US midterm elections: what we know so far

This is an audio transcript of the FT News Briefing podcast episode: ‘US midterm elections — what we know so far’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, November 10th. And this is your FT News Briefing.

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Binance’s deal with FTX had a shelf life of a little more than a day, and the midterms were supposed to be a red wave for Republicans, but it didn’t turn out that way. Plus, we’ll look at how a potentially divided Congress could affect investors. I’m Marc Filippino. And here’s the news you need to start your day. 

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A deal between two major crypto exchanges is dead just one day after it was announced. On Wednesday, Binance said it would pull out of its plan to buy its rival, FTX. It cited concerns about FTX’s business practices and investigations by US regulators. The FT’s Joshua Oliver has more.

Joshua Oliver
It has been a whirlwind 24 hours in crypto. No mistake. What Binance has said is that as part of their due diligence, they are concerned about apparent mishandling of customer funds and they do not see it as a viable deal to complete. And this was flagged by the Binance chief executive when they initially announced the deal, that this was something that had been inked very, very quickly and that they were gonna have to do their due diligence sort of after announcing the deal. So they were kind of backfilling the details. And it looks like once they saw the details, they were not happy.

Marc Filippino
OK, Josh, so what is next then for FTX?

Joshua Oliver
It’s difficult to see how FTX will survive. Binance looked like an investor of last resort for a company that obviously needed cash, and it’s very hard to see how they’re gonna get that cash from anywhere else. The other thing that we’ve learned from the reporting of our colleagues is that the SEC has widened an ongoing investigation into FTX, which is now looking at potential mishandling of customer funds.

Marc Filippino
Now I wanna point out, Josh, that bitcoin is down below $16,000 — just a massive drop since this deal was announced. What does all this turmoil mean for the wider crypto sector?

Joshua Oliver
Binance’s CEO, in a memo to staff yesterday, made it very clear that he does not see the collapse of their rival FTX as good news for his company or for the wider crypto space. He said competence in crypto has been severely shaken and that’s what we’re seeing in the bitcoin price. You know, the collapse of a major player not only in exchange, but also potentially the sister trading firm Alameda, which was, you know, very, very active trader and counterparty to many different firms in the space, potentially, you know, significant contagion risk. And a lot of people will be selling first and asking questions later.

Marc Filippino
Joshua Oliver is the FT’s asset management reporter.

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Unidentified speaker
(Drumroll and crowd chanting “USA”) Please, please, please. Vote. Vote.

Marc Filippino
The US midterm elections are over and we’re still waiting on the final results. That could take a while. But what we do know is that Republicans’ expectations of a huge victory going into the midterms didn’t happen. It looks like Republicans will control the House of Representatives by a smaller than expected margin. Democrats are fighting to hold on to the Senate. In our last instalment of our midterm election series, I’m joined by our deputy Washington bureau chief, Lauren Fedor. Hi, Lauren.

Lauren Fedor
Hi, Marc.

Marc Filippino
All right, Lauren. So last time you were on the show, you had just come back from reporting on a very tight race in Virginia and the incumbent, Democrat Abigail Spanberger — she just won her seat in the midterms. What did you take away from that victory?

Lauren Fedor
Spanberger’s race and bid for re-election ended up being a real watershed moment on the night for Democrats. In the final days of campaigning, and it looks like it was gonna be really close. And in fact, there were a lot of Democrats who were pretty nervous that she might not win. But when she managed to hold on and defeat her Republican opponent there, there are a lot of Democrats who started breathing a little easier on election night feeling like maybe these losses weren’t going to be so bad for them after all.

Marc Filippino
Now, Lauren, you had reported that Republicans really pushed hard on inflation. They hoped that this would give them a big edge. So in the end, was inflation the deciding factor in this election?

Lauren Fedor
I think it’s fair to say, looking at some of the exit polls and the results that we’ve seen in the official vote counts, that inflation was an issue for a significant share of the electorate. But we see that other issues, namely abortion, which is something the Democrats talked a lot about, was also a big issue for a lot of voters. And so it was kind of this mixed picture where you had multiple issues motivating people to vote for different reasons. If history was to repeat itself, we would have expected the Democrats have had a horrible night, given the state of the economy and the cost of living in this country. But, but it looks like they managed to stem some of those losses. Obviously, votes are still being counted. The Associated Press has not called either the House or the Senate at this point, but it’s fair to say that the Democrats had a better night than they thought they were going to.

Marc Filippino
Lauren, how influential was former President Donald Trump in this election? He backed some 300 candidates. How did they do?

Lauren Fedor
In the end, many of those candidates did, in fact, win their elections. But there were a couple of real high-profile misses. And those are raising some serious questions among Trump’s allies about his influence in the party and what kind of role he should be playing in the future. One big example was in Pennsylvania, which is always a key battleground state. Trump had pretty much handpicked Mehmet Oz, Dr Oz, to be the Republican candidate there, and he came up short in the Senate race. Trump has, you know, made no secret of the fact that he wants to run for president again. Earlier in the week, he was teasing that he’s gonna be making an announcement next week on November 15th in Mar-a-Lago. Now there are questions on whether or not that announcement is gonna go ahead and how does all this impact his, his thought process heading into a potential 2024 presidential bid? We’ll just have to wait and see.

Marc Filippino
Lauren Fedor is the FT’s deputy Washington bureau chief. Thank you, Lauren.

Lauren Fedor
Thanks, Marc.

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Marc Filippino
OK. So say the scenario plays out and Democrats do hold on to the Senate and Republicans manage to take over the House. How are financial markets gonna handle the prospect of a divided government? I reached out to the FT’s US financial commentator, Robert Armstrong. He says investors might not like this split because with one party in power, it’s easier to spend money.

Robert Armstrong
When the government borrows money and spends it, that is essentially an injection, a stimulative injection of new money into the economy. And that can land in a lot of different places from household checking accounts to, you know, corporate balance sheets. But what we have seen consistently over the years is that government deficit spending seems to have a very direct connection with corporate profits.

Marc Filippino
Gotcha. So if I understand this right, more government spending means more people spending, which means that more corporate profits go up and that is set to end.

Robert Armstrong
Yeah. And in a divided government, nobody can agree on anything. Spending tends to come down. And so at a lag over time, what you’re gonna see is the extraordinarily high profit margins we’ve seen companies making. There’s good reason to expect those profit margins to start to head back towards more normal levels. And, you know, we saw a dramatic spike in corporate profits over the pandemic period for precisely this reason, most famously, the stimulus checks that were sent out to American households. And, you know, that gets recycled through the economy and shows up as corporate profits. And that is gonna be under pressure going forward. And that, along with tightening by the monetary authorities, by the Federal Reserve — that is one of the reasons that people see recession coming down the pike.

Marc Filippino
And I guess the divided government is also pulling back on spending because of the inflation issue?

Robert Armstrong
Of course, and that’s the flipside for investors. So investors clearly want inflation to fall because when inflation falls, the Federal Reserve will be able to back off its rate increase campaign. That should be good for stocks. And that’s, that’s the kind of countervailing force to the fiscal spending. The fiscal spending improves profits, but lower inflation would, in theory, improve the valuation of bonds and stocks.

Marc Filippino
Rob Armstrong is our US financial commentator. He also writes our Unhedged newsletter. We’ll have a link to that in the show notes.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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