“to blow these Scotch beggars back to their mountains!”
The 5th of November is the day we celebrate Guy Fawkes’ attempt to blow up the UK’s parliament. (These are his words in this morning’s quote by the way.) However, as we enter a new lockdown, and the stresses of watching our treasonous cousins across the pond elect their new king unwind, maybe it’s time to pause, take a deep breath, calm down… count to ten.. And release.
Eyes open on a bright new era…? Maybe.. maybe not…. Rumours of potential violence around Trump’s claims of electoral theft swirl round markets this morning. Maybe someone should be asking Trump about the 10% of postal votes HIS postal service failed to deliver?
Enough! We’re nearly done about the US Elections. Let’s move on and work out what happens next: what are the likely investment scenarios for this changed world? If the objective is to maximise returns – how do we get there? I guess we need to start by understanding where we are now!
First, let’s make the informed assumption we’re going to get Joe Biden as US president later today while the Republican’s hang onto the Senate by a couple of seats. Does that mean long-term gridlock and, as some papers suggest - a Lame-Duck Biden regime stymied by a failure to enact stimulus, growth policies and even make new appointments to the Fed? Or, will the removal of Donald J Trump from the scene result in a coming together of Republicans and Democrats to solve the critical issues?
Whatever, but stocks loved it! Up in Europe and the US. Why? Because markets think anything is better than Trump’s chaotic tenure? Or more likely that potential gridlock means lower spending and consensus, yet they still anticipate stimulus from government and QE infinity for ever from the Fed? These seem mutually exclusive…. but maybe not!
I’m positive: the thin Rep. Senate majority of 2 seats, a sense of unity in the face of crisis, and the end of the era of Trump division means we may see a return to a new normal of deal making in Congress. If the Americans can learn to talk to each other again, then they can be part of the solution on the big global issues; Trade, the Western Alliance, Climate Change, and Equality.
If I’m right and accommodation is probable, then let the stock party continue!
Second, the most immediate critical issue is the Pandemic. The virus is the critical challenge of the modern age for the West. This morning the UK starts its second Lockdown, as is happening across Europe. Italy has put a curfew in place. The implications on corporate solvency, jobs, growth and confidence are immense – and deepening. At this stage, the only policy appears to be containing the virus to stop health services from being overwhelmed.
Is there any upside?
Yes, there is: flattening the hospital admission curves is one part, and damaging but probably necessary part of the strategy. Therapies are vastly improved raising and speeding up recovery. Govts finally understand track and trace. A 100% effective vaccine remains a long-shot, but shots that provide some form of boost will raise confidence, dim the fearfulness and boost confidence. The Pandemic will not be forever.
We might not have gotten a V-shaped recovery.. but it will end and growth will resume.
Third, how to address the growing instability and distrust across the West the US election has highlighted. It’s happening in the UK and in Europe as electorates are increasingly frustrated and feel put upon. How close Trump came to retaining the presidency sums up the distrust of conventional politics – for very valid reasons.
What does it mean for further populism across Europe as electorates fear for their jobs and seek to protect themselves against uncertain futures? What does that mean for the confidence underlying the West and Capitalism? What does it mean for the future of Government? It is not a necessary evil – without Government we’d still be hunting mammoths. Societies thrive because of not less, but better government.
I’m hopeful here as well – voters aren’t daft. Society changes and government eventually catches up. There is also a cyclical shift underway that could improve Governance and resolve inequalities. There is a shift from wealth towards society. The trend is visible in the focus on ESG investments, but also in the more long-term cycle shift from Shareholder Capitalism – the old Freidman trope about businesses to being run to benefit shareholders only, to a refocus on sharing the benefits among all – the Stakeholder society.
This shift is upsetting the Right and particularly the small band of libertarian nut-jobs who will do literally anything to stem it. They seem to forget 99% of people actually like other people, and even get a kick of doing good for others! Helping and being nice to others makes anyone a good person – and if that means they are a “socialist”, then I’d like to be one too! And that’s not incompatible with being a capitalist!
Fourth, how to invest in financial markets which are utterly distorted by policy and regulatory action? Yields have been repressed – some $17 trillion of Sovereign bonds now trade at sub-zero yields. The effect is to cause all financial asset prices to rise, despite the underlying economic weakness triggered by the pandemic: financial asset stagflation.
It leads to two consequences:
i) taking greater risk for lower returns and a risk/return equation that’s increasingly unbalanced, and
ii) a search for “better” returns which has simply spread financial asset stagflation from the bond market across all assets.
When you get told to buy, say, wine because its outperforming other investments, that’s a good example of how the search for returns is driving yield tourism!
The current big theme in “Yield Tourism” is China – the argument being the west is so weakened and crippled by pandemic, low growth, political friction and unemployment that it makes sense to switch to high growth China. Yesterday the news about the cancellation of Ant Financial’s IPO was generally overshadowed by the US election, but it was a classic warning moment. (I did write about in the Porridge y’day!)
Interestingly there is a lesson in the humiliation of Ant re banks. Bank have suffered post 2008 due to regulation, which reduced their capacity to lend, thus spurring the growth of Fintechs in the lending space. The Chinese regulators are trying to push high capitalisation rules on Ant which will effectively hobble it just as the banks are… but without lenders like banks once were, or the FIntechs want to be now – how to SME’s access swift and cheap financing? I suspect China’s regulators will make all the same mistakes that have been made in the West…
There are serious ESG risks investing in China. It’s even more fundamental to understand that China might be capitalism but, paraphrasing Dr. Leonard McCoy; “its capitalism Jim, but not as we know it”. The basics of investing in domiciles where the rule of law, the enforcibility of contracts, and the right of clear title are unequivocal and should not be forgotten. When the government has the ability to do whatever it wants, then that’s a reason to be cautious.
I guess I forgot that fundamental rule when I upped my position in Alibaba and other China stocks just last week…!
As I wrote yesterday, lets wait for the dust to settle and then figure out where we go from here… I suspect nothing much has really changed…