The midterm playbook: Congress, data centres and the cost-of-living vote

Welcome to Beyond the Benchmark, the EFG podcast with Moz Afzal.

Moz Afzal:

Hi everyone. So today I'm very happy to have Clayton Allen on the podcast. So Clayton, welcome.

Clayton Allen:

Thank you.

Moz Afzal:

So Clayton is the practice head for the United States for Eurasia Group and has spent many years in US politics, both on campaign trails, national security advisor, as well as working with the Obama administration. So I hope I captured all of that well, Clayton.

Clayton Allen:

If anything, I think you were generous, but thank you.

Moz Afzal:

Very good. Okay. So as we ease our way into the midterm elections, we though this is probably quite timely to kind of set the scene. So maybe Clayton, I hand over to you just to set the scene for us in terms of what the polls are telling us and where we think the real battle lines will be drawn against.

Clayton Allen:

Sure. So as you know, the polls are telling us a pretty clear story and it's a pretty good one for Democrats. I think that the things to take away from this, look at the House and the Senate as two completely different dynamics. That's the first thing. It's hard to take a view of Congress and say Democrats are going to win across the field. In the House, that's largely a reflection of the national political mood. It's 435 seats up for election every two years. Voters are typically responding to what they feel at the moment. Every poll we have tells you the voters are not happy. Economic uncertainty, questions about affordability, dislike of the president, all of those things are really creating a pretty negative position for Republicans and a pretty good opportunity for Democrats. If you look at just generic party approval, you go to most US citizens and say, "Hey, do you want a Democrat or do you want a Republican?" By about seven to eight points, people are going to say a Democrat.

That sets up for a house majority. That's pretty easy political math. At Eurasia group, we have an 85% chance of a Democratic majority. The Senate's a bit of a different picture. The Senate is much more idiosyncratic. About a third of the seats are up for election every two years. The map varies. One cycle, there'll be a lot of Republicans defending their seats. Another cycle, a lot of Democrats. This year, Republicans have the better map, if you want to look at it that way, if you have to make a value judgement . By that I mean Democrats to win a majority are going to have to carry basically every competitive election. I don't doubt that they're going to win some, probably most of them, but to win basically every competitive seat, that's a very high bar. If the bar is a flawless performance, the bar is set pretty high.

That said, polling is so bad for Trump and for Republicans. It's hard to be that confident in Republican's ability to hold. We only have a 55% chance that Republicans hold their majority. That could change. If Democrats gain in that generic ballot, if you have eight or nine points advantage for Democrats, if you see Republican fundraising and campaign spending in Texas, one of the biggest races continue to just be basically nothing, well, you're kind of handing the field to James Talarico, the Democrat in that race. If that close race tells towards Democrats, that's a pretty big tipping point as well. So a lot of things could change it. One note about polling though, people love to treat polls as though it's the Oracle Adelphi, somebody with a crystal ball. Polling has really taken a hit in terms of reliability, trustworthiness, accuracy in the last 10 years. There's a lot of reasons for it. We don't need to dive into them necessarily, but if this was horse handicapping, it would be very hard to put a lot of money on the line looking only at polls.

Moz Afzal:

I guess similar to what we had in the UK, you kind of have this shy Trump voter, right? So in a poll they'll happily say, "Oh, I don't like Trump." But actually when they go into the polling room, they end up voting for Republicans in this case. And I think that's a feature, right? That's clearly a feature given the pomp that Trump comes with and a lot of noise and rhetoric it comes with. The natural aversion is there. Is that a fair reflection of how to think about the polls?

Clayton Allen:

I think it's one of many factors. To put this maybe in UK terminology, every Count Bin Face voter was willing to tell you upfront very directly, "I'm voting for Bin Face." Every Farage voter perhaps was going to tell you, "I haven't made up my mind." This is really going to matter quite a bit in Texas especially, but also in states like Maine and in Michigan. The reason I say that, look at Texas. I hate to keep coming back to this, but Texas is just the most fascinating political story in the midterm cycle. James Talarico is leading Ken Paxton, the Republican nominee, by pretty healthy margins in most public polling. But if you look instead of the Talarico Paxton dynamic and look instead at where Paxton sits relative to the other Republican candidates that are going to also be on the ballot, he is by far the laggard.

Now, I believe fully in a world where voters will go into the booth and split the ticket as you put it, where you vote one way or you just don't vote on your top line contest or on any of the contests and then you vote straight Republican ticket elsewhere. Do I think that a lot of voters actually follow through on that regardless of what they're telling pollsters today? That's where I get a little bit sceptical. A lot of people when the money's on the line, when they're actually in the booth with the curtain closed, it's them, their thoughts and their God, they are probably going to default to their traditional voter behaviour. That to me creates this shy voter effect. It's potentially less pronounced maybe than you saw with Trump, but it's still going to matter.

Moz Afzal:

So let's assume certainly if we take the polls and also the Polymarket Kalshi crowd as well altogether, Democrats win the House, say convincingly, maybe marginally stays with Republicans and the Senate. How do you think Trump thinks about that from his perspective and the Republican Party as they move forward?

Clayton Allen:

I think honestly that Trump, and you can look at his own comments, he doesn't really care about Republicans losing the House. He said in variations of the same thing, "I'm not on the ticket. Voters are frustrated at the GOP. They're not angry at me." I'm not sure where he's getting that idea. Public polling data, focus group data really suggests the opposite. It's that voters are upset with Trump and that dislike of Trump is bleeding out to the larger Republican party. But in any case, he doesn't seem to view midterms really as a referendum on him at all. He's certainly from a functional kind of governance perspective, not that concerned. He really only needed Congress for one thing in this term, and that was a big tax and spending bill. He got that done in 2025, first thing out of the gate. The minute that the one big beautiful bill passed, Trump really had no use for Congress. He doesn't really have a use for Congress coming up.

So if I'm him, do I see this as an actual risk to my ability to govern? No. Think about Trump's approach also. He likes to govern through executive authority. He likes to govern as a CEO or a unitary executive. Having a dysfunctional or at least deadlocked Congress in some ways makes that easier because he'll be the only person with the ability to make policy, the ability to change things. He's already gotten most of the judges that he would want appointed. He has a Supreme Court that is not his lapdog, despite what you've heard and what you've seen people speculate on. They've actually proven very willing to rule against him, but they are still tilted towards a conservative majority that at least limits the risk profile for how much they might impede his ability to govern. It does mean you're going to see a president who does what a lot of US presidents do in the last two years they're in office. They shift towards the things where they're the least constrained and that's usually foreign policy.

Moz Afzal:

So what we've seen in terms of the spat with Canada, is that what we should expect going forward even more, squared or cubed?

Clayton Allen:

I don't know about exponential increase. So I think that Canada's a complex dynamic that I would maybe put off to the side. I would instead look at US-European relations as maybe a better example of what this looks like. There's two halves. There's the defence half, there's the economics half. Economics half, US wants to maintain the Turnberry Agreement. It's pretty committed to that. Now the US sees itself as having a bit more room to respond, i.e. This threat of tech tariffs, this 301 tariffs about tech fines. I think that that's a bit overblown as a near term story. It will be a point of friction, but it's one that's going to unfold over a span of 18 months or so. But the US is trying to maintain good trade relations. At the same time, it's taking a very bilateral approach to engaging with European countries on a security basis.

It's trying to say, look, we're going to keep a certain threshold of troops in Europe, but we're now going to evaluate where those troops are based, based on individual countries' alignment with US foreign policy, trying to push European countries to say, Hey, we're on board with your policies, Trump. We're on board with what you're doing and we're going to spend more on our own defence to align with you. I think that's a better view of how Trump is going to interact with the world. Transactionally, he treats US security presence as fungible, not entirely fungible, but more fungible certainly than you would've seen under previous administrations. That I think is a better model for how this works.

Moz Afzal:

And how do you think the relationship with China and then obviously Putin and the Strait of Hormuz evolves once we're through the midterms?

Clayton Allen:

That is such an expansive question. I'll try and answer it briefly. With the Strait of Hormuz, Trump is cornered. He's in a position where there's no great options. He planned for a six week engagement, a six week excursion, I believe we called it. We're now on month six. It's not something the US military planned for. He can't accept a deal because the MOU, the structure Iran keeps going back to, very clearly not politically acceptable in the US, does not win him any points with his own base. He also can't really escalate militarily, or at least if he does so, it comes with extreme cost. The US can sustain two weeks, two and a half weeks of high tempo military operations before air defence stockpiles become a critical, crucial, we need to end this tomorrow kind of issue. US offensive strikes, they're not impossible, but the US has spent down its long range unmanned systems, it's precision strike missiles, tomahawks and the like attack thems.

So if you want to start bombing again, it's going to be manned aircraft. There's more logistics, there's more risk to personnel, there's more cost involved with that. It's harder to escalate. Trump doesn't have any good options to change the status quo. So right now they're sitting on this plan of economic encirclement, economic isolation for Iran. That I think is what we see continue for as long as the administration can hold it together. Factors acting against that, look at bond yields. 10-year yields are the clearest pain signal that Trump has. You can chart his decision making against a chart of 10-year yields and come up almost exactly like for like. They're not a perfect fit, but it's very, very close. With China, again, it's a story of an uncomfortable status quo. The Trump Xi Summit in our view is very likely to move forward as scheduled.

We think that it's largely going to be a non-event in terms of new investment deals, new purchase commitments. There'll be some talk about that. They're not going to be the major thing. Big thing is extending the Chinese pause on rare earth export controls, extending the US pause on tech export controls. That's the next two years. It's the US and China staring at each other, each of them a little bit hesitant to fire their biggest economic weapon and both of them trying to keep things from just breaking down. That's also the most interesting because everyone else in DC is more hawkish towards China than Trump. You look at everyone in the city, Trump's the most dovish. He's the most willing to negotiate. He's the most willing to prioritise economics over security. 2029, whoever takes office, that US-China dynamic goes back to what it looked like several years ago.

Moz Afzal:

Well, it's interesting, isn't it? Because certainly the Chinese economy seems to have rolled over again, maybe under the weight of tariffs, maybe under the weight of the oil price and essentially swallowing the margins. Certainly that's what we've seen. So it's quite interesting to see what happens next, i.e. They probably need to re-stimulate their economy and they need better deals to do that. So it'd be interesting to see how China plays this over the coming days.

Clayton Allen:

I think Scott Bessent would absolutely love to hear you say that, that whether it's the war on Iran or sanctions or tariffs, there's been this kind of turnover in the Chinese. That's probably also incentivizing a little bit more aggression from the US side.

Moz Afzal:

Yeah. And I'll say also in Europe, we've also seen regulation sort of come in to stall at least the big growth engine that China's had in Europe, although the auto industry still looks to be very, very firm or Chinese auto industry seems to be very firm in Europe, but there's definitely walls certainly starting to even come up in Europe. So I think it'd be interesting to see as whether they will be as hostile. So let's move on to some of the financial market and sector implications. I was talking to someone the other day and the way they described the midterms was a referendum on data centres. So clearly you look at the statistics, data centres are I guess the favourite topic to beat up on at the moment. I saw one stat saying that 85% of data centres are now being contested in some shape or form, which is versus nothing 12 months ago. So clearly AI and data centres are hitting . I don't think they were necessarily popular in the beginning, but they're getting worse. Maybe talk us through what are the issues around data centres? Why are they so easy to beat up on? That's the first question. And then second, I think just before we came on air, you said, “Well, it's not just data centres. It's all about cost of living” and that's probably the bigger item than just say data centres.

Clayton Allen:

So first, you're absolutely right. If you had to pick a single thing that you're going to see highlighted in campaigning, it is going to be data centres. Senior Democratic campaign operative put it to me, said, "Look, if you're just a random person running for the house as a Democrat, and it's truly you get just everybody doing that," he said. And they came to me and they said, "What do I do?" I said, "You only say two things on camera. No new data centres, no new detention centres. That's it. You win in 75, 80% of competitive districts where a Democrat has a chance." Data centres really are kind of the Frankenstein's monster of this political cycle. The US has in very rapid fashion found its torches and pitchforks and is going up the hill. It's driven by a number of factors. One is people see data centres as sort of an abuse of, let's say, local governance.

It's these big investments being pushed on people that you don't get any direct benefit from them. They drive up property values, they increase electricity costs, or at least the fear is that they do those things, increase costs for water servicing and the like. The real problem is it's easy to say that. It's easy to make that case and say, "You don't want a big giant humming building that's going to make your electricity more expensive. And oh, by the way, it's going to be hosting these AI models that maybe takes your job, maybe takes your kid's job, maybe it prevents your child from getting a job as they graduate college." That's a really negative story to tell. Once data centres actually built, typically you see that viewpoint kind of shift because most data centre companies are taking on power sharing agreements, they're investing in local infrastructure, but getting over that initial hump is absolutely the defining factor, the single issue that's most salient.

And that exposes, I think, the larger dynamic that's really defining US politics and has defined US politics for the last six years. It's not data centre, it's not AI necessarily. It's fears that you will be making less money and that things will cost more, that your neighbours and your children will have a harder time finding employment. That's still driving everyone's political decision making. Every US election runs through people's pocketbooks. Everything comes down to your individual economic outlook. And people right now are saying in focus groups and the like that it's not that TVs or iPhones are more expensive. They're not. On a relative basis, they're cheaper. It's never been cheaper to look rich in the US, but it's more expensive to actually be rich because cars, houses, healthcare, retirement, those things are far more expensive.

So if you think about it from a perspective of how much does it cost to actually live the life that you though you were going to, that dollar figure's going up and people are responding to that by saying, "We didn't like what Biden was doing on inflation. Economic sentiment was extremely negative even as the US outperformed its OECD peers and economic recovery post - COVID. Trump came in and said," I'm going to fix all these things. My narrative is I'm going to make things more affordable. "What voters are telling you now is you haven't made anything more affordable. You've made it more expensive and you've created all these uncertainties, wars in the Middle East and everything else. That's why Trump is unpopular. That's why Republicans are at a disadvantage. Data centres are a facet of that. It's one lens through which you can view that larger issue, but US elections for six years have been a referendum on the economy. They will continue to be so.

Moz Afzal:

So moving, and that's clearly I think the absolute important certain for markets at least is any slowdown in AI adoption driven by regulation or I guess data centres not being put up quick enough, clearly that could be a market risk. One could argue that demand is so strong, it kind of doesn't really matter that much. So it may be just fleeting. But your point is a very relevant one in that Trump did indeed start the war with Iran and kind of pushed those oil prices to everybody else in the world and particularly the United States. The positive aspects, i.e. The big beautiful bill, has that all been forgotten now? I mean, it was a lot of money in a lot of people's pockets, particularly at the low end with tax on tips and so on and so forth.

Clayton Allen:

It's been forgotten. Yeah. US voters are really quick to forget what you've done for them and very quick to ask, "What have you done for me lately?" Tax credits and. Tax credits are also kind of an imperfect way to change people's opinions of you. It works really well for corporations, works less well for voters because you have to have tax liability in the first place to garner the benefit. You also have delayed benefit. People vote in November, they don't file their taxes until April. So the promise of two, $3,000 in tax refund, that's a completely alien figure. That's like telling somebody that you're going to win the lottery in a year and asking them to trust you today. It doesn't swing the needle for the median voter. If I can go back, you had a point, and we were talking about this before the call about material risk to data centres.

I would look at it two ways. One is that yes, the risk, the opposition to data centres from an investor perspective, it will likely slow completion on a national average basis. More importantly, it's going to create a patchwork because you don't have a federal regulatory system in place for either AI or really for data centres. It's truly as a state and local issue. So I think from an investor perspective, it's important to consider that disparate impact across different states.

Moz Afzal:

Yeah, no, I think you're spot on there. It's definitely going to be better. And actually from some of the evidence I've seen is, and I think you mentioned this earlier, is that once the data center's up, actually there's more positives than there are negatives and they start to see the benefits of that. So thinking about the midterms, I think, as you said, in some respect, there's some clarity as to where this may land. Your points of foreign policy are very well made and the domestic agenda is probably less important. How do you think, and this question I've been asking lots of people is, what does Trump want to be seen in terms of his legacy and will that drive him post midterms? Thinking about his legacy other than the ballroom, and maybe that is very important, but what are the sort of things that you think are.

Does he want that Peace Prize that everyone sort of semi jokes about? Does he want to be the peacemaker around the world? Does he really put a lot of effort to try and do a deal with Russia and so and so forth? Do you think that's where he sees his legacy? Have you thought about that?

Clayton Allen:

I haven't. I think the answer's actually far simpler. He wants to be remembered. That's it. He wants what every person with a great image of themselves or a very high image of themselves wants. He wants to be remembered beyond his time. So all of these things are important. The ballroom gilding the statues in DC, and they have used a very aggressively shiny form of gold leaf. I can assure you of that. Potentially building this arch that would dwarf Arlington National Cemetery right at the gates of the cemetery, renaming anything and everything in his image. That is actually the clearest reflection of how Trump thinks about himself. Everything else is that same story, just with a different accent on it. His focus on peace deals. Is he a Mahatma Gandhi, a great lover of peace, someone opposed to the very concept of human conflict? No, not at all. He's a guy who wants to be remembered as having accomplished something that no one else could.

He was the guy who stepped in and it wasn't the conference of Yalta. It was Trump telling the world how it was going to work. That's the focus on peace deals. He thinks of himself as the world's preeminent negotiator, and he thinks, "Well, how does that manifest itself in geopolitics? It's through peace negotiations, through peace deals. I can step in and force everybody to agree, then everyone's going to remember me." So I think that that's what his legacy looks like. Take that same lens, cast it to US politics. He doesn't care about the midterms because the midterms aren't his election. Oh, sure, Republicans lost the midterms, but that's because I, Donald Trump, wasn't on the ballot. He cares a lot about the Republican Party being remade in his image. You can see that clearly reflected in who he's trying to benefit and bolster. Ken Paxton. Ken Paxton is a less charismatic version of Trump's worldview. That's why he endorsed Paxton over Cornyn. He wanted to see Paxton elevated because as long as the Republican Party is made up of thousands of Ken Paxtons, it's going to look a lot like Trump.

Moz Afzal:

I guess maybe a last question. Very, very early days. Who's maybe the top three for the Democrat nomination?

Clayton Allen:

Oh, let's see here. Jon Ossoff from Georgia, Wes Moore, governor of Maryland, and I think I have to take the unpopular pick here and say Gavin Newsome from California. John Ossoff's the best communicator. He's imagine Obama, but from the South and 40 years old. Jon Ossoff is two weeks older than I am. Excellent communicator. Wes Moore, also a great communicator, less national name rec. Gavin Newsom is a great head of hair on top of a massive pile of money, and it turns out those two things really help in a presidential race.

Moz Afzal:

It'll be very interesting. I'll ask you the same question next year.

Clayton Allen:

Please do. I look forward to it.

Moz Afzal:

So Clayton, thank you very much for joining us on this podcast. It was very, very interesting. It's nicely set the scene for us as we move forward, and we look forward to having you again on very soon.

Clayton Allen:

Moz, I really appreciate it. Thanks for having me.

Moz Afzal:

Yeah, thank you. So that wraps us up for today, and we look forward to speaking to you again very soon.

 

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