December 7. If Congress doesn’t appropriate money to run our government by that date, then on December 7 the government shuts down. Now, you’ve seen this thing before; we get down to 11:59 p.m. the night before, and they finally agree on something, and I suspect that will happen again. But the government has shut down before. And if we’re seeing evidence in the few days before December 7 that there’s going to be a problem, I would suggest to you we’re going to see some market volatility.

The markets don’t like to see Washington dysfunctional. So keep an eye on what’s happening around the 6th or the 4th in December. If they’re really struggling, look for some market volatility; you could take advantage of that. The second thing I think that’s going to happen, believe it or not, is a bipartisan piece of legislation that’s going to pass, and that’s called RESA, which is the Retirement Enhancement and Savings Act. And there’s a lot of good stuff in there. We don’t have time to go through it. But essentially what it does is it allows small businesses to band together to create one 401(k) plan, so those of you who don’t have, perhaps, 401(k) plans. The administration’s too expensive. You don’t want to do it. Well, you’re going to be able to bond together with other small businesses in any industry and be able to offer a single plan. And I think what you’re going to see is that your broker-dealer is going to form a plan like this and let you offer it to all your small-business clients. So it’s going to be a huge chance for a new adventure for you guys.

So then what happens? Well, we have a Democratic House. We have a Republican Congress and a Republican Senate, so I don’t have to tell you the main thing. We’re going to see greater legislative gridlock. Things aren’t going to happen like they did before. Now, that’s a good thing if you’re an investor because markets look at Washington, and, by and large, they think Washington is doing stupid things. We have a saying in Washington: “No man’s safe when the legislature is in session,” and that’s what you’re going to see. And the markets like gridlock. They like knowing that the status quo is going to be there for at least the next two years. We’re not going to see any more fiscal stimulus, no tax cuts, no spending increases, Trump’s 10 percent additional middle-class tax cut off the table, maybe a modest increase in defense spending if it’s offset with an increase in social spending, domestic spending, safety net spending. But even that’s unlikely. Appropriations for the wall on the Mexican border, unless it’s done in the lame-duck session is not going to happen.

Now, all this isn’t such bad news because it means that the federal deficit, which has been growing astronomically, at least won’t grow anymore. We’re not going to see more spending; we’re not going to see lower tax revenues. I think the major thing, the major difference, you’re going to see in the House, though, is what we call “oversight.” You may be thinking, So what? We have a Republican Senate, Democratic House and I’m a Republican. What are they going to be able to do in the House? They’re not going to be able to get anything through. And, of course, that’s true. But the House is allowed to oversight the administration. And what that means is that they can undertake investigations into this administration. They have, and this is exceedingly important, subpoena power, which allows them to call and demand that somebody appear under oath and tell the truth. And, believe me, you will see a lot of administration officials called to testify under oath. They have the ability to compel document production to see what happened behind the scenes in the administration over the last two years.

They’re also going to be waiting with great anticipation for the Mueller report, the report into the investigation of Russian collusion. Because that’s going to be important for the Democrats.

Now let’s take a little footnote here and talk about what Mueller is looking at. Mueller is looking at three different items. The first you know about is Russian collusion: Did Trump himself, not his campaign, but did Trump himself collude with the Russians to affect the election results? Either he had to do it himself or he had to know what was going on and ignored it. Based on what we’ve seen now, I think the answer to that is no. Maybe there’s something we don’t know. But I would suggest that if there was a smoking gun, by now the press would have gotten it out.

The second thing he’s looking at is obstruction of justice. Once the investigation started, did Trump try to stop it by firing Comey, by castigating his Department of Justice, his Attorney General? Now, there may be something we don’t know about; there may be emails. But what we know right now suggests that, or at least I feel that, the answer is no, there hasn’t been obstruction of justice.

But there is a third item that people ignore, and that is if, in the course of his investigation, Mueller finds other evidence of malfeasance or crimes, then he can bring those forward. Now, I’m not going to dwell on that. I’ll just do it with an example. Remember the Monica Lewinsky investigation, of course, that led to Bill Clinton’s impeachment. That investigation began five years earlier as the Whitewater investigation. So you can see how investigations morph. And if all that happens, and the oversight proceedings upset the Democrats, well, sure they can bring articles of impeachment. I think that’s unlikely, but it can happen. Now, just remember impeachment does not mean conviction of a crime; it’s an indictment. It’s what a prosecutor would do in charging somebody with a crime. There’s then a trial. The trial’s in the Senate, and he would have to be convicted by a two-thirds majority. That’s not going to happen. Republicans control the Senate. But I can tell you, having lived through the Clinton impeachment, the trial in the Senate is all encompassing, with every bit of attention the administration is going through what is a very lengthy trial.

All right. Well, I talk about oversight. Let me start with this quote. On the subject of Russian collusion, I thought Senator Lindsey Graham had a great analysis of that. He’s a Republican from South Carolina. He said, “I don’t believe Trump colluded with the Russians. I don’t think he even colludes with his own staff.” All right, so what are some of the items of oversight? Well, I started thinking last night as I was coming in here that we might see the Democrats talk about the tax returns of Trump; they can probably get those returns. Whether he committed tax fraud, whether his businesses benefited from him being president, whether the women who have been accusing him of impropriety should be called to testify, whether the Russians actually have financial leverage over Trump, the Kavanaugh accusers — they can all be brought back in for testimony, the travel ban and family separation and it goes on and on and on.

And, I can tell you, this will bog down the administration responding to all this and make it very hard for it to move forward with its initiatives. And, you know, this is not a president who lays back and says, “OK, I’m going to comply.” He’s already said this morning, “I’m going to fight back as hard as they hit me.” So this is going to be a lengthy time.

All right. So putting that aside, what about substantively? What are the Democrats and Republicans going to talk about? Well, the first thing I’ll mention is the one thing they seem to agree on and that is spending a lot more money on infrastructure, better roads, better railroads, better airports, to try to make the U.S. more transportation friendly. Right now we see a lot of crumbling of infrastructure. And, in this way, the Democrats’ victory in the House actually helps because in the House, as you know, are Republicans called fiscal conservatives. They don’t want to spend money unless they raise the same amount of money. And that has stopped infrastructure spending because it will cost money, and they don’t want to have to raise money to offset it. Now, those fiscal conservatives are silent. They have no power. And that means that we can do infrastructure spending without taking on deficits, taking on money and spending it. And so that suggests to me that this has a pretty good success rate. Why does that matter to you? Construction stocks, materials stocks, all of those should do better if we see more infrastructure spending.

What about technology? Well, here we start seeing some divergence. The Democrats are going to be more concerned about tech security and privacy. They’re going to hold hearings on that, probably calling the big companies from Silicon Valley with a subpoena. They’re going to want to reinstate net neutrality, which, as you know, lets smaller companies get equal time on the internet. Now, legislative changes here are unlikely. They can’t get anything through and get it through the Senate. But you’re going to see some headline risk as more and more of these people are compelled to testify. And that could lead to some volatility in tech stocks, depending on whether they like net neutrality or don’t like net neutrality.

What we care about—financial services. In this case, the news is pretty bad or upsetting and that is that Maxine Waters, and you probably have seen her, is going to take over control of the Financial Services Committee. And she is not a friend of our industry. She wants to reverse the rollback of Dodd-Frank. She thinks the SEC best interest standard is too loose. She wants to move back to a fiduciary standard. And she wants to see the SEC pull back on that as well. Now again, legislative changes are unlikely. She is going to create a ton of noise. You’re going to hear a lot coming out of Maxine Waters. She can’t get legislation through, but she can pull the SEC commissioner in for testimony. Now, the SEC, again, is an independent agency, and it can do what it wants. But if there’s enough pressure, it may have to change what it’s doing. So financial services again, some volatility in our industry stock as we see Maxine Waters try to get a good name for herself out there as chair of the Financial Services.

What about trade? Well, most people believe that Congress has to approve the new NAFTA. Now, there’s some debate about that. But, generally speaking, the old NAFTA requires congressional approval, and any changes require congressional approval. Is the House going to approve NAFTA? Very unclear. The House wants to protect existing workers in the U.S. from foreign competition to the extent possible. We’re uncertain if NAFTA is going to help outsiders, Mexico and Canada, compete too vigorously against our workers. So, again, we might see NAFTA fail to be approved. This is the new NAFTA, the one that is negotiated by President Trump. Now, if that’s true, and we’re hearing that’s true, that will hurt stocks of industries that are dependent upon trade here in North America. Something else to keep an eye on.

On the subject of trade, let me talk a little bit about what the president has been doing. As you know, or I think you know, President Trump doesn’t take the same view of foreign relations that his predecessors George W. Bush and Barack Obama did. They were trying to export democracy around the globe. Trump is trying to protect, like Democrats actually in the House, U.S. workers and U.S. businesses from foreign competition. Now, what Trump is concerned about is the balance of payments, the fact that U.S. imports vastly exceed U.S. exports. This is not a new problem. It’s been around for a long time.

In fact, George W. Bush commented on it when he was president. He said, “The problem is more and more of our imports are coming from overseas.” Think about that. Now you have your arms around the problem right. So what President Trump imposed was a series of tariffs. Tariffs are taxes, of course, on imported goods. If you put a tax on imported goods, that makes the good more expensive here in the U.S., and that makes the domestic-produced goods cheap in comparison. So you end up pushing down imports and increasing our own domestic production. Now, that sounds good, but it has problems, and those are, first, that if we impose tariffs on goods entering the U.S., then our trading partners impose tariffs on goods leaving the U.S., and that hurts U.S. exporters. And it particularly hurts, say, farming, which relies on China to buy a lot of its production. You may have heard that China’s buying no grain right now from the U.S. Farmers are having trouble.

There is another concern. Who pays tariffs? You and me. Think if there is a 10 percent tariff on television sets coming in from Asia. Well, the price of TVs just went up 10 percent, and that’s why you’ve seen a lot of fluctuation in the markets. When Trump first announced his tariffs, markets plummeted. On days when he said there’ll be liberal exceptions, markets jumped very high, and then he would announce another tariff, and they’d go down. And earlier this year you saw this vacillation over about a month, depending on what was happening in tariffs. And then, finally, the markets got inured; they said, “Look, we don’t know what’s going on; we give up,” and they just started to be steady. And then a couple weeks ago, corporations started announcing their quarterly earnings, and they started identifying how much the tariffs were reducing their earnings. Ford, for instance, said the tariffs on metal imports were costing it $1 billion next year. The reason is, when you impose tariffs, as the president has done, on steel and aluminum imports, that’s great for those industries, but it’s not good for the car industry. They have to pay higher prices. And that caused another gyration, you’ll remember, a few weeks ago in the markets as earnings were being announced, and they started talking about tariffs, up one day, down the next, depending who is reporting earnings.

The other thing that got people realizing was how much tariffs are going to cost. Right now Trump has imposed a 10 percent tariff on some Chinese goods. He’s talked in the last week about raising that to a 10 percent tariff on all Chinese goods. If he does that, it will cost the average American family about $127 a year, taking away for many middle-class people the advantages of the tax cut. And if he raises that 10 percent tariff to 25 percent, which is what he says he’s going to do on January 1, that’s going to reduce GDP next year by about a percentage point. So the end of this story has not been written. The president obviously is trying to force other countries into negotiations here. He may be successful. In the case of China, I think they’ll probably wait. They have a long memory. They’re very patient. And I think there’s a probability that they’ll say, “You know what? At some point this guy won’t be president, and we’ll just wait till that happens.” So it may be tough to have negotiations with them, but we’ll have to see what happens in this story ahead. If we start seeing higher and higher tariffs, we’re going to see the markets go down. If we start seeing deals negotiated, they’re going to go up. So it’s something to keep an eye on.

By the way, this is what the Fed chairman said a couple of weeks ago: “If we have widespread tariffs that remain in place for a long time, that’s going to be bad for the United States economy.” Now, I have to go back again to Senator Lindsey Graham. You’ll remember that the president has threatened to put tariffs on goods coming in from Mexico to pay for his wall on the Mexican border. I think Graham had a good statement about that. He said, “Simply put, any policy proposal that drives up costs of Corona, tequila or margaritas is a big-time bad idea. Mucho sad.”

All right, let’s finish this up then with a deep dive into what all this means for you. What’s going to happen with the economy? What’s going to happen with the markets? What’s going to happen with taxes given that we now have a split Congress? Let’s start with something obvious. The markets have loved the Trump administration. And why not. When he was elected, he said, “I’m going to reduce taxes on businesses. I’m going to pull back regulations that are shackling business growth, things like Obamacare, environmental regulations. Businesses will make a lot more money. When businesses make money, their stock value goes up.” And guess what? He came through. We did get lower taxes, particularly on businesses. We’ve gotten a lot less government regulation, and that has kept the market generally quite happy. And that fundamentally is not going to change. We’re going to continue to see lower taxes. We’re going to continue to see less regulation, and that means again that you don’t have to worry too much about what’s happening in Washington. We should see the markets be OK.

But there are three things that I think you want to keep an eye on, three caveats that if they happen could affect that market trajectory. We don’t know if they’re going to happen, but I want you to watch for any signs of them in the coming year because they will affect the advice you’re giving your clients.

First of all, inflation. When you impose this much stimulus on an economy at full inflation — tax cuts, additional spending, government agreeing to $500 billion of new spending last year — when you do all that, you end up running the risk of inflation because you have full employment, and that means that industry has to pay people more to attract them, and that means wages start going up, demand starts going up with the higher wages and you’re looking at inflation. And if you have inflation, well, the Fed then starts raising interest rates faster. That makes it harder for companies to borrow. And that starts bringing down the profits of companies, and it hurts the market.

Now, you may remember in January of this year the Department of Labor issued its biweekly report, and it showed, for the first time in years and years and years, that real wages were going up. Well, gee, isn’t that what we tried to do with the election of 2017? Help the middle class, who felt that their wages had stagnated? This is great news; it all worked. The market went down 1,000 points. Why? Because people looked at that, and the fact that wages were going up, and said, “Oh my gosh, we’re starting down a road to inflation; the Fed’s going to raise interest rates; this is a disaster.” Now, pretty quickly, economists and market watchers said, “Don’t be ridiculous. We’re not in a time of inflation. Prices are still low; everything’s fine.” And, pretty quickly, the market came right back. But if we start seeing real growth in wages, we’re still seeing some, and that’s a good thing. But if they skyrocket, if prices skyrocket, well, that means the Fed will raise interest rates and that means the market may be dampened a bit. Again, it’s not happening now. Just keep an eye on it going forward.

The second thing I’ve already beaten to death, and that’s tariffs. If Trump does go through with a tariff on all Mexican goods, if he does go through with a 25 percent tariff on January 1, I think that will concern the markets. They are worried about a trade war. So you want to watch that.

The Mueller investigation: If he comes out with some sort of charge of malfeasance, or if the Democratic initiatives in the House come forward with malfeasance, that’s going to slow down this administration. It’s going to bog it down, and that means it’s not going to be able to do more initiatives, pull back on more regulations, for instance. And I think that will concern the markets. They want Trump to do what he does. They don’t want him impeded. They want things to go as they’re going now.

Now, what about the fiscal situation? Because that also is going to influence the markets. As far as government spending is going, we have kind of a bad case right now. The baby boomers are aging, which of course means that government spending on Social Security and Medicare is going up. We also saw the revenue loss from the Tax Act last year, the Tax Cuts and Jobs Act, of $1 trillion. The government is losing $1 trillion. Now, some of you may be thinking, Wait, wait, what about economic expansion? The original, the static cost of the Tax Act — and this was done by nonpartisan estimates — was $1.5 trillion, but they agreed that the lower taxes were going to allow businesses to invest; people to have more income; all of that revenue goes up. You impose taxes on that, and you start earning some of that back. In fact, you earn back about $500 billion. And that means that the revenue costs of the Tax Act was about $1 trillion. Government gets $1 trillion in lost revenue.

And then mid last year, something really strange happened. The Democrats and Republicans agreed to raise federal spending by $500 billion. That is the largest increase in federal spending that we have seen since the Recovery Act in 2009 at the beginning of the Obama administration. That was $700 billion; last year $500 billion. Now, that may puzzle you because back in 2009, no Republicans supported that additional spending. Now, at this point we had a Republican Congress and a Republican president, and spending went up $500 billion. How did that happen?

Well, the Republicans in Congress felt the most important thing they could do right off the bat was increase spending on defense. They feel the military’s woefully underfunded. They wanted to appropriate more money. The Democrats didn’t disagree with that. They said, “Fine, but for every additional dollar you spend on defense, we want to spend the additional dollar on social programs, food stamps, safety net programs.” So the parties shook hands, and by the time they walked out of the room, they were raising spending by $500 billion. So you add up the fact that the baby boomers are aging, the Tax Act costs money, and the additional $500 billion, and you realize that the deficit, which is the annual amount each year by which spending exceeds revenue, is going up. And, more importantly, total debt outstanding is going up. Total debt outstanding is the amount the government borrowed this year plus all the amounts it borrowed in prior years to cover the deficit.

So all this tells me that we are looking at an explosion of U.S. debt; a tremendous amount of Treasurys have to be sold. And that has repercussions because at some point, when we need to sell these Treasurys and we don’t do anything to stop the trajectory of debt outstanding, we don’t do a thing like entitlement reform, cutting Social Security and Medicare. At some point purchasers of our debt, China, Japan, maybe many of your clients, are saying, “We’re looking at the U.S. fiscal situation. It’s only getting worse. We’re not going to buy new debt for 3 or 4 percent interest. We want 5 percent, we want 6 percent.” And that means interest rates rise, and, again, it costs businesses more to borrow. And we see something of a downturn. Now, if that rings a bell, it’s exactly what happened in Europe. Creditors of those countries said, “We don’t like your fiscal situation; we’re not going to buy your debt.” Interest rates rise, and they have to do something about it. Now, we’re not Europe. The dollar is not the euro. We’re not going to see a spike like that, but we could start seeing a slow increase at the Treasury auctions. In fact, the recent auctions for interest rates are the highest since 2009.

The other concern here is that normally you do not have a large deficit when you are in a period of economic prosperity because in that era, tax revenues are typically high and safety net costs are typically low. People have jobs. But we have a large deficit in a time of economic prosperity, and that raises the concern that when we do have a downturn, which is going to happen at some point, we’re not going to be able to handle it as well without adding a significant amount more to the deficit. Is this a problem now? No, it’s not a problem. The country’s zooming along. Everything looks good; it might be a year problem, maybe a two-year problem, but we’re starting to hear that drumbeat. This is from varied sources over the last couple months.

The nonpartisan Congressional Budget Office (CBO): “The high debt level increases the risk that investors become unwilling to finance the government borrowing unless compensated with very high interest rates.” Bloomberg: “With the U.S. about to sell the most debt in eight years, the Treasury Secretary may be relying on a buyer base that needs to see higher yields before loading up.” Goldman Sachs: “The increasing supply and the Fed not buying any Treasurys means the government will have to pay investors more to buy U.S. debt.” And, finally, Reuters: “Foreign investors are showing signs of fatigue in absorbing or growing Treasurys posing the risks that bond yields spike.”

All right, so what’s the bottom line here? The fundamentals, as far as Washington is concerned, are very good. We’ve got lower taxes. We have lower regulation. That’s not going to change. That’s good. It’s going to probably be good for quite a while. But do watch for risk of inflation. Probably not a problem now. Tariffs — the end of that story hasn’t been written. The Mueller report and Democratic oversight hearings, which could make the market concerned that Trump won’t get his job done.

Longer term, the year may be longer. Worry about U.S. debt because with the explosion of debt being sold and the prospect of a downturn at some point, and therefore the debt getting even greater, tells me we’re going to be issuing a tremendous amount of Treasurys, and I don’t know if we can have that supply and a lower demand without seeing interest rates go up to encourage people to buy those Treasurys. So, longer term, watch the interest rates at the Treasury auctions. If you’re starting to see them creep up, get ahead of that curb, and realize that we may be starting to see higher rates, higher than we’ve heard from the Fed.