Bubble blowing not the answer

Eleanor Creagh
Australian Market Strategist, Saxo

Summary:  With the second round of fiscal stimulus MIA, the 'K-shaped' recovery is in full swing - and set to worsen

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This year’s US election is all but guaranteed to be chaotic, divisive and unparalleled – not least due to the high probability of a contested outcome, where accusations of fraud from mail-in votes presents legal challenges. The trade then becomes volatility, not direction, as a surge in mail-in voting delays the result, with the added possibility that neither candidate concedes defeat. Under these uncertain scenarios, risk assets will struggle to price the eventual policy path during what could be an extended period of uncertainty.

A lack of courage to address structural inhibitors to diversified inclusive growth in the political sphere is leaving a legacy of worsening inequality and dividing American society. The current platform of ‘state capitalism’ (or ‘corporate socialism’) subverting markets in self interest serves an ever-diminishing subsector of the populous. Time is ticking to fix capitalism before calls for socialist experiments grow louder thanks to shifting voting demographics. 

From the outside looking in, the question appears to be who to back in a no-horse race? Therefore, the decisive factor lays in the ability to mobilise voters, using turnout as a swing vote. 

A lasting legacy of the pandemic has become the entrenchment of prior inequities: worsening income gaps, inter-generational divides and racial wealth disparities. These have laid bare the cost of doing too little.

Neither candidate has a vision that addresses rising inequality. Worse still, both the crisis itself and the policy response have supersized the problem. Not just via asset ownership, but via the pandemic’s uneven impact on certain sectors and industries: a dynamic coined the “K-shaped” recovery. Low-skill, low-wage workers who cannot work remotely face a depression-like environment. This is in stark contrast to the highflying technology sector, which has been accelerated by the pandemic. 

Winner-takes-all monopsony marketplaces, automation-driven displacement, stagnating wages and the diminishing return of profits to labour over capital already left wealth concentrated in the hands of the few. QE worked (and still is working) to reflate asset prices, but not wages. And the pandemic has disproportionately hit the disadvantaged. Wealth divides are already larger in the US than in any other G7 nation. For the top 1%, incomes have risen by more than 80% (cumulatively) between 1986 and 2016. That has left a hollowed middle, with their contribution to aggregate demand in decline.

Source: Branko Milanovic
https://www.pairagraph.com/dialogue/320a8c4b776b4214a24f7633e9b67795/2

This broken economic model is depicted by fresh highs in stock markets out of touch with reality, contrasted with ‘Main Street’ where millions of Americans are still receiving unemployment benefits. With the second round of fiscal stimulus MIA, the ‘K-shaped’ recovery is in full swing – and set to worsen. 

Source: Federal Reserve, Bloomberg, A diminishing share of ownership of financial assets fuels wealth disparities

This dichotomy fuels the anger and division that allows politics to be weaponised. Policy makers have become incapable in addressing these problems to promote a more sustainable path; some are seemingly intent on exacerbating them. This can only lead to more volatility and social unrest down the road, and a long volatility stance is a core position. 

Unless these structural issues are addressed, income and wealth disparities will continue to spiral – exactly as they did after the global financial crisis – promoting a slower, lower growth path. The cost of a hollowed middle and increased income polarisation is nationwide anger and unrest, increasing stress on economic and political systems. Got gold?

Turnout: the swing vote

The ‘have nots’ are now left behind by the political ideologies that historically would have supported their cause. The left cosied up with Wall Street and Silicon Valley, forgetting homegrown labour in their pursuit of free trade and open borders. This leaves vast swathes of the electorate feeling abandoned by both parties. In 2016, Trump used this opening to his advantage and adeptly spoke to those who had ‘lost their voice’, going after the middle of the country as an agent of disruption. Swinging the Electoral College vote, where the system structurally favours Republicans, not the popular vote. With the economic playing field becoming more uneven, we cannot underestimate his capacity to do so once more.

Anger drives turnout, which may swing the result in either direction, regardless of the polling. Therefore, the ability to capitalise on this discontent and win turnout is crucial, given just over half the population vote.

The difference this time is Trump no longer operates as an agent of disruption; he is a known entity. This mechanism in reverse drives voter turnout in support of the Democratic Party. Not necessarily because Biden’s platform provides a cohesive vision for the future. But because those who have “lost their voice” with respect to climate action, principles of democracy, international cooperation, and women’s reproductive rights, unified by the anti-Trump vote, turnout in force.

A key aggressor could be the capacity of social media to contribute to the increasingly split cultural and political landscape. Social media platforms and their attention-devouring algorithms have become a polarising cesspit of swirling discontent, disinformation, and foreign interference. The “left behind” rust belters pitted against the climate vote, anti-Trumpism and progressives.

In the midterms young people voted overwhelmingly in support of Democratic House candidates. The youth vote provides a crucial swing factor for a Biden victory, amid a concentrated effort by social media networks to re-energise younger voters, where green policy and racial equity are huge drivers. This as Facebook, Instagram, Snapchat, and Spotify have all initiated their own voter registration efforts and resources in a bid to drive turnout. Although Biden’s youth appeal may be less than other candidates, Trump’s disdain for climate change stokes anger amongst this voting cohort who demand action on climate policy, leaving them motivated to oust Trump. 

However, unless these dynamics can drive a Democratic landslide on election night, the probability of a contested outcome remains high. The problem being, Democrats are far more likely to use mail-in voting. Certain battleground states exclude election officials from beginning to process mail-in votes until election day, therefore Republicans votes are likely to be counted first, leading to a potential election night “red mirage” in which Trump appears victorious before the mail-in ballots are processed.

The ability to seize upon that lead and sow chaos and confusion, with accusations of fraud surrounding the mail in ballots could then see the outcome contested. Trump has already declined to commit to respecting the integrity of the election results, which raises the stakes on instability and volatility. The polarised environment which has only been worsened by the pandemic has already sown the seeds of democratic decay. Setting the stage for civil unrest across a nation already divided by the poisonous hyper partisan political environment. With factions of the population on either side believing the victory has been stolen.

Regardless of the electoral outcome, America itself is divided, making the current election cycle and next political cycle sure to be turbulent. However, hope remains for the increasing polarisation of outcomes to fuel a level of discourse that eventually drives real reform and social change.

Alternatively, we can tune out the noise and ditch the crystal ball. In 2020 we have been constantly reminded that the future, and any forecast, is fickle, but we can focus on themes that make sense either way: 

  • Climate change
  • Fiscal primacy, move over central banks
  • Diminishing policy orthodoxy, with the Covid crisis fuelling the fire 
  • Death of the 60:40 portfolio
  • Deglobalisation
  • Inflation
  • Big tech regulation, a slow moving but existential risk

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