Trump's Race-Baited Hook

In a post entitled “Understandable Terms” published on January 23, 2017, I wrote about my attempt to understand the 2016 presidential election results.  It was just a week after Donald Trump took the oath of office as president of the United States.  The first of several marches by concerned citizens had just been staged in Washington DC.  A half million citizens had just descended on the Capital to remind the new president that his campaign to ‘make America great again’ would not be allowed to roll over social and economic progress made over the last few decades.  Mostly women, they came wearing pink hats and carrying signs against racism, sexism and hate.  Over 400 marches of the same sort were simultaneously held in communities around the country.

It was baffling how Trump was able to gain the most powerful position in the country, perhaps even the world when so many people had so little confidence in him.  I wanted to understand how that could happen.  I needed to sort through the election in terms familiar to an investor. After all voters are essentially ‘investing’ their single vote in a single person who they think will do the most good for the country. 

In “Understandable Terms” I shared my 'financial' analysis of the 2016 presidential election.  Given the events of recent weeks as violence in the name of race escalates, it seems appropriate to reprise the article.  At the time I stopped short of making a clear connection between hate-filled racism and the 2016 election results.  Now it seems inescapable.  Trump won the 2016 through the tacit approval if not full-throated encouragement of racial animosity.  Now as he faces the disapproval of a majority of tolerant, peace-loving Americans he cannot reel back in his racism-bated hook.

“Understandable Terms”

For the second time this century a U.S. president took the oath of office without the support of the majority of voters.  In 2000, Al Gore won the popular vote in the presidential election by a very narrow margin of 537,520 votes.  George W. Bush ended up as our president because he won more than required minimum votes in the Electoral College, albeit with only one vote to spare.  In 2016, Hillary Clinton won the popular vote by a whopping 2.9 million votes, giving her a 2.1% lead over Donald Trump.  Of course, we already know that the Electoral College delivered the win to Trump instead, largely because smaller rural states have in inordinate influence over the final Electoral College tally by virtue of guaranteed minimum representation.

Plenty of politicians have already poured over the election results, offering one opinion after another about who voted for Trump and why.  I wanted to understand the election in terms I could understand.  Who are the people in those small states with 3 and 4 electoral votes that have had so much influence over the fortunes of my country?

Rural America

On a nationwide basis, each of the 538 electoral votes accounts for an average of 422,227 eligible voters.  Electoral college members from twenty-nine states and the District of Columbia represent fewer than the average.  These states and DC are shown in the graph.  These are the states that have inordinate influence over of the presidential election than is warranted by the state’s population.  To be clear, some of these ‘influential states’ voted for Hillary Clinton.  Indeed, 25.4% of the electoral votes for Clinton were from states that have a fewer than average eligible voters per electoral college vote.  However, 41.8% of electoral votes for Trump were from these ‘influential states,’ making it very clear that rural America held sway in Trump’s favor.

To begin, I had some idea already of the rural character found in the states that voted for Trump.  My beginnings were on a cattle ranch in South Dakota and I earned a bachelor degree in economics from the University of South Dakota.  Independent minded and hardworking, South Dakotans are a tough bunch.  Yet many people in the state are isolated and lack experience with the sophisticated and sometimes sinister intrigues of more worldly players.  Yet to understand the 2016 Presidential Election and the Women’s Marches, there is more to understand than nostalgic notions of rural America.

Having established which states made a difference in the election in my own way, I looked at various social, demographic and economic factors to understand better what might be coloring the view of these voters. 

Losses not Recovered

The labor participation rate tells an important part of the story.  For Trump 138 electoral votes out of his total of 336, were from states where the labor force participation was below the average of 63.6%.  That represented 45.1% of Trump’s total electoral votes.  However, 113 electoral votes for Clinton were from states that fell into that same low employment status or 48.7% of her total electoral votes.  While there appears to be some connection, this data was simply not compelling enough to say it explains the conundrum of how we have a president in the oval office who is so unpopular.

The intensity of the loss felt by some communities might provide a better explanation.  Instead of looking at labor participation, the economic fortunes of each state can be understood through what each has lost in terms of income.  On average median household income in 2015 was down 7.8% from the peak median income for the state.  Some states are experiencing double digit decreases in median income.  Even if a population is largely employed, if purchasing power is not what it used to be, voters are bound to feel discontent.

A look at a chart of ‘median income change from peak year’ makes it clear that Trump’s message resonated well in states where median incomes have dropped by significant amounts.  Indeed, 178 of the electoral votes for Trump were from states where median incomes fell by more than the average 7.8% from peak median income for that state.  That represented 58.2% of all electoral votes cast for Trump.  By contrast, Clinton won only 85 electoral votes from states where income is down by more than the average.  These votes represented 36.7% of her total Electoral College votes. 

Thus ‘sense of loss’ seems to be a more direct driver of Trump’s Electoral College victory than simply a lack of jobs.

Weakness Within

The obvious question is why have some states experienced such a deep loss of income and why have they not recovered from the Great Recession of 2010-2012.  Those of us who follow the small-cap sector have a good understanding of what happens when small companies with their limited resources are hit with adverse circumstances.  Earnings losses are possible.  Bankruptcy is a reality.  Recovery takes time.  Weak balance sheets, poorly trained workers, jaded managers or any of a dozen other deficiencies slow things down. 

Do those states with deep reductions in income have such deficiencies?

Securities analysts use balance sheets to explain corporate deficiencies.  There is no state balance sheet to analyze.  However, the state’s asset base could be considered analogous to the corporate body.  The presence of public companies provides an interesting perspective on a state’s economy.  Public companies require an element of sophistication to meet shareholder and regulatory requirements.  Their financial records are audited and subjected to scrutiny by the public.  These companies must adopt codes of ethics and standards of business conduct.  Public companies are also central to job creation.  Thus it follows that the more public companies in a state, the more resilient the economy.

Of course, the larger the state geographically or the more endowed with natural resources, the more public companies might expected.  We are looking beyond which state has the most public companies.  Instead we are looking at whether there is a connection between corporate formation with income recovery.  The connection does not seem to be borne out.  We can see in the graph of exchange listed companies that states which had the greatest change in median income from the peak are also among those with numerous public companies.  Indeed, among those low-population states with the inordinate amount of influence in Trump’s favor in the Electoral College, public companies formation seems to be quite robust.

It All Begins in the Home

Households present another economic resource, but only if they are fully functional.  Something like a company with negative working capital, income deficient households are ‘gut punched’ by adverse economic events. On their backs, these households cannot contribute to economic recovery.  It is somewhat alarming that nationwide 14.9% of households are below the poverty level.  Interestingly, a good share of the states that voted for Trump have even more beleaguered households, including Kentucky with a whopping 19% of its households below the poverty level.  This includes a good share of those small states with inordinate influence over the 2016 election outcome relative to their population.   

Drug use has been cited as a factor related to workforce participation.  The graph illustrating households below the poverty level also shows the percentage of the population that uses illegal drugs such as heroin or cocaine.  Nationwide approximately 8.5% of the population uses illegal drugs.  There appears to be an inverse relationship between household income and drug use.  It stands to reason that households in a struggle to pay the rent and put food on the table would also have trouble paying the local drug dealer.

Educational Springboard

Companies recover from difficult times by tapping the talent of their employees.  They have contests to see who can come up with the best money saving tactics and offer bonuses for product innovations.  The talent pool for each state can be viewed from the same vantage point.  How strong is the talent pool in a state in terms of education and ability to pursue self-learning? 

While there is little difference among the states in terms of attainment of high school education, there are significant differences in the achievement of college degrees.  There are far fewer college graduates in those states were household incomes are lower.  Indeed, in those states where income is well off the peak there appears to be the fewest college graduates as a percentage of the population.  These are the states that pinned their hopes to Trump baseball caps.  In the other states education may provide options for those who lose their jobs, allowing them to get back into the workforce faster.  In turn, this preserves household income.

The Internet and mobile apps have changed nearly every institution.  It is no longer necessary to travel to a college campus to get an education.  Instead students can take classes online.  News is no longer just on the radio or television.  Mobile apps deliver news from a host of new channels.    This makes access to at least the Internet an imperative for every household in order to be fully participating members of our economy and society.

Surprisingly, an average 29.5% of households in the U.S. do not have access to the Internet.  As shown in the chart depicting educational attainment, there are wide differences in across our country in terms of who can jump on the ‘world wide web.’  We can see that among those states with voters backing Trump, Internet access is lower.  There does not seem to be a particular link to state size, but connection to the Internet seems to be lowest in those states with low income.

Violence to Solve Problems

Perhaps it is not so much capability of our labor force as it is attitude.  The final chart illustrates ‘attitude’ from two different perspectives. 

The murder rate per capita can be a proxy for how a community solves its problems.  Across the country the murder rate is near four per capita.  In those small states with particular influence over the outcome of the 2016 presidential election, the murder rates seems to be lower than average with the exception of a couple of particularly violence-prone states like Louisiana and Mississippi.  However, most of the larger states that voted for Trump the murder rates are above the national average. 

Attitude can also be measured in terms of social groups that advocate violence and extremism.  The same chart depicts the number of hate groups by state accordingly to the Southern Poverty Law Center.  Alaska and Hawaii are the only two states considered free of hate groups.  Every other state has some presence of Ku Klux Klan, Nazis, neo-Confederates or other groups organized around hatred toward some segment of society.  Obviously those states with higher population have more such groups than low population states.  It is somewhat alarming to see the incidence of hate groups among those states where Trump garnered support. 

Even after a half dozen charts attempting to connect votes for Trump and Clinton to demographic and economic factors, the analysis still seems to fall short of a full explanation for the election outcome and why a half million women marched through the streets of Washington DC to tell the victor that he was not really a winner at all.  However, the exercise  shed some light on the angst felt by some people in our country.  That is something we all need to understand on any terms possible.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.