Blain’s Morning Porridge 9th Sept 2024 – Tuesday’s Gladiatorial TV Showdown will have multiple unanticipated consequences.
“Ave suffragii morituri te salutant!”
Rates, Inflation, Deficits, the Dollar and the future of everything might just depend on how Tuesday’s televised US Election Debate goes? There will be a winner and a loser. Next week’s Fed Meeting will be more nuanced – but could it ultimately be as important over the long-term?
I am tempted to shut up shop for the next week or so. Everything seems to hinge on tomorrow’s US Presidential Debate, and by how much the Fed eases on Sept 18th. Should we just sit back and throw darts at stock pages till then? Or face the reality; each event is followed by successive events.. each of which we will similarly struggle to comprehend in terms of the route of economic and market history.
There are three kinds of market-moving surprises in markets. Participants bet on them in terms of short-term trading, but what do they mean when taking the medium-long term investment perspective?
- There are the moments you can anticipate and plan for, aware markets have analysed the Non-Farm Payrolls Report thousands of times. (I first sat in on a trading floor huddle ready to call clients with our take on the number back in 1986! It stretches back to 1913.)
Friday’s weak US employment report, and further big revisions, confirmed job creation in the US has declined, even though the employment rate remains strong (even better than last month). The market has added it to the list of other economic indicators and data suggesting recession approaches, thus the weakness in stocks and the rally in bonds. Would the markets’ much changed if it had been a strong number? Probably not. The market expected a weak number because it expects the Fed to ease rates.
- At the other extreme are the no-see-ems, the things you simply can’t anticipate because they are just so wild and out there – a minor one being Donald Trump asking Elon Musk to oversee US government efficiency. Come November we probably won’t have to worry about what kind of friction and undelivered promises such an extraordinary appointment might entail.
As an election promise, the diminishing number of Elon-Fanboys will be delighted. As serious policy…. really? Who cares? It’s a populist sound-bite policy teaser from Trump that might just get him some more votes.
- And then there is third kind of surprise; binary outcomes. These are usually known unknowns, but come with the potential of unanticipated cascading consequences.
The consequences from this week’s big binary event don’t come any bigger: who will win Tuesday’s US Presidential TV debate? It’s likely to be a critical decider in this too-close-to-call US election. Whomever of Harris or Trump comes out the winner will likely decide just how big the US budget deficit goes over the next 4 years, and will set the global economic tone. I reckon either is just a question of scale in how badly and deeply they scare markets.
After the debate, I’m going to try to work out the +ve/-ve of each candidates programme in terms of probability-weighted market consequences (ie guesses), on the deficit, inflation, global trade and economic confidence. I’ll try to cost everything they’ve said, haven’t said, and promised – which, having listened to Trump’s masterful incoherence is difficult, while I’m still waiting for Harris to explain anything truly meaningful. It will be a fun exercise.
Of course, this election is not about policies, fiscal and monetary consequences, but all about personalities. And which personality takes the Oval Office throne room, as we all know, will be determined by a tiny number of voters who will determine who wins the critical swing states that determine the electoral college outcome. These states look tighter to call than ever before. I am told Pennsylvania is the one to watch most carefully.
The polls suggest Harris has a 2-3 point lead in national poling, but is it enough? The way the US system is designed evolved fiddled compromised means the Democrats historically need a clear 4-5% majority to win these critical swing-states. A number of commentors suggest Harris’ honeymoon rise since Biden stepped down is now played out – the momentum that got her and the Democrats back in the game is now fading.
It’s now a straight level race through to Nov 4th – and Tuesday night is the only time US voters will get a chance to see them perform against each other. It will be gladiatorial.
Trump, 3rd time in the Presidential Arena. Harris, beat Pence in the last election during the VP debate, but can she counter the old man of the Ludus, Trump the TV Showman and Election Populist? The reality is the US electorate know exactly what they get in Trump, but have little real feel for Harris. She has to effectively present herself the US electorate and show she is more than just a viable alternative to Trump – but the extraordinary presidential candidate the Democrats have bigged her up to be.
Tuesday night is her best opportunity to prove it in literal combat. If she fluffs it – she may not get another chance to reset her momentum. It could be a singular “thumbs-down” moment from the baying crowd. Or she might get them onside? If so, Trump is doomed.
There are of course multiple threads woven through the US election. Men are leaning towards Trump. Women are leaning towards Harris. The effect of the right-wing Supreme Court decision to overturn Roe-Wade abortion rights, may mean many women are unwilling to reveal their true voting intentions, fearing backlash. The degree to which Black and Latino men vote Trump will be critical in the key swing states.
But the reality is, to win Trump has not to lose. Simple as. He controls his Republican Party. The Republicans for Harris movement is intellectually interesting, but isn’t going to change the loyalty of the US voters who adore him. He also has the advantage of not being the incumbent – when voters are unhappy (and US voters certainly are) its easy to blame the resident of the White House. Will that be balanced by the reality it’s Harris is the fresher, younger, candidate?
We will be taking our seats in the Circus Maximus to see how it plays out Tuesday night. (Probably short-comment Wednesday – flying very early…)
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Friday’s US Non-Farm Employment report puts the world in context. The US economy is slowing. It would seem the Fed came close to a soft-landing, but no cigar. Where do we go next?
Some folk think there is an aggressive cycle of easing coming – the market is pricing in 240 basis points ease over the coming year – down from 5.25-50 to 3%. That’s highly unlikely unless inflation tumbles dramatically to leave real-interest rates still some 2% about inflation. To let real-rates sink into negative territory – as they did for most of 2010-20, would simply repeat the mistakes of the QE era in terms of inflated financial asset prices, speculation and bad decision making on the back of daft interest rates.
At the other end of the scale, the risk of substantially higher inflation is seen by many commentors as rising. Just how much depends, partially, on the election. Do you have isolationism or global trade? What will geopolitical policy choices do to prices. I’ve seen estimates as high as 8% interest rates in the next three years.
My guess is in the middle – the Fed sticks to keeping interest rates “normalised” around 4-6%, remains vigilant on inflation, and the global economy adapts. One the current election uncertainty is out the way – either way, blue of red – things will stabilise fairly swiftly… they usually do…
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Charity
I did a couple of swims over the weekend preparing for “Bill’s Pub to Club Swim” on Saturday. I am raising funds for Wessex Heartbeat – the cardiac care charity. 8 years ago Southampton General’s Cardiac Dept put me back together after an infection caused a massive heart-attack, following a heart-operation. I survived and got very interested in how we treat, cure and prevent cardiac disease. (Fine for me to say being overweight – the biggest single issue!)
A key issue is it’s not just the victim of cardiac disease that suffers – the charity’s focus is also on providing support and care to families at what is a very distressing and uncertain time. I remember very little about my illness, but I know She-Who-Is-Mrs-Blain and my Kids were absolutely traumatised. Nicky still suffers PTSD flashbacks every time I get indigestion..
I’m going to Swim 2.5 miles from the Jolly Sailor pub on the River Hamble downriver to the Royal Southern Yacht Club on Saturday morning. Thanks to everyone who has contributed.
Out of time, and back to the day job
Bill Blain
Author of the Morning Porridge, founder of Wind Shift Capital
One Comment
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Harris need not worry, those sucking on the government teat vastly outnumber those whose priority is government policy. Like you said, “policies do not matter.”