August 24, 2020
The US Election is now a little over 2 months away and as traders and investors slowly return home from their holidays (or with undue haste if they are trying to get back to the UK) it will increasingly be the main focus of discussion. The consensus of analysts surveyed, as well as (or likely because of) the polls, suggest that the winner will be Joe Biden and the fact that this coincides with stock markets at or close to new highs suggests that the traders at least are assuming that a Democrat win would be ‘good’ for markets. They thought that last time of course, which is why they sold off sharply when ‘their’ candidate lost. Except of course they were then blindsided by the sharp turnaround rally.
Indeed if we look at the other similar shock event of the last 5 years, the Brexit vote, we see a similar pattern; a consensus building in support of the Establishment position as traders confuse their own political preferences with those of the electorate, then a horrified over-reaction to the ‘wrong’ result followed by a snap back. Within our framework, we can see this as a perceived reduction in near term uncertainty as the traders all back the ‘obvious’ candidate followed by an exaggerated spike in the risk premium at the very moment that uncertainty does in fact disappear. Thus rather than trying to predict the winner, the best advice is probably to go into the election flat and take the opposite side to any subsequent sharp move.
Having said that, it is still worthwhile considering the medium term risks and even the longer term trends that may emerge in the wake of the Election. This is a topic we shall doubtless be returning to regularly over the next few weeks and months.
As such we will start with the Democrats, where the most important thing about Joe Biden and Kamala Harris, as far as the US Corporate Establishment is concerned, is that they are not Elizabeth Warren or Bernie Saunders. They are the safe candidates. From an international perspective, should Joe Biden become President of the United States this November, while his first priority will be Corona virus, on foreign relations his starting point is likely to be a simple one; don’t do what Donald Trump would do. As such he is likely to be seen as both calmer and more predictable than his predecessor and will have the added advantage that the US corporate establishment and over 90% of the media will be throwing bouquets rather than brickbats at him. He will thus be in a similar position to Barack Obama in 2008, arriving to ‘save’ the country from crisis, albeit with little of Obama’s star quality about him. However, he will likely be more personable than Obama on a one to one diplomatic basis and will almost certainly make some symbolic gestures to the Globalists, such as re-joining the World Health Organisation, the Paris agreement and even perhaps the Iran Nuclear deal. A Biden honeymoon would thus be presented in the context of ‘getting back to normal’ after the aberration of the Trump era.
If China is a country with State Owned Enterprises, the United States is a country with Enterprise Owned States.
On actual policies it is difficult to tell, but the nature of US Politics is such that both he and his team, including Vice President Kamala Harris, will be beholden to many of the usual Corporate Interests. If China is a country with State Owned Enterprises, the United States is a country with Enterprise Owned States. Most obvious of these is Delaware, where Joe Biden is the senior Senator and which successfully reinvented itself in the 1970s as ‘the Luxembourg of the United States’. Originally dominated by Chemical giant Dupont, it evolved to be a home to many major financial services including banks such as JP Morgan as well as most of the major credit card companies. Indeed, as Senator for Delaware, Joe Biden’s critics often referred to him as ‘the Senator for MBNA’. As with Hilary Clinton and New York, Joe Biden is heavily backed by the Finance industry and thus it is difficult to see much in the way of meaningful reform as a result. Meanwhile, his Vice President, Kamala Harris, is from California and widely regarded as ‘the Senator for Silicon Valley’, representing another major component of Corporate America.
A key question for many investors will be what this new administration would mean for US/ China relations. Currently the attack ads from the Trump camp are that Biden is some form of Chinese agent, but this is largely a caricature. Historically he was pro China because the US Corporate Sector was pro China. The probability is that while some of the more recent rhetoric will be rowed back, by no means all of it will because Corporate America, the people that pay the bills, are no longer so enthusiastic.
For context, Corporate America was traditionally very pro-China because it saw the Chinese Consumer as its new Gold Rush and because for decades it had prospered under a tried and tested formula for dominating emerging markets known as the Washington Consensus. Briefly, this involved countries opening up to US multi-national Foreign Direct Investment to build factories and drive plantation farming, to be staffed by cheap labour from the rural economy, which would then provide cheap exports for US consumption, with high margins along the way for corporates. In return, newly enriched consumers in emerging markets could buy western produced higher margin goods, with monopoly distribution ensured via connections with ‘democratically elected’ local politicians. In addition, consumers were offered the wonders of consumer credit, ultimately backed by US $ loans to the local banking system. Exchange rates needed to be freely floating, which meant that when the inevitable boom and bust occurred due to over-expansion of the credit system, US banks and corporations were protected (and if not were bailed out by the US taxpayer). The net result was that while few if any emerging markets ever emerged, the global corporations prospered regardless and simply moved on to the next market.
China with its billion plus consumers was thus seen as the ultimate emerging market, except right from the start it didn’t play by the rules. It didn’t have a floating exchange rate, or open capital markets and it didn’t allow US corporations to buy assets in China. Moreover, if US corporations wanted access to Chinese consumers, they had to give up technology. Thus, far from China stealing IP via ‘forced technology transfer’, many US corporates had voluntarily given it up hoping for access to China’s huge domestic market, something many of them now regret. Moreover, after 2008, the Chinese largely stopped using the western banking system and with the arrival of Xi in 2012 set off on development plans such as One Belt One Road and Made in China 2025 that all but eliminated the need for the US, or for US multi-nationals.
Despite this realisation that China wasn’t going to play the role the US corporates had scripted for it, the original resistance to Donald Trump’s trade tariffs had come from US multi-nationals, principally those using China for outsourced manufacturing but also those still hoping to capture some of its consumer spending. This stance however, has steadily weakened and is unlikely to reverse. Meanwhile, the establishment of the new Firewall in the US to exclude any foreign hardware and software that can’t be controlled by the US itself will not be changed by a new administration. Indeed, the irony is that the US will likely start to behave to China they way that China has behaved towards them. The recent actions around Chinese companies such as Huawei, Tik Tok, ZTE and Xiaomi has effectively been to try and deny them access, not only to the US, but hoping to force them out of lucrative third party markets such as Europe. Having said that, a Democrat administration or even a new Trump one is nevertheless likely to be more pragmatic and to soften somewhat compared to the current heated rhetoric. It was interesting to note that former Trump strategist turned anti China Firebrand Steve Bannon was recently arrested on fraud charges aboard the 170 Foot Yacht of Guo Wengui, a notorious anti China billionaire fugitive and reported backer of the Hong Kong protests. With him out of the picture and major Trump backer Sheldon Adelson facing licence renewals for his Macau Casinos, we might see some ‘deals’ being done come year end. Regardless of who wins the Election.
As a final point, we would highlight the very real probability that, regardless of who wins in November, Corporate America may be looking to enhance its competitiveness and its profitability by pushing for a deliberate collapse in the US $, particularly against the Yuan, but also against the Euro.