Category: zerohedge

Yes, it’s a completely meaningless and arbitrary comparisons but some are asking: can/will the price of gold surpass the value of the S&P?

As BMO chief economist Douglas Porter writes, amid all the recent excitement over the new all-time high for gold prices, spare a thought for the humble S&P 500.

“Fully aware that this is like comparing apples to orangutans, but consider the level of the S&P index to gold prices over the past 30 years. On July 20 1990, those many years ago, gold changed hands at just over US$361 the ounce, while the S&P 500 finished the day at 361.”

Since then, the annualized rise in gold has been 5.8%, while the S&P 500 is up 7.6% per year (plus dividends). That has left the S&P about 66% above gold prices now (which of course ignores the fact that central banks have been doing everything they can to boost the “wealth effect” of global stocks while keeping gold prices as low as possible). Finally, as Porter shows in the chart below, “the last time these two prices crossed paths was April 9, 2013 (at around the 1570 mark for both).”

Separately, BMO senior economist Sarah Howcroft does not expect gold to surpass the S&P any time soon:

While we expect gold and silver to remain well supported over the next 18 months as global monetary conditions remain accommodative, any slight rebound in U.S. yields or the dollar could trigger a modest pullback in prices. Conversely, a further deterioration in U.S./China relations or failure to contain regional COVID-19 outbreaks could push gold above $2,000.

That said – apples to orangutans and all – one wonder can one ounce of gold, currently trading at $1,961 surpass one unit of the S&P500, currently at 3,247? And speaking of totally arbitrary comparisons, just this past week one bitcoin – currently trading just around $11,000 – surpassed the Nasdaq once again…

 

As the English-language science and financial press focuses on vaccine candidates created by Moderna, Pfizer and BioNTech or AstraZeneca and the University of Oxford, we’ve seen surprisingly little reported about a Russian vaccine candidate that has already been administered to members of the Russian business elite.

With Moderna reportedly planning to charge an outrageous $60 per course for its experimental vaccine candidate, Russia is hoping to beat its western rivals to the punch by registering the coronavirus vaccine by Aug. 10-12, clearing the way for Russia to secure the mantle of winning the first official approval of a vaccine targeting SARS-CoV-2.

After winning approval, the vaccine developed by Moscow’s Gamaleya Institute (bolstered by financing from the Russian government) could be approved for civilian use within 7 days.

Here’s more from Bloomberg:

The drug developed by Moscow’s Gamaleya Institute and the Russian Direct Investment Fund may be approved for civilian use within three to seven days of registration by regulators, according to a person familiar with the process, who asked not to be identified because the information isn’t public.

The Gamaleya vaccine is expected to get conditional registration in August, meaning it will still need to conduct trials on another 1,600 people, Deputy Prime Minister Tatyana Golikova said in a televised meeting of officials with President Vladimir Putin Wednesday. Production should begin in September, she said.

“The key requirements for a vaccine are its proven effectiveness and safety so everything needs to be done very carefully and accurately,” Putin said at the end of the meeting. “Our confidence in the vaccine must be absolute.”

To be sure, the speed with which the vaccine has been developed, and the opacity surrounding the research, have raised questions abroad. But not enough to stop Phase 3 trials that are set to begin next week in Russia, Saudi Arabia and the United Arab Emirates.

Russia has the fourth-largest outbreak in the world, after the US, Brazil and India. With more than 800,000 confirmed cases.

While the vaccine has been touted by its developers as safe and potentially the first to reach the public, the data hasn’t been published and the speed with which developers are moving has raised questions in other countries. Gamaleya is scheduled to begin Phase 3 trials next week in Russia, Saudi Arabia and the United Arab Emirates.

Russia has more than 800,000 confirmed cases of COVID-19, the fourth-most in the world. While the number of new daily infections is down by more than half from its peak, Putin has reportedly criticized some regions of the country for reopening too quickly.

“The situation remains difficult and can, as they say, swing in any direction,” Putin said. “There is no reason for complacency, to relax, to forget about the recommendations of doctors.”

Researchers and pharmaceutical companies in other countries including the US, the UK, Japan and China are also racing to develop vaccines. And both the US and the UK have accused Russia for sending shadowy state-backed hackers to infiltrate vaccine research in the UK and the US. Despite the risks, rushing a product to market would be a great PR victory for Putin, whose popularity has reportedly been sagging due to the outbreak, which his government failed to prevent.

The Russian vaccine will be provided to health professionals before clinical trials are complete, according to the Russian Health Minister Mikhail Murashko. The ministry doesn’t expect vaccine to be widely available until late in the year.

As Pantheon’s Ian Shepherdson notes:

“The Fed made no policy changes, as expected, and the key language of the statement is unchanged… In short, this is a holding operation, pending developments with both the virus itself and fiscal policy.”

Which is perhaps worrisome as we noted ahead of the FOMC statement that BofA ominously warns, “perception that the Fed is out of ammo could cause a reassessment of the Fed “put” and support USD via lower risk assets.”

For now stocks are unmoved but the action remains in currency markets as the dollar accelerates lower on Fed promises to “use all tools” and extends its global bailout swap lines.

This has helped sparked further gains in gold…

Will Powell spoil the party further?

With bond yields at record lows, the dollar tumbling, and gold at record highs, one side of the market is screaming that The Fed is entirely out of control while stocks remain near record highs, increasingly echoing the early days of Venezuela’s or Zimbabwe’s epic stock rallies.

Simply put, as we noted in our preview, Fed Chair Powell will have to explain to his audience of “give me moar or die” day-traders how he will “out-dove” the already uber-dovish expectations (all without negative rates).

Watch Live (the virtual press conference is due to start at 1430ET):

Authored by Kalev Leetaru via RealClearPolitics.com,

As Washington intensifies its focus on the influence of social media platforms on American life and the democratic process, the heated rhetoric and myriad policy proposals lack one crucial element: data.

For all the concern over “community guidelines,” content moderation, fact-checking and advertising policies, we have few of the actual data points necessary to evaluate how well the companies are doing. Could it be that they get it right most of the time and it is just a few high-profile mistakes that are driving our concern? Conversely, are the companies getting it wrong much more than we — or even they — realize? What are the datasets that Congress should require from social companies in order to help the public better understand the role those platforms play in society today?

On paper, the platforms’ content moderation practices and fact-checking partnerships seem like reasonable solutions to the difficult task of keeping bad actors from disrupting their digital communities. Yet how closely do the companies adhere to these rules in practice? To what degree do the unconscious biases of the companies’ engineers manifest themselves in their algorithms? Would the American public be as supportive of content moderation if they understood the disproportionate ways it can impact certain voices or the unevenness in how the platforms apply their rules. In order to compare rhetoric to reality, we need data that captures the daily functioning of our modern public squares.

Here are 10 datasets that Congress could demand from social media companies that would begin to provide the critical insights needed to understand their roles in our modern democracy and highlight areas that may require further legislative action.

1. A Database of Violating Tweets. Given that all tweets are publicly viewable and already accessible to researchers using Twitter’s data APIs (application programming interfaces), there would be few privacy implications in requiring Twitter to provide a public database of all tweets the platform flags each day, along with a description of why Twitter believed each tweet was a violation of its rules or disputed by a fact-checker. Such a database would permit at-scale analysis of the kinds of content Twitter’s moderation efforts focus on, while the ability to compare those violating tweets against the rest of Twitter would make it possible to assess how evenhanded the platform’s removal efforts are.

2. A Database of Journalist & Politician Private Post Violations. Most social platforms, such as Facebook and Instagram, are a mixture of public and private content. Publicly shared content violations could be compiled and disseminated to researchers, as could public tweets, but private content such as non-public Facebook posts that are deleted or flagged as misinformation pose unique privacy challenges. One possibility would be to treat the verified official accounts of journalists and elected officials as different from other users, given their outsized role in the public discourse, and to automatically make available to researchers any posts by those accounts that are later deleted as violations of platform rules or disputed by fact-checkers. A separate voluntary submission database could allow ordinary users to submit their own posts that were deemed violations, along with the explanation they received regarding the violation. Having a single centralized database of such removals would make it easier to understand trends in the kinds of content platforms are most heavily policing and whether there is public agreement with the platforms’ decisions.

3. A Demographic Database of Content Removals. Social platforms use algorithms to estimate myriad demographic characteristics of their users, including race, gender, religion, sexual orientation and other attributes that marketers can use to precisely target their ads. While these attributes are imperfect, the fact that the companies make them available for ad targeting suggests they believe they are sufficiently accurate to build an advertising strategy upon. The companies should be required to compile regular demographic percentage breakdowns of deleted and flagged posts for each of their community guidelines and fact checks. For example, what percentage of “hate speech” posts were ascribed to persons of color or how many “misinformation” posts were by members of a given religious affiliation? Do the companies’ enforcement actions appear to disproportionately impact vulnerable voices?

4. A Database of Exempted Posts. A common criticism of content moderation is the unevenness with which it is applied. Why do some users seemingly face constant enforcement action while others posting the exact same material face no consequences? Why is one politician’s post preserved as “newsworthy” while another is removed as a violation? A critical missing component in our understanding of content moderation is the degree to which companies create silent exemptions from their rules. On paper, Facebook prohibits all forms of sexism, racism, bullying and threats of violence, but in practice, the company allows some posts as “humor” or otherwise declines to take action. How often do users report posts that the company determines are not a violation? And does it systematically exempt certain kinds of content? Compiling a central database of posts the companies rule are not violations would offer critical insights into how evenhanded they are and where their enforcement gaps are.

5. A Database of Deleted & Exempted Protest Posts. Protest marches are increasingly being organized over social media. As platforms extend their censorship to these posts, they are able to control speech that occurs beyond their digital borders. This makes understanding how platforms moderate protest-related speech uniquely important. For weeks Facebook touted its removal of COVID “reopening” protests that did not require social distancing, yet quietly waived those rules for the George Floyd protests. Having a centralized database of protest posts removed by platforms as well as those exempted from its rules would go a long way towards understanding how much the platforms are shaping the offline discourse.

6. Increased Access to Facebook’s Fact-Checking Database. Facebook provides an internal dashboard to fact-checking organizations that lists the posts it believes may be false or misleading. Today, access to that dashboard is extremely limited, but broadening access to policymakers and the academic community as a whole would enable much closer scrutiny of the kinds of material Facebook is focusing on. Given that the company already shares this content with its fact-checking partners, there would be fewer privacy implications to broadening that access to a wider pool of researchers.

7. A Database of Fact-Checked Posts. What are the kinds of posts that social platforms delete or flag as having been disputed by fact-checking organizations? Are climate change posts flagged more often than immigration posts? How are platforms managing the constantly changing guidelines for COVID-19, where just a few months ago posts recommending masks would have in theory been a violation of the platforms’ “misinformation” rules governing health information that goes against CDC guidance? How often are posts flagged based on questionable ratings or potentially conflicted sources?

In an ideal world, platforms would be required to compile a database of every post they flag as being disputed by a fact-checker. For public posts such as those on Twitter, this could be possible, but for platforms like Facebook, this would pose a privacy challenge. One possibility would be to require platforms such as Facebook to provide a daily report listing the URL of every fact check they relied upon to flag a user post that day, along with how many posts were flagged based on that fact check. For example, of all of the climate change fact checks published over the years, which are the ones that yield the most takedowns on social platforms? Do the most heavily cited fact checks rely on the same sources of “truth” as other fact checks on that topic or is a particular source, such as an academic “expert,” having an outsized influence on “truth” on social platforms? Such data would also help fact-checkers to periodically review their most-cited fact checks to verify that their findings still hold, while during pandemic public health officials could use it to flag emerging contested narratives.

8. Increased Access to Facebook Research Datasets. Through academic partnerships and programs like Social Science One, Facebook permits large-scale research on its 2 billion users, from manipulating their emotions to linking data sets to more in-depth analyses of the flow of information across its platform. Researchers from across the world have been given access to study misinformation and sharing on Facebook, and a closer look at the projects approved to date suggests the kinds of access they have been granted would also support work into understanding the biases of Facebook’s own moderation practices.

9. Algorithmic Trending Datasets. The power of algorithms to shape our awareness of events around us was driven home in 2014 when Twitter chronicled the unrest in Ferguson, Mo., while Facebook was filled with the smiling faces of people dumping buckets of ice water over their heads. A public dataset capturing how public posts are being prioritized or deemphasized by these algorithms across classes of users and over time would provide insights into inadvertent biases in these algorithms and provide greater visibility into what the public is and is not seeing.

10. The Legal System. Many of the “community guidelines” enforced by social platforms are, at least on paper, also violations of U.S. law, including libel, harassment and threats of violence. How often do social media companies or recipients of those messages refer them to law enforcement and what was the outcome of those cases? If few such posts are ever referred to law enforcement, why do social platforms believe harassment and threats of violence should not be reported to officials if they believe they are dangerous enough to warrant removal from their platforms? Tracking cases where posts were referred to law enforcement and the resulting legal decisions would shed light on how closely social media platforms’ interpretations of U.S. laws adhere to reality.

In the end, we lack the necessary data to determine what kinds of regulation are required for social platforms. The datasets above would give policymakers and researchers critical building blocks upon which to begin understanding Silicon Valley’s influence over democracy itself.

Since the last FOMC statement on June 10th, when Chair Powell pretty-much went “all-in”, gold has exploded higher, the dollar has weakened, and stocks tumbled…

Source: Bloomberg

And the yield curve has flattened dramatically…

Source: Bloomberg

Neither of which are good signs for The Fed’s credibility. Worse still, the market is pricing in negative rates at or before Dec 2021 and basically zero rates for the foreseeable future…

Source: Bloomberg

So, as we noted in the preview, how can Powell “out-dove” a market that is already at historic levels of implied dovishness?

As BofA ominously warns, “perception that the Fed is out of ammo could cause a reassessment of the Fed “put” and support USD via lower risk assets.”

One way that some expect is for the FOMC to describe the main purpose of asset purchases as increasing policy accommodation and supporting the recovery, rather than supporting smooth market functioning. The new purpose would likely imply targeting a somewhat longer average maturity rather than buying roughly evenly across the curve.

Most expect a nothing-burger today, more-of-the-same (with policy actions perhaps in September), with ‘hints’ at actions the most likely.

And largely it was – no change on rates obviously:

• *FED HOLDS BENCHMARK FUNDS RATE IN TARGET RANGE OF ZERO TO 0.25%

• *FED HOLDS IOER AT 0.10%, DISCOUNT RATE AT 0.25%

Things are improving (just as employment data is about to roll over):

• *FED: ACTIVITY, JOBS PICKED UP BUT STILL BELOW EARLIER LEVELS

And will continue with its “all-in” buying scheme:

• *FED REPEATS WILL INCREASE ASSET HOLDINGS `AT THE CURRENT PACE’

• *FED EXTENDS CENTRAL BANK DOLLAR REPO AND SWAP LINES TO MARCH 31

And nothing will change until everything is fixed?

• *FED ON HOLD UNTIL CONFIDENT ECONOMY ON TRACK, VOTE UNANIMOUS

The key quote from the FOMC:

“The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

Separately, and also not surprisingly at all, the Fed also said that it would extend emergency measures it launched earlier this year through March 31, 2021 to ensure the global financial system has access to a ready supply of U.S. dollars, including temporary liquidity swap lines and its temporary repurchase agreement facility for foreign and international monetary authorities.

“The extensions of these facilities will help sustain recent improvements in global U.S. dollar funding markets by maintaining these important liquidity backstops,” the Fed said, noting that the extension of temporary swap lines applies to nine foreign central banks previously announced March 19, 2020.

*  *  *

What was notable is just how little in the statement was changed from last time: as the June Redline below shows, there were virtually no changes, with the only notable addition the sentence “The path of the economy will depend significantly on the course of the virus.” Well duh. The Fed also changed language modestly around the labor market, noting a “pick up in employment”… just as employment pick up reverses lower.

The NFL’s Stephon Tuitt is not going to be kneeling for the flag during upcoming games this year and also has a message with anybody who takes exception with his decision: “Screw anybody who have a problem with that”.

Tuitt took to Twitter on Sunday and wrote about the success of his grandmother – an immigrant from the Caribbean – to explain why he refuses to disrespect the flag. 

“I’m not kneeling for the flag and screw anybody who have a problem with that,” he said. “My grandmother was a immigrant from the Carribean and age worked her ass off to bring 20 people over the right way. She had no money and educated herself to be a nurse. She living good now.“

Tuitt joins a very short list of professional athletes, including San Francisco Giants Relief Pitcher Sam Coonrod, who have broken from the liberal groupthink haze our country is in by refusing to disrespect the nation and its flag. Last Thursday, Coonrod was the only player who didn’t kneel during a Giants and Dodgers game.

“I only kneel before God,” Coonrod said, when questioned about his decision.

NFL Hall of Famer Mike Ditka also weighed in recently, saying those who can’t respect the flag should “get the hell out of the country”.

Via SchiffGold.com,

Gold has rallied above its previous all-time record high this week. But can it sustain this bull run? Peter Schiff thinks it can and will.

It’s not about the coronavirus, as many mainstream analysts seem to think. It’s the government and central bank response to the pandemic — the borrowing, the spending, and the money printing. Peter believes that ultimately the Fed’s monetary policy is going to collapse the dollar and it will lose its reserve status. In this podcast, he talked about what this portends. He also explained why he doesn’t think the Fed can kick the can down the road again.

Peter has been talking about a looming dollar collapse for years. He admits he was wrong on the timing. He thought it would happen a lot sooner than this. But he doesn’t think he is wrong now just because he was wrong back then.

The problems are so much bigger now than they were a decade ago, and therefore, I think our ability to kick the can down the road again, I think is gone. I mean, yes, I underestimated that ability before, but at this point, it’s impossible. And so I don’t really see how the US government, the Federal Reserve, is going to stop gold from going up.”

Looking back, gold’s first major rally was in the 1970s when the price went from around $35 to over $800. At the time, Fed Chair Paul Volker’s willingness to get out of the way and allow interest rates to rise sharply to wherever the market was going to take them stopped that rally and kicked off a 20-year bear market in gold. “The Fed did what it took,” Peter said. “They did the right thing.”

The second gold rally started after the dot-com bubble popped and ended after gold set its previous record high just over $1,900 back in 2011. What stopped that? What caused gold to pull back from $1,900?

Somehow, they were able to convince the world and everybody who was worried that QE would end in disaster and that zero percent interest rates would be a failure – the Fed was able to convince everybody that the programs worked, and because they worked, they were temporary and would be ended, and that the Fed was going to start normalizing interest rates and shrink the balance sheet back down to pre-2008 crisis levels. And the market actually believed it.”

In effect, the Fed never had to raise rates to stop the gold rally. It just had to convince the world that it would raise rates.

Of course, the Fed never did normalize because it couldn’t normalize. When the central bank finally tried to slowly notch rates up, it broke the stock market in the fall of 2018. That led to the “Powell Pause” followed by three rate cuts in 2019 and the launch of a quantitative easing program that the Fed refused to call quantitative easing.

The other thing that kept the dollar propped up was the rest of the world slashing interest rates and running their own quantitative easing programs. The dollar got a lot of help from bad monetary policy abroad that made US policy look not as bad in comparison. As Peter put it, “We were the cleanest dirty shirt in the hamper.”

So here we are now. We have another big rally in gold that actually started in 2015 at just over $1,000 an ounce. Peter asks the operative question: what rabbit is the Fed going to pull out of its hat to stop the gold rally this time?

I think the hat’s empty. There are no more rabbits in there.”

Peter said that the Fed can’t raise rates like it did in 1980. The country can’t afford it. There is too much debt. There isn’t enough savings. And the Fed can’t pretend it’s going to raise rates like it did in 2008. Nobody will believe it.

So what are they going to do? Nothing. There is nothing they can do. Now, is there something that I haven’t thought of? I don’t know. Maybe. But obviously, since I can’t think of it, I can’t discuss it. So, is it possible that there’s a rabbit in there that I can’t see? Maybe. And so that’s why we’re not going to go all in. Because you don’t know what you don’t know. So, it is possible that there is a way to kick this can down the road again. I just can’t see it. But the bottom line is we don’t have to go all in. There is so much opportunity in the foreign markets, in the emerging markets, that just having an allocation in gold and gold stocks is all you need.”

Peter went on to talk about the mainstream talking points about this gold rally and the fact that people are actually starting to talk about the dollar losing its reserve status.

It turns out that even hedge funds are not immune to the Robinhood model. And it looks like the days of 2 and 20 are over.

We already know that the retail brokerage landscape has changed significantly since Robinhood burst on the scene, offering commission free trades. Names like e-Trade, Ameritrade and Schwab have all changed their business models to offer the same service, leading to consolidation within the industry and widespread adoption of what looks to be the “new” brokerage business model: selling order flow to make money behind the scenes instead of charging a commission.  

Now hedge funds – suffering from poor performance and shrinking business prior to the pandemic – are looking to make a similar shift to combat what Bloomberg is calling a “terminal decline”. 

The new report highlights some of the “specials” funds are offering to attract new business, including one fund in London that is foregoing performance fees until a high water mark is hit and another in Hong Kong is that offering “full-loss insurance” to cover all losses.

Even well known manager Kyle Bass is telling his clients he will only charge 20% if he earns triple digit returns in a new fund he is spinning up.

Paul Singer’s Elliot Management Corp. is also lowering their fees in exchange for locking up investor capital for longer amounts of time. The company has a share class that will lower investor fees to 1.5% from 2%. Redemptions for this class are spread out over 18 months. 

The goal for hedge funds now – long critiqued for their excessive fees – is less about growth and more about survival. 

Andrew Beer, founder of New York-based Dynamic Beta Investments said: “The hedge fund industry is littered with the carcasses of small funds that never reached scale. Fees in the industry are still twice what they should be.”

Indeed, it looks as though the days of the stand-out celebrity hedge fund managers justifying their 2% annual management fee and a 20% cut of profits may be over. The exotic strategies that only hedge funds had access to in the 1990’s are now widely available to retail traders. 

Hedge funds have also been mired with poor performance (relative to the S&P) since 2008, leading even well known names like Alan Howard, David Harding and Paul Tudor Jones to cut their fees. Now, with the bull market looking shaky and possibly on its last legs in the midst of a pandemic, managers like Ray Dalio and Michael Himntz have had some of their worst months on record. 

Hundreds of billions flowed into the industry in the decades leading up to the 2008 financial crisis. But returns then slumped after the Fed decided to step in and essentially eliminate the idea of stock picking and price discovery. Volatility – usually an important variable that hedge fund managers could capitalize on – all but disappeared completely as a result. In 2014, the largest U.S. pension fund decided to exit hedge funds when CALPERS withdrew $4 billion in investments. So far, in the first half of 2020, hedge funds have lost 3.4%.

Saleem Siddiqi, founder of Musst Investments said: “Some hedge funds have become like very large oil tankers cruising down the Suez Canal at snail’s pace. Lower asset levels will cut reliance on management fees and potentially refocus managers on performance.”

Bloomberg has included on their site an interactive calculator to help give readers an idea of how much hedge fund fees can add up to – in addition to several interactive charts that provide visuals on exactly how the industry is “evolving”. You can view those charts and maps here. 

Meanwhile, fees aren’t the only concept that hedge funds are “borrowing” from the Robinhood crowd. They are also approaching the founder of RobinTrack – a website that keeps track of what stocks Robinhood retail traders own – to aggregate the site’s data for “real-time insight into where amateur stock pickers are sending their money,” according to Bloomberg.

As we noted in an article several weeks, ago, this Robinhood-inspired shift not just in hedge funds – but in the entire industry –  was captured beautifully in a series of Tweets from Bloomberg’s Morgan Barna, CFA. She showed how trading volume spiked significantly in Q1 and Q2 of 2020, obviously attributable to the Covid lockdown and the introduction of new “traders” who have followed the herd, led by Barstool Sports’ Dave Portnoy, into the market.

She also showed how Schwab has seen its revenue per trade collapse over the last 5 years, as the brokerage has tried to keep pace (or in some cases lead the charge) for lower commissions to help bring in new clients. 

For all intents and purposes, commissions no longer seem to exist for stock trades and have been almost totally priced out of the industry.

Finally, she showed that interest in creating retail accounts continues to rise.

Among the surprises we’ve seen during the Covid lockdown has been the fact that Americans are actually saving money and paying off credit cards, instead of spending it, with the economy melting down and the government wiring them free checks. They are also putting this money into brokerage accounts, as you can see below:

This is, like the fall of the hedge fund industry, been completely enabled by the Fed, behind the scenes, doing everything it can to make sure that the NASDAQ continues to hit new highs despite what has been an unprecedented economic collapse in the country.

In addition to “saving” the market by sacrificing the dollar, the Fed may be able to add two new names to its running death count: hedge funds and retail brokerage profits. 

Yesterday, July 28, JPMorgan held a conference call for clients in which it laid out the outlook for the US elections using external strategists and consultants “and not necessarily the opinions of J.P. Morgan research analysts.” The bank was quick to note that its research team “remains explicitly nonpartisan and does not advocate for any particular candidate or policy platform”, although we doubt Jamie Dimon will cry if Trump loses. The conference call was closed to members of the press. The summary report below presents the issues discussed in the calls without direct attribution to the speakers or their institutions.

Key dates to watch include:

• the official release of the Democratic platform at the Democratic National Convention, which will take place from August 17-20.

• The Vice Presidential selection will likely take place in the first half of August, immediately before the convention.

• The first televised presidential debate is scheduled for September 29.

Below are the top 10 Top 10 takeaways from the conference call:

1. There was a consensus from all three external speakers that the Democrats would sweep the Presidency, Senate and House, with odds of a Biden victory placed as high as 85% by one speaker. The November elections will effectively be a referendum on Donald Trump. While Trump’s supporters remain loyal, Biden is ahead of Trump by around 9 to 10%-pts in major polls and Biden’s disapproval rating with voters has remained low.

2. Trump’s re-election prospects will be defined by the three C’s: culture, competence and China. COVID-19 is preventing a return to “business as usual,” with Trump losing the culture war. Trump’s handling of the COVID-19 pandemic has raised questions about his competency to manage a crisis and has weakened the “cult of personality” that was much of his attraction. Trump and Biden are likely to spar on who will be toughest on China.

3. Biden will act as a unifier and is likely to appoint a mixed and diverse cabinet that will incorporate more progressive elements of the party. Elizabeth Warren is likely to receive a prominent role in the cabinet or potentially as Chair of the Senate Banking Committee or Attorney General as she is the proxy for the progressive wing of Democratic Party. The  leading Vice Presidential candidates appear to have narrowed to Kamala Harris or Susan Rice. The next Treasury  Secretary is unlikely to come from Wall Street with compromise candidates favored and an aversion to having a billionaire assume the position.

4. Biden’s “Build Back America” plan is decidedly centrist, and he has rejected the most progressive Democratic proposals, including Medicare for All, the Green New Deal and defunding the police.

5. Expect higher taxes, a turn on energy policy back to renewable energy, increased infrastructure spending and the possibility of student debt forgiveness under Biden. Biden is likely to propose both corporate and personal tax increases during his first year in office. The next president will take office with $3trn (potentially $4trn if the latest stimulus bill is passed) in unfunded spending added to the federal deficit. Neither candidate has outlined how the deficit will be funded.

6. Consensus that anti-China rhetoric is here to stay and likely to intensify as part of the election campaign strategy on both sides. There was no appetite for bipartisan consensus focused on engagement, with arguments that President Xi is taking a different approach from previous leaders, embracing a nationalist, authoritarian approach. Trump has consistently attacked Biden as being too weak on China, and Trump takes pride in being the first major leader to stand up to China.

7. The US-China conflict will extend beyond trade issues to technology and finance, including limiting the access by Chinese corporates to US capital markets, as well as greater focus on strengthening human rights and democracy initiatives.

8. Biden will focus on rebuilding multilateral and international relationships with the world by reaching out to Europe and rejoining the Paris Agreement on climate, re-engaging NATO, and Pacific allies like Japan and Korea. Part of the strategy for countering China will likely include teaming up with the EU and Mexico against China on trade issues.

9. Increased regulation under Biden remains a real possibility. There is considerable scope in Dodd Frank to effect policy and impact oversight regulation, particularly as Randal Quarles’ term as Vice Chair for Supervision ends in October 2021 (even as his role as board member for the Federal Reserve continues until 2032). Pressure will also be strong to adopt anti-trust measures to limit the size of megatech companies and collect higher taxes.

10. J.P. Morgan US equity research views a Biden victory as neutral or slightly positive in contrast to the market consensus that a Democrat victory in November will be negative for equities. However, speakers pointed out that the cost of higher taxes is underpriced and could be as much as a 10 to 12% hit to EPS. The JPM equity research team highlights that increased spending on infrastructure and an increase to the minimum wage as well as a reduction in the uncertainty that has been associated with the Trump administration’s style of governing would offset much of the tax implications, which strategists estimate would be an earnings drag of ~$9 for S&P 500 EPS.

And here is the summarizing commentary as put together by JPM strategists:

Campaign Strategy and Outlook and Execution Risk in the Elections

Going into November, the speakers are looking for a Democratic sweep, but not a landslide. Pre-COVID-19, the conviction level of a Biden victory in November was at 60% but now stands at 85% after the current  administration’s handling of the virus and the subsequent economic fallout. Biden remains ahead in national polls by around 9 to 10%-pts. More importantly, he is ahead in some of the key swing states by 4%-pts or higher.

2020 is a bigger challenge for President Trump, because personal attacks have been less effective against Biden, and Trump has not grown his base and faces heavy criticism for his management of the pandemic. This presents challenges for congressional Republicans, because this election is being treated as a referendum on Trump. In 2016, Hillary Clinton was particularly vulnerable to Trump’s personal attacks as she had the second highest unfavorability as a presidential candidate in history (behind only Trump); conversely, Biden’s unfavorability is relatively low which may explain why Trump’s attacks have not seemed to stick. Meanwhile, first term presidents have historically used their first 18 months in office to broaden their support, but polling affirms that Trump has not achieved this. This makes it critical for Trump to energize his traditional base, which appears to be his approach in recent national issues, which would have been the case even if the COVID-19 pandemic had not unfolded. The extent to which American life can be restored to normalcy under COVID-19 (e.g. the NFL season, return to school) will strongly influence a visceral sense of how well or poorly COVID-19 has been handled. If Trump loses, the bigger concern centers on attempts to undermine institutions and delegitimize his loss, rather than an outright challenge of results or refusal to vacate the White House. Meanwhile, any actions taken between elections and inauguration will be subject to the Congressional Review Act.

China policy going into the election will be a “race to the bottom” in a competition to see who will be the strongest anti-China candidate. Trump has attacked Biden as being too weak on China, and this is a vulnerability as Biden’s long standing position has been for free trade and a multilateral approach. So to counter this, watch for concrete policy commitments to be made by Biden to bolster his credibility on standing up to China. If elected, Biden could choose to “pocket” the cumulative measures that Trump has enacted against conflict.

What would a Biden Administration Look Like?

The next President will be in a radically different position next year as they will be inheriting a $3trn increase in the federal deficit (potentially $4trn if the latest stimulus bill is passed), an economy that is unlikely to be in a strong recovery and a vaccine that will unlikely be available until middle of next year at the earliest. This will ultimately affect what Joe Biden is going to be able to achieve if he does become President, but he sees himself as a great unifier. He has spent his career in the Senate and as Vice President working with different groups who are at odds today (e.g. law enforcement and civil rights groups). He will likely downplay the culture wars in his outreach to the populist wing of the party. Over the last four months, he has used his personal relationships to work constructively with the progressive wing. His team has set up a Biden-Sanders Unity Task Force, and the report that they issued on July 8 contains very little that should cause concern for the markets and business community. The unity report does not embrace Medicare for All, the Green New Deal or defunding the police, yet it was fully endorsed by the Sanders team. Biden has shown that he can deal with the populist wing without lurching to the extreme left, and this is likely reflective of how he will build his cabinet and move forward with his policies next year.

Biden has adopted the moniker of “Build Back America” and has put forth a decidedly centrist economic plan that focuses on building infrastructure, supply chains, and enhancing domestic trade, with the first priority to strengthen the American economy. Biden is unlikely to be doctrinaire or ideological when it comes to trade agreements, but instead will focus on the practicality of agreements. He will also likely emphasize rebuilding international relationships by reaching out to Europe, NATO, and Pacific allies like Japan and Korea. Foreign policy will be a key and immediate focus by his administration, despite some concerns that the domestic agenda will dominate, given the impact on the domestic trade front.

There have been reports that Biden is favoring Kamala Harris and Susan Rice for the Vice President position while Elizabeth Warren is more likely to be considered for a cabinet position or a Senate leadership role, where she would still have outsized impact. Elizabeth Warren is seen as a proxy for progressives broadly when it comes to financial regulation, and therefore will have broad leeway for initiatives on areas for which she has been very passionate about, particularly over consumer protection issues. In a number of her prospective future roles, either as Treasury Secretary or Senate Banking Committee Chair, she would have significant power over how regulation is implemented. In particular is the potential replacement of Randal Quarles in his role as Vice Chair for Supervision when his term in that role expires in October 2021 (even as his role as Federal Reserve board member continues until 2032).

Market Implications of a Biden Victory

Markets though have not been as focused on the election as they were in the last 20-30 years given the impact of the COVID-19 crisis and are instead focusing on any positive news around advanced therapeutics and vaccines. The most underpriced risk today in the US equity market is the amount by which corporate tax may go up in the case of a Democratic sweep. Be cautious on the complacency around this issue given that Biden sees higher taxes as a moral responsibility to address widening inequality. He also wants to embark on up to $2trn in infrastructure programs, including green energy, and other job programs to get the economy back up and running, which will need to be funded by raising taxes. In the case of a Democratic sweep, it is likely that Biden will try and push through both corporate and personal tax increases using reconciliation with the Senate in a simple majority during his first year in office.

The market consensus view is that a Democrat victory in November will be a negative for equities; however, we see this outcome as neutral to slightly positive for equities. It remains to be seen how much of Biden’s campaign agenda is implemented if he is elected and what the make-up of his cabinet will look like.
History suggests that challengers to an incumbent typically campaign at an extreme only to converge to the
center post-election. Additionally, Biden’s proposed policy priorities were introduced in a healthy economy
during the primaries which took place pre-COVID-19. Given the current economic weakness, business recovery
and job growth are likely to be prioritized over policies that could dampen economic growth and perhaps even
jeopardize the desired 2022 midterm election outcome. A more diplomatic approach to domestic and foreign policy will likely result in lower equity volatility and risk premia. Regardless of how policies and polls evolve in
coming months, especially in the run-up to the Democratic National Convention in mid-August, investors are
assessing the cost/benefit of all major proposed economic policies with wide confidence bands.

Higher statutory tax rates would be an earnings headwind but would also require significant political will to push tax rates significantly higher. A partial reversal of the Tax Cut and Jobs Act (TCJA) benefits would be a significant headwind for earnings, which has been a catalyst for effective tax rate falling sharply to ~18% (vs. 26% pre-TCJA) which in turn resulted in an EPS growth of 12-14% in 2018 (or $16-18 EPS). Assuming Democrats reverse half of the statutory tax rate benefit from 21% to 28%, we estimate this would be an earnings drag of ~$9 for S&P 500 EPS. The second order impact of this change would be lower capital expenditure and buybacks. However, if the statutory rate increase is accompanied with the implementation of a “minimum tax” and/or reduction in GILTI deduction, it could create an additional $4-5 impact on EPS and a potential $14 hit to EPS. While higher corporate taxes are becoming a consensus election risk, it is worth noting that the tax rate has been drifting lower since the 1960s, and it would require significant political will to push tax rates significantly higher. In other words, headline risk might be greater than actual policy similar to many scares that have come before it (e.g. healthcare costs, antitrust).

Infrastructure spending should be a priority for Biden and could fulfill multiple agenda priorities such as increasing employment in a post-COVID-19 economy, expanding use of alternative energy and green technologies, and updating and expanding existing public transportation, power and communication systems. Size and scope will ultimately determine the fundamental impact, but a $1 trillion plan over five years with S&P 500 companies grabbing 50% of spending (directly and indirectly) at 8% of profit margins would imply an EPS benefit of $1/year. Further, increasing the federal minimum wage, while neutral to positive for S&P 500 companies, would be a negative hit to margins for the broader economy and would likely contribute to further drive inequality between companies that are able to absorb higher wages vs. those with lower pricing power / scale. Softening on tariffs could be a significant offset to higher taxes. Tariffs were the largest headwind for global growth in 2019 and had a cumulative effect of ~$12 on EPS. Therefore, if Biden is able to achieve bilateral easing of tariffs with increased purchases of goods by China, it could be a significant offset to higher taxes.

The Tech sector has been at the epicenter of multi-year secular growth, and with the global digitalization boom accelerated by COVID-19, it is now trading at premium. However, nominal growth and inflation prospects remain structurally low, and investors will continue to pay a bigger premium for innovation. Though a significant inflation shock is the biggest risk to the tech trade, technology continues to be one of the largest weapons that the US possesses, and the tech companies are systemically important and are backed by strong fundamentals.