Blain’s Morning Porridge, 13th Oct 2020: How bad can it be?

“We’re all gonna rock to the rules I make, I wanna be elected, elected, elected!”

The polls say Joe Biden is around 60% likely to win the US Election. Markets aren’t quite embracing these numbers yet – there is a hesitancy based on Donald Trump’s surprising the pollsters in 2016.  Many traders and commentators think/fear this election could still surprise us, and still go to the wire.

Speaking to a US fund manager (a Trump supporter), he told me Trump voters are being undercounted because supporters are scared to reveal their intentions to pollsters because of BLM and “Antifa” harassment – he genuinely believes Republican voters are being repressed by waves of negative media and radical agendas. The first rule of elections is never admit you are losing. However, the second rule of elections is a landslide can be minimised by playing the underdog to the extent the opposition don’t think they the need to try hard to get voters into the polling stations!

Whoever wins the election has got an awful post-corona economic mess to clean up. Getting 7-8 million Americans back to work will be the first priority. Establishing credibility with the electorate on solving the Pandemic will be the second – look how quickly Boris Johnson has seen his popularity plummet in the UK as a result of his botched virus performance.

How well the election winner succeeds depends on just how well either party wins. A Biden presidency and a Republican Senate sounds like a recipe for squabbles, delay and partisanship – or can a Post-Trump Republican party overcome its distaste, and sup with the Democrats and actually achieve something useful?  That’s one-reason why markets are increasingly easy on the prospect of Biden wining a clean sweep.

Whatever, what’s the likely effect of the vote on markets? Lots of commentators now believe it will be neutral, suggesting a Biden win is pretty much priced in. I still think how well and by how much he wins is the critical issue.

The Vampyre Squid (Goldman Sachs to anyone that never read the classic Rolling Stone article) was on the wires yesterday saying a Coronavirus vaccine will be a far more important market mover than the election. They expect Q3 earnings (now emerging) to show an “uneven road” to recovery, divided by business thriving under “Stay at Home” factors, while “back to normals” are still struggling. It will take a vaccine to even them out.

But the vaccine news isn’t great. Everyone agrees a “cure” is likely – we will learn to live with Covid – but it might not provide a 100% solution/protection against the virus and its successors. Another trial of a promising vaccine has been suspended because a test subject has come down ill, while other vaccines show only moderate threat protection prospects. The US has also found its first patient with a second infection of Covid. Listening to the medical noise – there is little realistic chance of a comprehensive vaccine rolling out before Q2 2021.

And even a positive vaccine roll-out will take time and might not help as Anti-vax disinformation and fake news is likely to severely limit vaccine take-up. The good news is that new therapies to diminish the medical threats posed by Covid are most certainly improving. If you can cure an overweight, unfit, wheezing 74 year old of Covid in just 4 days… then what are we worrying about…?

The assumption Goldman and other analysts are taking on a vaccine and therapies is Covid can simply be wiped from the market equation, therefore releasing the whole global economy to bounce back to where it was – massive gains? Perhaps not – I reckon the additional debt many struggling companies are now encumbered by, plus a year or more of forgone sales lost and fixed-costs still to be paid, is going to hold back capital investments and business growth for years.. Unless they get ongoing aid and support.

(There is also the additional problem of Bureaucratic land-grabs – it’s a simple fact that in any time of crisis, regulators and the authorities creep forward. They will be blathering on about pandemic preparedness for years, inspecting premises and demanding 3 cm more space and new ventilation systems, while the tax authorities will be scouring company finances in depth for evidence of virus-loan frauds.)

That’s by-the-by stuff. It’s going to be critical to see how future governments around the globe intend to address Long Financial Covid effects on commerce and industry. Covid is likely to leave many businesses wheezing for years.  It not just short-term furloughs and business continuation loans – it’s how corporate health is rebuilt long-term that going to matter.. Doing it with the least amount of distortion and addicting corporates to the teat of government bailouts will be a major issue.

Which is where the result of the US election gets interesting.

The big plus for a Democrat win is the expectation of a larger stimulus programme. If Biden wins a clean sweep, then there is even the change of the long-promised and never delivered rebuilding of American’s creaking infrastructure. There will be a focus on improving information tech across the nation – which means spending lots of dollars. The Republican’s say that increasing US debt to pay for it will be a disaster, bring down the Republic unleashing pestillance and inflation upon the land…. Which is nonsense – no nation on Earth can create money as easily as Uncle Sam and spend it.. Ramping up renewable power is going to create all kinds of angst for the fossil fuel dinosaurs – and lots of noise about how windfarms steal the food from American children’s mouths.. Noise.. just noise.

It’s probably fair to imagine a new Democrat administration is going to be overly “Woke”. I will miss Trump trampling over social niceties… If woke adds further burdens to the economy… then that’s a bad thing..

The big negative about a Biden will be the expectation of tax-hikes by a new Biden administration – any good Republican knows its irrefutable gospel truth that any tax increase spells the end of everything; an extinction-level event on every US job and business. Of course… it won’t be… but they do like to scare voters. Remember, in America proposing a tax increase automatically defines you as a Rabid Communist and threat to Mom and Apple Pie.

In fact… successful businessmen should see paying taxes as the clearest way to demonstrate their success. It’s a strange world when a businessman defines his success in his ability to pay zero taxes – and expects to be popular for making his fellow citizens pay his share. Tis a strange place, America.

To an outsider – taxing the 0.01% of Americans who have seen their wealth quintuple in the last few years and own 10% of the nation’s wealth seems pretty logical. If they are being seen to be paying greater taxes, then surely their social stock will rise!  Let’s not forget the defining move of the Trump years was his tax cuts.. which rewarded the very rich by pushing up the stock market, and did little more than sustain an already rising number of US jobs.

Following this election it’s more likely Biden will propose a larger and sustained stimulus programme to aid job and economic recovery, a longer-term infrastructure spend and hold back on immediate tax rises to avoid any push back of job creation. That all sounds pretty positive across the board for stocks – unless you happen to own stocks in private prisons, which the Democrats are not minded to support.

There is little to worry about should Biden win. Four more years of Trump? That’s a topic for another day…

One question might be Tech. Is a Biden presidency more likely to crack down on Techstocks and their use of data to sell/enslave customers? The evidence of just how Facebood algorithims impact consumers and how fake-new divides is becoming just too big a topic to ignore. Action looks increasingly likely – whoever wins.

It’s unlikely Biden will roll back on Trump’s China case – if Trump has succeeded in one thing, it’s raising the China threat level across the West. Where Biden can add momentum is restoring and rejuvenating traditional US alliances with the rest of the Western alliance. Recent surveys show 25% of Germans trust China more than the US – and that’s a number that needs to be reversed.

Five Things too Read Today

FT – US investors pivot to “blue wave” as odds favour Biden

BBerg – Dalio Says “Time Is On China’s Side” In Power Struggle With US

WSJ – How Investors are Trading November’s Election 

Guardian – “They refused to act”: inside a chilling documentary on Trump’s bungled Covid 19 response

FT – Investors seek glimmers of turnaround in US third-quarter earnings

Out of time… and back to the day job.

Bill Blain

Shard Capital