By Eric Peters, CIO Of One River Asset Management
When 2020 started, Trump seemed destined to win. The economy was strong, unemployment low, markets were priced accordingly. The odds of a Democrat victory were low, though market consequences of such an outcome seemed clear - higher taxes and re-regulation would knock equities lower. A 25% S&P 500 decline, give or take 10%, seemed reasonable.
Then came Covid. When stocks bottomed on March 23rd, Trump narrowly led Biden in betting markets. But pandemics have consequences and this catastrophe hit a nation that had spent decades optimizing its economy to spur asset price appreciation. America’s financial system was as overleveraged as it was unstable. A depression was inevitable in the absence of something utterly unprecedented.
On March 27th Trump signed the $2.2trln CARES Act, and this, combined with a breathtaking array of asset purchase programs marked the effective start of MMT (Modern Monetary Theory) - with the Fed and Treasury coordinating policy.
And ever since, it has mattered less who wins this election. Because you see, once the link is broken between what the government must collect and what it can spend, who leads the nation is less consequential – at least to stock markets in the near-term.
Tuesday's election will be a critical one for the nation. No matter who wins, investors can rest easy knowing there will still be long-term opportunities in the market—and Jerome Powell will still be running the Fed. In this week's issue: pic.twitter.com/gsFIQI5teO— Barron's (@barronsonline) October 31, 2020
But to a nation descending into tribalism, who wins elections matters greatly. And by early September, with betting markets showing Trump and Biden tied, a new risk emerged: a contested election that would tear the nation to shreds. Provoking civil conflict. War. Stocks declined. But since the first presidential debate on Sept 29th, Biden gained on Trump in the polls.
This is how a decisive Biden victory that had once been seen to be bearish has now become bullish, thanks to MMT which ensures that whoever runs the nation will spend money with reckless abandon.
And we are thus left to trade the impact of a virus that is not finished with us, even if we are desperate to be done with it. As we all pray for a decisive electoral outcome.
Ten years from today, what will market historians write about the present time? This is among the most important questions.
In 2012, they wrote that Gordon Brown sold half of the UK government’s gold between 1999-2002 at 20yr lows, around $300/ounce. The world had lost its mind, wildly overvaluing intangibles, shunning hard assets. No sooner had Brown hit sell then gold began a 10yr rally to $1,915/ounce.
What will market historians write in 2029 about the 2019 Saudi Aramco IPO with oil at $75/barrel? That was the world’s largest exporter puking reserves. They’re nowhere near finished. The pain for exporters has only just begun.
But far more importantly, what will historians write about the panic adoption of today’s new policy paradigm? Without even a brief public debate, the US government chose to borrow somewhere between 15-20% of GDP from the central bank, which itself engaged in all sorts of financial asset purchases to inflate their prices.
And this shielded those people least touched by the pandemic from pain, as those who hold no stocks and bonds were simultaneously devastated. And this dramatically amplified the inequality that was already tearing the nation’s fabric to shreds.
Traders who spent a decade watching quantitative easing and low interest rates fuel stock price gains, applied yesterday’s lessons to tomorrow. Equity prices surged. While this felt somehow wrong, they could no longer bear the pain of underperformance and convinced themselves that there is no alternative.
But never in the history of humanity has a state of no alternatives sustained for long. For decades, an ever-growing share of the economy’s profits had been awarded to capital owners at the expense of laborers. And as financial asset prices were lifted to record highs, forming a secular top, the system that had driven itself to a state of severe imbalance, instability, was facing tumultuous change. And lurking below, suspended in those watery vaults, a white whale.