Dear Reader,
It goes without saying that this year’s US presidential election will be…different. Perhaps you’re sick of the coverage already. That’s understandable. But as an investor, you can’t ignore the impact of US politics on stock markets worldwide, says Jim Rickards in today’s Daily Reckoning Australia.
So, over a series of editions, Jim will seek to outline everything you need to know as Election Day draws closer. One thing’s for sure: It’s going to be a wild ride. You’d best strap yourself in.
Until next time,
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Shae Russell,
Editor, The Daily Reckoning Australia
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This Is It
This is it. The presidential election is just 49 days away. The first presidential debate is just 15 days away. The candidates have been nominated and the tickets are set. The party platforms have been announced. It will be a sprint to the finish line from here. Game on.
My plan for 2020 was to cover the presidential election in depth. There’s no doubt about the fact that US politics affect investment choices for all investors globally, especially when the nation and the political parties are so deeply divided.
Politics<pandemic
For example, Donald Trump wants to keep the capital gains tax rate at 20% and possibly lower it. Joe Biden proposes to almost double the capital gains tax to 39.6%. There’s no faster way to crash the stock market than to double the capital gains tax (and equalise it with an increased personal income tax rate of 39.6%).
That’s the easiest illustration of how politics affects investment returns, but there are many others. Any investor who ignores politics could be walking into a market buzz saw.
My 2020 political coverage plan lasted about 30 days before it was blown to bits by the COVID-19 pandemic and a new Great Depression. Politics still mattered, but it was fourth or fifth on everyone’s list of key issues after health, unemployment, business failures, and a crashing stock market.
Since then, I’ve tried to offer up-to-date analysis on the spread of the disease, the responsibility of the Chinese government for letting it get out of control, the rise of unemployment, and the stress placed on small- and medium-sized businesses, especially the restaurants, bars, salons, gyms and other small businesses that collectively provide 45% of GDP and create almost 50% of all jobs.
The lucky ones…and the not-so-lucky ones
Big business weathered the storm fairly well — especially those in technology, telecommunications, and digital and streaming services that were relatively unaffected by the pandemic. Some companies like Amazon and Zoom boomed as people shopped and worked from home. Netflix saw subscriptions soar as movie theatres remained closed.
Even some bricks-and-mortar stores like Best Buy did fine as customers raced to buy TVs, audio systems and smartphones to compensate for the fact that arenas and theatres were closed, and concerts and sporting events were cancelled. They were the lucky ones.
Other businesses were not so lucky. Airlines, hotels, casinos, resorts and cruise ship lines were devastated and still haven’t recovered. Even as the economy slowly reopens, it’s not clear that people are in any hurry to fly for any reason or to visit popular destinations. Those industries will take at least two years to recover. Some may never recover.
Setting records
The depth of the economic crisis combined with a 35% plunge in stocks from late February to late March prompted a US government policy response of unprecedented magnitude.
The Congress added $4 trillion of new deficit spending on top of a baseline deficit of $1 trillion for fiscal 2020. The projected deficit of $5 trillion will bring the national debt to $27 trillion or 135% of GDP once the decline in GDP is considered.
That’s the highest for the US in history (higher than the end of the Second World War) and one of the highest debt-to-GDP ratios in the world after Japan, Greece, Lebanon and Italy. Of course, the US will not default on this debt because it can print the dollars to pay it, but the implications of the high debt level for slower growth and potential inflation are daunting.
The Fed gets busy
While Congress was busy spending $5 trillion, the Fed was just as busy printing $4 trillion of new money and guaranteeing trillions of dollars more in obligations. In late 2019, the Fed had got its balance sheet down to around $3.6 trillion from the record high of about $4.5 trillion in early 2015. Today, the Fed’s balance sheet is over $7 trillion, almost $4 trillion higher than in late 2019 — and the highest ever.
The Fed has also guaranteed the commercial paper market, the corporate bond market, the municipal bond market, the Payroll Protection Plan loans and far more, and engaged in trillions of dollars of currency swaps with foreign central banks, including the European Central Bank, Bank of Japan, Bank of England and many more.
The combined $9 trillion of deficit spending and money printing worked. No major financial institutions failed. The stock market rallied in late March 2020 and major stock market indices were at or near new all-time highs by late August. Unemployment peaked in May and started to decline in June and July. Job losses were huge, but not as bad as many expected.
The question for the economy going forward is whether the $9 trillion of combined fiscal and monetary stimulus laid the foundation for a sustainable recovery, or whether it was a bridge loan to help struggling businesses and workers until the pandemic was over in August and the economy could reopen to accommodate ‘pent-up demand’.
29.5 years to normal
Unfortunately, August has come and gone, and the pandemic is still with us. So-called pent-up demand is nowhere in sight and many job losses during the March–June pandemic peak wave appear to be permanent, not temporary. Many businesses have shut their doors forever and jobs associated with those businesses are not coming back. The $9 trillion bridge loan looks like a bridge to nowhere.
The economic impact of the response to the pandemic will play out over years, not months. Some research shows that it takes 30 years or more to normalise an economy after a pandemic of this magnitude.
That research is based on 15 major pandemics over the past 650 years, starting with the Black Death. A 30-year normalisation period is also consistent with the impact of the Great Depression of 1929–40, which continued to exert a strong influence on the economy and behaviour until the late 1960s.
Strap yourself in
In any case, we’ll have ample time to discuss the economy and the impact of the pandemic in the coming year. For now, we must pivot back to our original topic — the election of 2020, and its impact on your portfolio and investments.
To do this, I’ll first provide a snapshot of the state of the race today, then do a deep dive on predictive analytic models to forecast a winner. Finally, I’ll consider several wild cards that could appear before election day and turn the models upside down.
The one forecast that is certain is that the next two months will be a wild ride. Stay tuned for my next edition of The Daily Reckoning Australia.
All the best,
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Jim Rickards,
Strategist, The Daily Reckoning Australia
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