The election remains close as votes continue to be counted. Milbank Family Senior Fellow at the Hoover Institution at Stanford University Niall Ferguson joins Yahoo Finance Live to discuss.

Video Transcript

AKIKO FUJITA: We've got Niall Ferguson, who is the Milbank Family Senior Fellow at the Hoover Institution at Stanford University. And Niall, it's great to have you on on this day, especially when we're trying to process these results coming in. I was looking at some of the comments you made, even just as recent as a few days ago, saying Trump-- Trump's lead-- or, actually, Trump's obstacles to re-election look insurmountable, and yet we're looking at this electoral map right now, seeing as they come in. How are you processing these results as they come in?

NIALL FERGUSON: Well, I also wrote just a couple of days ago on Bloomberg Opinion that-- that it could be 1948. You'll remember then that Harry Truman surprised everybody, all the commentators and all the pollsters, by coming from behind and defeating Thomas Dewey. I think what's been fascinating about the last 24 hours is how wrong people have been who based their assessments on opinion polls alone. You really had to be skeptical of opinion polls, particularly state-level opinion polls this year, because such a large proportion of people were saying that they weren't being straight with the pollsters, particularly Republican voters.

Second big takeaway is huge turnout. And when you have a big increase in turnout, this could be the highest turnout in 120 years, it's hardly likely that models calibrated in the last 10 elections are going to deliver the right result. So I think the way to think about this election going into it was that there were really quite fat tails to the distribution of possible outcomes. The blue wave disappeared and turned into a ripple overnight, precisely for these reasons. The Republicans basically got people to turn out who hadn't voted before.

The other thing that's really interesting, Akiko, is that the argument that Trump is a candidate who appeals only to white men has taken a huge beating, because if exit polls are anything to go by, and we got to be a little bit cautious, it feels like Trump has actually gained votes with almost every demographic except white men. He's increased support amongst Hispanic or Latino voters, and that's, of course, why he won Florida and why he has won Texas.

But this ain't over, and I think it's extremely important to recognize that we're in a very, very delicate situation here, with a number of states right down to the wire, and the president himself making it clear that he intends to contest results that don't go his way. Recounts are on the agenda. Lawsuits are on the agenda. The president's already talking about going to the Supreme Court. I find the market a little bit too sanguine at the moment, as we could well be on the brink of a very protracted painful process that will make the year 2000 election look like a walk in the park.

AKIKO FUJITA: What do you mean specifically by that? I mean, we are seeing the Dow up off of its session highs, but still up about 560 points. When you say the market is being too sanguine, what are the outcomes that investors really should be preparing for?

NIALL FERGUSON: I think the reason the markets are taking things in their stride is partly that the plausible outcome of Republicans holding the Senate but Biden as president leaves people feeling relaxed. There was a downside to the blue wave. While some investors were very persuaded that a blue wave, a Democratic sweep, would lead to big fiscal stimulus next year, there was a downside risk if the Democrats had won big-time, namely that a lot of radical ideas would have been on the agenda, and, of course, significant tax hikes for the upper income earners.

So I think this moment right now is a moment where people say, hey, we could live with divided government. This isn't the worst outcome. The other thing, of course, is that you're looking here at big jumps in big tech. And big tech is beginning to look like the new safe haven when people don't quite know what else is going on.

So my sense is that this rally is a rather fragile thing. Remember, as I've said, the president shows every sign of contesting this. We have a scenario in which we could end up with Joe Biden getting to 270 electoral college votes if he is declared the winner in Michigan, and Wisconsin, and maybe in Georgia, as well as Arizona, and the Trump campaign is simply going to say, no, we don't accept that. And we then could find ourselves in, as I said, a situation far murkier than the one we were in when Al Gore and George W. Bush went head-to-head over Florida.

This could be over multiple states. And I think there will be a kind of take no prisoners approach to the litigation. I think the president has spoken recklessly in claiming that he has won. I think he has spoken recklessly in saying that he can somehow throw this to the courts. And I think it's, of course, absurd to talk as if voting is somehow going on.

What is going on is that ballots are being counted. But this could get ugly fast if there isn't a quick resolution in the swing states, in the key battleground states, and if Republicans don't persuade the president to accept that he's lost. Or, of course, it could go the other way. You could find that somehow Republicans edge it in the battleground states.

But at the moment, what I'm really concerned about is that this becomes a contested election far more hotly contested than in the year 2000, and we don't have a clear result, not today, not by Friday, this could drag on in that scenario for a long time. And I think that's-- I think investors will lose their nerve if they start to attach a probability to that kind of a scenario.

ZACK GUZMAN: Yeah, Niall, Zack Guzman here. I just want to push back a little bit on that idea here because if you talk about maybe some of those downside risks being built into a blue wave-- we were discussing that yesterday and we're seeing it play out right now in the health care sector, the strongest performer here along with communication services. Today, we had a guest on talking about how that pressure of a blue wave would lead to pricing pressure for some of these big pharma companies.

But when we talk about-- you mentioned taxes there is another thing. I wonder how much of today's rally might be tied to what you're discussing there in this expectation that there's going to be gridlock, whether the presidency goes to President Trump or Joe Biden here, since we didn't see that big wave in the Senate perhaps investors might be enjoying at least that case here in the months to come?

NIALL FERGUSON: Yeah, I mean, my view was that if a blue wave did materialize that investors would then have second thoughts, because it would suddenly hit them that they weren't just going to get Keynesian fiscal policy, they were going to get a bunch of pretty ugly tax rises, not to mention a variety of ideas that Democrats on the left have been touting from packing the Supreme Court to giving statehood to DC and Puerto Rico to, of course, the standard fare of a Democratic administration that controls Congress, a whole bunch of regulation across a variety of different sectors, and no doubt another attempt to health care reform.

So my sense was that if the Democrats had really delivered a landslide and a sweep that the markets wouldn't actually have rejoiced in the way that we were led to expect that they would. And now what's happening is that people are saying, oh, well, actually, we can live with divided government that takes the radical ideas off the table. And who knows, maybe Mitch McConnell will be willing to grant some fiscal stimulus, if only to get those final Senate races over the line for the Republican Party.

But as I said, I think to simply say to yourself right now OK, Biden's going to just sneak in as president and Republicans are going to hold the Senate is premature, because I think there are fights still to be fought, and they may be protracted and acrimonious. So it's much too early, I think, to conclude that this is a relatively safe outcome for investors. It may prove very differently. It may turn out very differently in the coming hours and days.

ZACK GUZMAN: No, for sure, but you brought up polling there as one of the big issues, again, this time around. I'm not sure how many people expected that, considering all of the prognosticators had mentioned a lot of those issues had been fixed. You mentioned the Dewey defeats Truman headline, that could be playing out here as well.

When you look at maybe where things went wrong, obviously, polling continues to have its issues. But when you look at maybe how this race has gone here, as Texas did go red, some hope there among the Democrats that it would go blue, perhaps maybe wasted energy there, because even on the down-ballot races not a lot happened there. In some cases, they lost by larger margins than they had in 2018, which was the election cycle that really gave them the hope they could flip Texas into being blue here. So maybe if you look at that, how do you gauge where the effort was spent here to get us into the day after Election Day still not knowing how this race is going to go?

NIALL FERGUSON: Well, I think this is a colossal failure on the part of the Democratic Party, because they should have won this election handily. Not only has there been a pandemic, generally not good for incumbents, but it's pretty clear that President Trump's handling of it is not going to get an A from the examiners. There's been a brutal recession, even if the country is coming out of it. And there is no immediate end in sight to these problems.

I think the key to Democratic failure, perhaps, has been to misjudge the public mood on the pandemic, to campaign on that issue, and to try to turn the election into a referendum on Trump's handling of COVID-19. That has not worked. And I think part of the reason for that is that the public broadly shares Trump's view that the pandemic is China's fault and that there hasn't been anything exceptionally bad about American performance, and hey, can we please get the economy back and get back to normality? And oddly enough, it's been Trump who's made it sound as if he can get the country back to normality faster than Joe Biden.

The other big mistake that I think goes back some months now has been to give law and order some currency as an issue in this election. I've said for months that if you look at gun purchase data, that's revealed preference, which is, in many ways, superior to the things that people tell pollsters. People have bought guns in unprecedented numbers this year. And one thing that we learned from 2016 was that gun ownership was a very strong predictor of voting Republican.

I think concerns about law and order, which really blew up during the Black Lives Matter protests, have played a part in getting working-class voters who never voted before-- remember, this is a story of turnout-- to show up for Donald Trump. So my broad conclusion is that the Democratic Party has misread the mood of the country, once again, and failed to connect with what used to be a really important part of its constituency, the working class in the Rust Belt. And by playing identity politics, which the left of the Democratic Party loves to do, they've really misread the mood of Hispanic voters, but also of a significant number of African American voters.

So as I said, when you look back on this, you can only really say that this is an epic fail of Democratic strategy. They should not be struggling to get over the line in an economy like this, in the wake of a public health disaster like this. This really should have been a cut-and-dried Democratic victory. And the fact that the Republicans prevented that is a remarkable tribute to the way they have read the public mood in key battleground states.

AKIKO FUJITA: Niall, let me pick up on that point that you were saying about the Democrats misreading the public sentiment, because while we don't know who won yet, if last night is any indication there is a very deeply divided country we're looking at right now. Whether it is on the view of the virus, as you point out, the issue of social justice, the integrity of the political system, it appears as though there are two very different realities that are playing out. So I'm curious as you look to that, are things going to get worse from here in terms of that division, or is this kind of an inflection point?

NIALL FERGUSON: Well, I think it's fascinating that opinion pollsters missed this. If you tried to look away from Nate Silver and company and look, for example, at Facebook, you saw a very different story, which was the dominance of shared content on Facebook of conservative commentators like Ben Shapiro. Now, Facebook has a much bigger reach than, say, cable television, so it really struck me as highly significant that day after day after day the top 10 shared items on Facebook were nearly all from conservative content producers.

So I think what we're seeing here is, as you say, the fact that the nation is very evenly divided that this election's, once again, very, very close indeed, as it was four years ago. But you know, the divisions are not that straightforward. They run through not just states, but they run through districts. They're not clearly along ethnic lines. They're not even along generational lines anymore, because seniors have not broken, as far as I can tell, as clearly for the Republicans as they did four years ago.

So we are a divided country, but not in a straightforward way that would lead you down the path of, let's say, civil war, as happened, of course, in the 19th century when the division was absolutely clear cut and regional. I think what's consoling to me is that although we clearly have a whole set of issues on which we're deeply divided, it's not obvious how this leads to a kind of major breakdown. Actually, would like to take the optimistic view that this has been a tremendous 24 hours for American democracy.

We have not seen turnout like this since 1900, since McKinley versus Bryan, Incredible levels of engagement by voters on both sides of the partisan divide. And you know, American politics has always been something of a contact sport. Charles Dickens wrote about this back in 1842. Let's not imagine that there was some kind of happy-clappy kumbaya past where everybody got along just fine in this country. I think that's a misreading of American history.

So the way I would think about this is that we are going to get a result. The worry I have is that the president may challenge the legitimacy of a result that doesn't go his way and create a very toxic atmosphere in which his supporters then don't accept the legitimacy of the results. So he's walking a very, I think, dangerous road in doing what he's doing.

There's is a very long history in this country of accepting peaceful transitions of power, of being, as it were, a good loser. And even some very hard-nosed politicians in American history, think of Richard Nixon in 1960 who had every reason to feel that he had not been beaten fairly and squarely by John F. Kennedy, nevertheless accepted defeat. So yeah, we're in a very, I think, fraught and dangerous moment.

A lot is going to depend not just on how the votes finally turn out, but also on how the two candidates accept the outcome, whoever is said to have got to 270. And I do very much hope that President Trump, if he turns out not to have won, accepts that defeat with a good grace and that his party counsels him to go down that road. Because I think the last thing that we need is weeks and weeks of litigation followed by a fundamental rejection of the election result.

And that goes both ways. I think if it turns out-- and I think it's less likely, but if it turns out that actually Trump gets to 270, one would hope that Joe Biden would concede with good grace. That's a really critical part of our system. I mentioned William Jennings Bryan, who was the unsuccessful populist back in 1900, he set the pattern, he established the tradition of relatively early concession and graceful concession in the face of defeat. One of these men is going to have to make a concession at some point or we're going to be in a very bad place.

AKIKO FUJITA: Yeah, that, I think, all of us can agree on. And Niall, it's great to get your insight as we try to process the results coming in. Niall Ferguson, Milbank Family Senior Fellow at the Hoover Institution at Stanford University. Thank you so much for joining us today.