October 26, 2020

“But you can’t make people listen. They have to come round in their own time, wondering what happened and why the world blew up around them.”— Ray Bradbury, Fahrenheit 451

We have been procrastinating, dreading the last thing we want to do after one of the craziest years of our lives that would probably inspire more than a handful of mentally and emotionally-scarred Gen Z filmmakers in the foreseeable future to produce movies of how the apocalypse started and dystopia began.

Lethargy and burnout aside, it is high time we start to weigh in on the most important economic event for the future of the world—the U.S. presidential election, touting the two oldest candidates ever to vie for the presidency of the most powerful nation on the planet.

Donald Trump already holds the record for being the oldest president to be sworn into office in 2017 but at 74, he would be the second oldest candidate ever to run and trumped (no pun intended) only by older Joe Biden who is 78 and we are back to 2016 again, where paying attention to the vice-presidential candidate would be just as important.

Four years have gone by, filling the world with revulsion as Trump laid bare the sordid underbelly of politics complete with deceitful lies, oppression, blatant abuse of power, cronyism, gaslighting, jingoism, sycophants and every single word we can possibly summon on the demise of democracy, replaced by what we can possibly describe as a kleptocratic-like, sort of dictatorship wannabe.

Looking back on the four years, it has been nothing but chaos and discord, running from trade wars to threats of war, polarising the country as racism and xenophobia spilled into anarchy on the streets amidst widespread environmental destruction and then the virus struck with not an ounce of global leadership. What a mess it has been. If there is anything we have learnt, we have started to question the meaning of life and existence as nervous wrecks.

Just as there does not seem to be any safe harbour in sight, we cannot buy into the pure and unadulterated faith of televangelist, Pat Robertson, that “Trump will win, then an asteroid will hit Earth.” The asteroid will hit five years later and “disaster for the country and the world after the election, including civil unrest, at least two attempts on Trump’s life and a war against Israel that will be put down by God.”

So, let’s get started.

The quick summary of election outcomes as we have from various bank reports and studies.

President Joe Biden and the Democratic Party win the Senate (most likely)

  • Steeper yield curve on fiscal stimulus (inflationary)
  • Lower oil and copper, higher gold on uncertainty and Biden’s commitment to green energy
  • Higher taxes on the wealthy (including hike in capital gains tax) and corporations especially Big Tech
  • New spending initiatives on public health, infrastructure etc leading to weaker USD
  • Hike in minimum wage (inflationary)
  • Emerging markets to outperform as Biden moderates on foreign policy for easier global relations
  • Stock markets to trade lower initially before rallying
  • ESG, clean Energy infrastructure, Materials and Industrials positive
  • Energy, Financials (tighter regulations), Utilities, Healthcare and Big Tech negative

President Biden and Republican Senate (next most likely)

  • USD positive and US treasuries supported on stimulus deadlock and less spending
  • Stock market expected to trade higher on reduced policy uncertainty
  • Oil price supported but not much case for base metals and other commodities
  • Unwind in Energy, Financials, Utilities and Healthcare Biden-win trades
  • Unwind in ESG, clean Energy infrastructure, Materials and Industrials Biden-win trades
  • Big Tech and Telco positive
  • Emerging markets supported on the dissipation of trade rhetoric
  • Political brinksmanship to lead to deflation or stagnation

President Trump and Republican Senate (third most likely)

  • Stock market rally on expectations of tax cuts and growth
  • Further US-China conflict—trade, technology, financial, diplomatic and possibly military
  • Aerospace, Airlines, Defense, Financials, Infrastructure positive
  • Clean energy, Healthcare/Pharma negative
  • Lower chance of fiscal stimulus (deflationary)
  • Gold to sell off on strengthening USD
  • Unwind of all Biden-win trades

President Trump and Democratic Senate (lowest probability)

  • Four more years of political impasse and potential revival of impeachment process
  • Big Tech, Telco, Real Estate, Utilities positive
  • Bodes badly for USD assets and risk

All odds are pointing to a Democratic sweep, and there has not been such an outpouring of support for anybody who would oust Trump from office because “if Trump loses, the biggest factor won’t be Covid-19 or the economic meltdown or the social unrest. It will be his unlikability,” according to Politico. Undecided GOP voters polled “dislike Trump but fear Biden’s policies,” as CNBC reported.

Scientific American, USA Today, doctors, scientists, soldiers and celebrities have all stepped out to endorse the man who would oust Trump and some venturing their opinion for the first time in 175 years like Scientific American (which was outdone by The New England Journal of Medicine’s first partisan endorsement in politics after 208 years).

Wealthy Americans are rushing to change their estate plans on anticipation of a Biden victory and tax reforms while guns sales are skyrocketing to record levels (just like 2016) as folks fear for unrest and bloodshed on either election results while across America and especially in swing states like Pennsylvania, “retailers are reinforcing glass, hiring guards or retaining on-call teams that barricade and board up buildings. Citizens of all political stripes are snapping up guns and ammunition in record numbers.

All we know is that the U.S. is about to have its highest election turnout since 1908 as more than 50 million Americans have already voted in early voting and mail-in ballots with ten days to go, compared to the estimated total votes of 138.8 million in 2016. Playing a big part in all this uncertainty is the record number of Gen Z and Millennials in what The Atlantic describes as “the most profound generational transition” of the electorate since the early 1980s when the Baby Boomers became the largest voting bloc.

Coming back to the investor, there are two prescribed alternatives for the portfolio: Do nothing or hedge.

It is not hard to see the need to hedge because the markets are overly complacent right now and underpricing the odds of a contested election that nobody really wants to think too much about because we are living in 2020—numb to all manners of oddities and freak accidents.

Bloomberg’s John Authers gives several reasons why things could go wrong:

  • Biden could still lose the electoral college even if he wins the popular vote as Republican voter registration gains momentum in 3 critical states—Florida, North Carolina and Pennsylvania
  • Mail-in votes take more time to be counted and “there is a strong possibility of an apparently good showing for the president on election night, followed by a “Blue Shift” as the Democrats steadily overtake him thereafter” which would lead to heightened volatility.
  • There is the possibility of Trump contesting the results which would be followed by weeks of uncertainty along with the potential of civic unrest and lawsuits
  • The Democrats need to win the Senate
  • The Democrats need to vote in favour of Biden’s agenda
  • Vaccine news

Given the various radical possibilities, diversification and some form hedging would be a good idea even if it requires paying for it.

The ‘Do Nothing’ camp argues in FT that “even in the event of a sell-off, investors say reliable hedges are harder to find. Typically, US government bonds, the global haven asset, perform well in periods of stress. But yields on such debt are already minuscule, since the US Federal Reserve cut benchmark interest rates to near-zero in the depths of the coronavirus shock in March, giving the bonds little room to rally further in price. Equity put options, which profit from a drop in stock markets, are already expensive.” Also, in the long run, stocks outperformed regardless of who wins although the most troublesome outcome would be Trump refusing to accept a loss and clinging to power.

Yes, that would be the most disruptive result for the U.S. election because while Trump has recently just admitted he would accept the election results, he sang a different tune last month. He suggested that he may not be willing to concede and has enough supporters “preparing for the worst” to take to the streets. We are seeing increasing numbers of posts such as the day-by-day guide to what could happen if this election goes bad by Politico magazine and New Yorker’s guide on What Can You Do If Trump Stages A Coup? which resonates with Fitch Ratings’ warning that a departure from “well-understood rules and processes for the transfer of power that are broadly accepted and executed” would be a negative for the U.S. credit rating—of all things to consider as a possibility.

There are good reasons, too, for Trump to deviate from a peaceful outcome should he lose the election, especially the legal reckoning when he becomes a private citizen again as CNN has nicely summarised from sexual assault claims to his tax returns and fraudulent business dealings, all which he is enjoying impunity from, as the current president. In addition, there is the matter of his business debts due in the next four years, some $900 million worth, which would possibly be easier to refinance if he were still POTUS.

As November 3 approaches, the biggest mistake is to be blasé. We stay woke and weighed in on the U.S. election under a hedge.