Episode summary
'Financial Crisis' Trigger: What Midterm Elections Will Do To Markets | Steve Hanke
The David Lin Report
· · 45 min · Hosts: David Lin · Guests: Steve Hanke
Summary
Steve Hanke said the midterm election is being driven by affordability, dissatisfaction with tariffs, and the cost of the war against Iran, which he believes has fed through to gasoline, diesel, and grocery prices. He argued that Trump has become “very toxic” to swing voters and expects a Democratic sweep or close to it, with a divided government becoming the most likely outcome.
Hanke said divided government would actually be economically preferable because it slows down legislation and limits new regulations and taxes. He added that a Democratic Congress could try to roll back some tariffs and restrain the White House on foreign policy, though he warned a frustrated president might lean even harder into foreign policy and create more risk.
On growth, Hanke argued that the 3.4% real GDP print in Q3 is heavily dependent on AI investment and likely marks a peak. He warned that the scale of AI capex, combined with aggressive credit creation and rising asset prices, raises the odds of a financial crisis rather than just a slowdown. He also said Europe’s debt and energy problems remain severe, with France and Germany both looking vulnerable.
Key takeaways
- Steve Hanke expects a Democratic sweep to reflect voter anger over affordability, tariffs, and war-related energy costs.
- Hanke says divided government is economically useful because it slows legislation and restrains policies he views as harmful.
- He argues that 96% of Q3 real GDP growth came from AI investment, making the current growth surge fragile.
- Hanke says the AI boom, if it cracks, could produce a 40% broad-market drawdown and a much larger hit to tech stocks.
- He sees Germany and France as deepening European debt and energy stress points, with recession risks still elevated.
Notable quotes
“we're increasing the probability of of actually having a financial crisis. Trump has basically become very toxic”
“divided government is in my view the optimum thing to happen to have the presidency in one party and the congress in another party”
“If you look at the projected revenue associated with that investment and the level of investment involved, there's a there's a 58% revenue shortfall”
“We We've got plenty of liquidity. We've got too much actually”
How the episode opens
We're not only increasing the probability of a slowdown, David, we're increasing the probability of of actually having a financial crisis. Trump has basically become very toxic. The dangerous part is that if you have a divided government, they can't get anything done and and the economy starts going south, then the president will turn to foreign policy and and he could get us in more trouble than we're already in.
It's Monday, November 2nd, and Americans vote tomorrow in midterms. That could come down to one issue: affordability. President Trump says that if Democrats take Congress, he'll become Mr.
Veto. So, what happens to the economy and markets after the midterm elections? Steve Hanky, professor of applied economics at Johns Hopkins University, will give us his outlook, who might win, and ultimately what's next.
We're also going to go over the latest GDP numbers, 3.4% 4% real GDP in Q3 Q3, but Professor Hanky says that this most likely is the peak for now. We're going to find out why. On the midterm elections, the Democrat controlled House has been a foregone conclusion for quite some time now.
So, all eyes on whether or not the Democrats can take the Senate as well, which would ensure a blue sweep and a divided government. Right now on couch sheet, traders predict a 75% chance that the Democrats will win control of the Senate after tomorrow's 2026 midterm vote. But let's say you disagree with that outcome.
A $50 trade on the Republicans could yield a $182 if you're correct. This video is sponsored by Koshi, the largest prediction market in the United States. Unlike a sports book, you're trading peer-to-peer on real world events from economic data to political outcomes.
And the price moves based on public opinion, not a house.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- midterm elections
- financial crisis risk
- ai spending
- europe debt crisis
- liquidity and money supply
Companies and tickers mentioned
- Kalshi
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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