Market Thinking

making sense of the narrative

Due Diligence…

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One lesson of proper risk management is that when something with a meaningful short term downside and a non zero probability of happening is dismissed out of hand, we should be wary. Such is the case right now with risk and uncertainty over the outcome of the US Election.

Absence of Evidence is not Evidence of Absence

Carl Sagan

Carl Sagan’s use of a relatively well known lawyers’ phrase was to do with extra-terrestrial life forms, which may make the proposition somehow seem less valid and more ‘conspiracy theory’ but in fact the point is highly relevant for investors. As we noted last week, the fact that no evidence of Widespread Election Fraud has so far been presented does not mean that there is none and markets would be wise to retain that as a non zero risk. Moreover, it doesn’t have to be widespread, it only has to impact 4 states and a total of 95,000 votes – or even 50,000 if the votes were switched from one side to the other.

As narrative watchers, we observe that the mainstream media, perhaps especially the Globalist house magazines like The Economist, are very assertive that it is all over and there is nothing to see here and are very keen to declare the Election ‘over’. However, as any investor should know, the media consensus saying something is true doesn’t necessarily mean that it is. Think of Wirecard as but the most recent example of the worth of doing your own research. Moreover, surely if we truly care about democracy, there is nothing to lose by more transparency?

We should however be in a better position to judge in a week or so. Given that while even a great week might add 2 or 3% to the markets, a shock such as an Election reversal could knock 10-15% off, we would suggest there is no need to rush.

Short Term Uncertainties – Election Result not actually final

There is an observable phenomenon where when someone knows something in detail they realise that everything in the press about it is wrong, and yet they somehow also assume that everything else in the press (that they know little about) is somehow correct. So, in our opinion, it should be with investors and the current issue of potential voter fraud. Not that investors know about the votes per say, but they do tend to have a skill set based around data analysis and questioning the received wisdom. For example, we know as investors that insider trading exists and that it is most likely to exist where the upside is meaningful. Similarly with accounting fraud, the incentive is important. If it is large enough then so is the likelihood of insider trading or fraud – however much the authorities might wish to reassure us it doesn’t exist. However, we tend to focus more on the fraud since our own risk is larger and so it is with the election. It is almost certain that lots of small frauds take place, all the time and on both sides. However, what is meaningful now, is whether or not there is voting fraud that while not necessarily widespread, is significant enough to cause an upset to our current equilibrium.

Thus we might consider the voting data in the manner of an analyst casting a suspicious eye over a company report and accounts. The first thing that we do see are some numerical oddities that would certainly warrant some further due diligence. In particular we should be alert to the fact that the oddities only seem to occur in places that mattered for the election, the three or four key swing states.

First up might be the turnout itself. Think of this as auditing sales, a classic indicator of corporate fraud. This was very high, as we know, but particularly in the key state of Wisconsin, where it was over 90%, which is not far off the level we see in Australia where voting is compulsory! This is up from around 70% in 2016. Most important was in Milwaukie, where turnout was 84% and Biden got a margin of 182,000 votes, more than enough to win the state (he won it by only 20,000 votes.) Good job you might say, shows how they got the vote out and how motivated people were. Possibly, but in nearby state Ohio, where Cleaveland has a similar demographic (and also voted Biden), the turnout was a more normal 51%. Rather like a company reporting strong sales from a geographic region that seems to be outperforming its comparators, we would like a check.

Second we might note the oddity of Biden only votes. By this we mean votes where there were no ‘down ballot’ votes for other elections, ie the people filling in the ballot only voted for the Presidential race. Again, this could be perfectly plausible, but much less so in states with a tightly contested Senate race, such as Georgia. There was a reasonably significant number of Biden-only votes nationally – around 450,000 – but almost a quarter of those, 95.801, were in Georgia which has been called for Biden with a margin of less than 15,000 votes. This feels a bit like a ‘costs of goods sold’ line in a report and accounts, where revenues seemed to have increased more than costs to the extent that margins look flattering. Again an audit of those ballots might be worthwhile.

Third is the outperformance of Obama votes by Joe Biden. Again this could be explained by how keen the Democrats were to ‘rid the country of Trump’ and get the vote out, but also here again the ability of Joe Biden to apparently out-motivate ‘rock star’ Obama seems odd, especially as he appeared to have only done it in key states, this time Pennsylvania, which was declared for Biden with a 65,000 majority (1%). Here a diligent analyst might spot that in Montgomery county, Joe Biden got almost 85,000 more votes than Barack Obama did back in 2012. This might be like a company beating its previous record sales but only in a few locations. Possible, but interesting.

Finally we might consider the auditors – always an issue in Fraud – and whether they are doing their due diligence well enough on our behalf. The equivalent here might be the procedures. Here we might look again at Pennsylvania, where the governor unilaterally changed a number of the Election procedures and perhaps most interesting where we see the rejection rate of mail-in Ballots was only 0.03%. This is interesting as normal rejection rates are 1% and for first time voters nearer 3%. Bear in mind that the main concern expressed over mail-in ballots long before the Election was that the procedure of sending out unsolicited mail in ballots was new. States were used to sending you a mail-in ballot if you requested it, but only 5 States had previous experience of sending out millions of unsolicited mail-in ballots and thus issues to do with accurate databases and surveillance were justifiably raised as concerns. As a comparison when nearby New York experimented with mail-in ballots for the primaries it had a rejection rate of over 20%.

So overall we might suggest that were this election a company we might be wary of the stock, The equivalent of Red flags on turnout, Biden only Ballots and the ultra high acceptance rates on mail-in ballots are heightened by the fact that they appeared most obvious in the three or four key states where it mattered to the overall result. As with Short sellers on a stock it may well be that the ‘concerns’ are being heightened by the Trump camp and that there are sensible explanations for each and every one, in which case we would say ‘great’. What we don’t like however is that the concerns are simply dismissed as ‘not relevant’. We think it sensible to follow the old Russian Proverb made famous by Ronal Reagan.

Trust but Verify

Ronald Reagan

In the same way, as with the ‘guns and gold’ type market commentators who are always calling a market crash we don’t need to go along with any of the other stories and rumours circulating about much bigger issues to do with the software on the counting machines at this point. We don’t even need to ‘go there’ as they say to suggest that while it may well be that the consensus view of ‘nothing to see here, move along’ is correct, the risk return looks skewed right now.

Notice that in all of this we don’t need evidence of ‘widespread fraud’, since the possibility of manual recounts and simply following procedure could disqualify enough votes to swing the Election result. Note we are not predicting this, but the market is not even recognising it as a possibility.

Medium Term Risk – Government interference in Private Investment

The announcement of an executive order banning US investors from owning companies ‘linked to the Chinese military’ probably caught a lot of investors by surprise – even though the list (complied by the Pentagon) had been leaked to the Financial Times back in June. The fact however is that several companies like China Mobile and China Telecom will now suffer some ‘dis-investment’ – since evidently this includes Emerging Market funds.

This should not be a surprise in that it merely extends the already insidious trend of government determining what private investors are allowed to do with their savings that has already begun with the ESG movement. The principle is now established that lobbyists – in this instance the Pentagon- can effectively determine the flows of private sector capital.

Long Term Risk – Corporate interference in government.

We have noted before that where China has State Owned Enterprises, the US has Enterprise Owned States with lobbyists all pervasive in getting legislators to favour the interests of their corporate clients. Indeed this has become embedded into the system thanks to the ‘need’ to raise campaign funds for re-election at every level of government. We have Big Pharma, Big Tech, Wall Street and the Military Industrial Complex all looking to create monopolistic opportunities for themselves, while the media, who, let us not forget, rely on corporate advertising dollars, encourage us to see this as ‘a good thing’. It may well be for (some) investors but it has also got to the stage where companies become too dependent on government such that a change of policy can fundamentally disrupt a company’s prospects, significantly increasing stock specific risk.

In the EU, the equivalent lobbying is at the EU Commission level, with national politicians not so heavily involved due to their relative lack of ability to influence matters. Covid has started to change this however, as the Magic Money Tree throws off enormous sums to be spent at ministers’ apparent discretion and perhaps nowhere is this more obvious than in the UK, where the imminent departure of the UK from the EU is focussing the lobbyists’ minds. It is perhaps no surprise that, having failed to prevent Brexit, the corporate lobbyists are now working out their new routes to power and patronage for their clients and thus we see the spectacle this week of two opposing sets of spin doctors fighting over who has the ear of the Prime Minister. As noted, when government expands its balance sheet, as now, inflation will follow in the things it spends its new ‘free’ money on and corporates are going to pay up to make sure it is on them and their products.

The broader issue of course is the slow realisation that the lobbyists are also going to bypass the EU and go further ‘up the chain’ and focus on the Global Bodies, specifically the various agencies of the UN such as the WHO, but obviously the UN itself with its sustainability agenda driving private sector investment via ESG even more than the Pentagon is currently doing on China. Indeed, when back in 2015 the WHO declared that the biggest threat to Global Health was Climate change, you had to worry about who was doing their day job. No-one as it turns out.

This of course all leads to Davos and the World Economic Forum with its Great Reset Agenda that we have discussed previously, not least because both Boris Johnson and Joe Biden adopted its slogan of Build Back Better – in turn adopted by the WEF from the UN. Intriguingly, many western liberal politicians are dismissing concerns about the advancement of this agenda as ‘far right’ conspiracy theories at the same time as the UN, WEF and seemingly most governments are talking about them and are set to be the agenda for the delayed World Economic Forum next Spring – albeit in Lucerne rather than its traditional home of Davos.

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