Rabo: How Much Deeper Down This Particular Rabbit Hole Can We Go?

By Michael Every of Rabobank

Ongepotchket

The title of today’s Daily takes us past Covfefe and past Malarkey, or another other recent Bidenism. It is a word defined as meaning “complicated, but needlessly complicated. If, when asked how to make an omelette, you start off by telling the person which store to buy eggs at, your description may be ongepotchket.”

Well, things are certainly looking that way if you think about it. If one wanted to plot out a risk-off scenario for the US election ahead of time, it would have gone something like this:

A razor-thin win in lots of key states for either candidate, but perhaps more so for Biden; accusations from critics that the US voting system is not fit for purpose in the 21st century; a contested win marred by public allegations of fraud (timing of ballots received; turnout levels relative to the past and similar geographies; suspiciously partisan mail-in-vote splits; that the Senate stayed Republican and House seats oddly swung against the Democratic trend, etc.); Trump disputing the result and calling some states himself; the Supreme Court getting dragged into it; and multiple recounts ahead, with further arguments over what voting standard would then apply to each ballot, which is both a technical and legal nightmare.

How much deeper down this particular rabbit hole can we go? As we choke on a red and blue pill simultaneously, we are about to find out.

Then consider that if we do indeed get a President Biden, it would be with a Republican Senate determined to do unto Biden on Ukraine-related issues what the Democratic Senate did unto Trump on Ukraine-related issues, and with less of a House majority now to boot. Forget about fiscal expansion, or much of what Biden promised on the election trail (apart from the Buy American part?). No reflation trades for you, just the virus –and lockdowns?– and hopes for a vaccine. Of course, long-end yields are already pricing that in to some degree and more of that is surely to come. Equities are loving it, of course: no tax hikes, no spending, no legislation – just the same old political-economy that led us to a Trump victory in the first place in 2016. .

Indeed, regardless of the election result, Trumpism, meaning a more nationalist, populist, protectionist foreign and economic policy, is being recognized by many political observers –including Bloomberg!– as having become rooted in the US. The world may no longer have Trump, though don’t rule anything out just yet in 2020(!), but Trumpism looks here to stay. That means live will stay a lot more ongepotchket for most of us making longer-term plans.

Both points link up when one considers that a President Biden would have to express himself more on the international stage than substantively at home. Here the Senate would again limit his room for action over key appointments. Any secret Biden hopes of nominating China-doves, for example, would clash with a bipartisan consensus on the need to remain hawkish on all the ground staked out so far, and probably more so from the Republican side on the economy; meanwhile, on human rights the Democrats would want to look even tougher too. The volatility in CNY and CNH may just be getting started; and not only in them – we already hear reports Biden is apparently committed to keeping US troops in Syria to ‘challenge Russia’, probably portending a far tougher stance on that geopolitical front too.

Meanwhile, if we assume we are on the glide-path to a Democratic administration, a lame-duck President Trump would still have until 20 January in office, and could well opt to use that time, and existing legislation, to ensure that there really is no chance for US-China détente.

As I said, if one wanted to paint a risk-off scenario, in many ways this is going to look like elements of it.

Of course, against this joyous backdrop, today has both a BOE and an FOMC meeting, the former of which has to take place under a fresh English national lockdown of course.

As Stefan Koopman notes, “Here we go again. This lockdown may have to last longer than the planned four weeks if the infection rates don’t fall quickly enough. The impact on economic activity isn’t expected to be as severe as in the spring, but it surely is time for the ‘Economics of Chicken Licken’. We already expected the BOE to boost QE, and this now looks all but a given. We stick to our forecast of a GBP100bn increase, but there is some risk the MPC decides to speed up its purchases, and this would require an even larger envelope. As the risks to the economic outlook will not subside any time soon, speculation on negative policy rates is likely to get louder. That said, we don’t expect that the MPC will provide any guidance at this week’s meeting.”

Meanwhile, on the FOMC Philip Marey notes, “The FOMC meeting decision will take place in a volatile environment, just after Election Day, while the country is dealing with another resurgence of Covid-19. What’s more, we are still waiting for an extension of the fiscal stimulus: the election outcome could determine whether the Fed will have to provide more monetary policy accommodation to offset any shortfall in fiscal policy support to the economic recovery. For Fed Chair Powell there is more at stake than fiscal stimulus in this election week. After all, his first term as Chair expires on 5 February 2022.”

Meanwhile, it’s been a long, sleepless couple of days for many of us. Let’s try to finish with some humor:

A man, born poor, becomes very successful. He decides that he needs some high class art. He goes to an art dealer and asks to see whatever is most “in’’. The dealer shows him a vast white canvas with one black dot in the middle, and says the painting costs $10,000. He buys it, and shows it to a new art-loving friend, who says “This is genius! Such good taste!”

The man gets very excited, and goes back to the dealer to buy another painting immediately. The dealer shows him one with TWO black dots in the middle. The man buys it, and takes it home eagerly, hangs it, and calls his new friend to come see the masterpiece. The friend stares at it for a second, shrugs, and says: “Ongepotchket.’’