- In finance, leverage is a way to increase the possible return on a relatively pedestrian trade.=, but it also carries much higher risk.
- Similarly, President Trump used a high-leverage strategy built on racial anxiety, wild rallies, and a dark campaign message in 2016. The high-risk, high-reward strategy ended up working out.
- But this time around, the same highly-leveraged strategy has Trump trailing Joe Biden by a large margin and is on course to blow up in the president’s face.
- George Pearkes is the Global Macro Strategist for Bespoke Investment Group.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider’s homepage for more stories.
The President is famous for his use of leverage, with borrowed money (as well as bankruptcies) fueling his real estate and casino investments since the 1970s. The use of leverage also works well as an analogy for his electoral strategy, but the risky strategy that worked in 2016 is looking like a disaster in 2020.
In finance, leverage is often used as a tool to turn relatively stable cashflows into big returns.
For example, if an investor can earn 5% on an investment over a year, without leverage she can make $5 for every $100 she invests. But if she borrows $90 at 1% and earns $5 on her investment, she’s now earned $4.10 net of interest…41% returns on her initial investment!
Of course, this cuts both ways. If the hypothetical investment ends up losing 4%… she’s now closing the trade with a $4.90 loss. That’s just about half of her initial stake, versus a 4% loss without leverage.
In other words, leverage makes it easier to do something that would take a long time or a lot of luck, but it creates a much larger downside.
Trump’s levered political strategy
Headed into 2016, the conventional wisdom was a “Blue Wall” of states in the upper Midwest would create an insurmountable hurdle for Trump in the Electoral College. The odds of Pennsylvania, Michigan, and Wisconsin all lurching Republican were seen quite low.
For a conventional campaign, it wouldn’t have mattered. But the combination of strategies pursued by the President were effectively leverage: they allowed him to do something that was otherwise untenable, and achieve a narrow victory of about 107,000 votes across three states which put him over the top.
The specific strategies in question are too lengthy to list here, and are of course the subject of controversy. Targeting voters with negative advertising to reduce turnout, general themes of racial anxiety, and a rally-focused campaign style aimed at personal connection with his fans are all high-risk, high-reward strategies and examples of the “leverage” Trump deployed four years ago.
A conventional campaign probably would not have used that approach, and also probably would have lost due to the structural headwinds of the Electoral…