US Election Countdown: Zero Hour - What the US Election result won’t change

Macro 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The market seems to be putting on the reflationary trade today ahead of the uncertainties of the US Election as the USD and JPY wilt, while the AUD rushes higher after brushing off the well flagged easing moves from the RBA overnight. Any strong turn-out among Democrats could support an extension of this development, while a contested election scenario would very likely do the opposite.


I promised a series of articles through at least Election Day today, and was scratching my head this morning on what, if anything, I can contribute today after covering nearly every angle I could think of in terms of scenarios, reactions, how the results would unfold and even: what if I am totally wrong? I came upon today’s theme just before our CIO Steen Jakobsen penned this pre-election piece that almost read my mind, as he says that neither candidate, despite their differences, will bring any real change to the extend-and-pretend game in the grand scheme of things. In this article, I look at some other important things that will not change.

Steen also disagrees with my lean in favour of a Blue Wave outcome for the most credible of reasons: that there may be turnout votes among the young and among non-white voters for Trump that the polls haven’t picked up. I would connect that with an argument I have recently heard elsewhere that a large contingent of young voters may be rebelling against Covid restrictions, which have become highly politicized in the US. I can’t quantify that, but the reasoning is solid.

But in addition to Steen’s points, especially on the inevitability of extend-and-pretend policy, I would add a further couple of thoughts about what will not change after this election.

The Balkanization of reality
Our modern world of choose-your-own-reality has come about from the echo chambers that spring up on Internet forums and from “rabbit-holing” social media algorithms, and due to the decline of the authority and independence of the news media, the traditional societal referee representing the Fourth Estate. This is critical stuff and already has resulted in a de facto societal civil war of narratives in the US and elsewhere. The influential Yuval Noah Harari has pounded on this point and outlined how all civilizations must have the power of “shared stories” with which nearly everyone in that civilization agrees if its people are to avoid chaos and coordinate their efforts and agree on norms.

But what happens when we are no longer reading from the same script describing reality what is happening in the world and why? My thoughts on this topic were triggered yesterday by a link sent by the FT’s great Izabella Kaminska to a YouTube video by an outfit called Schism discussing this topic and how “consensus reality is manufactured”. The video uses the Balkanisation of reality phrase that is the title of this section. Chilling and compelling stuff – and how on earth does most of society get back on the same page again? The war of narratives will continue and could risk deepening regardless of outcomes, with many believing no matter the result that the election was somehow “stolen”. This is a wild card that could lead to real civil war - like outcomes in the US, not so much in terms of military conflict, but plenty of random violence and even the risk of a constitutional crisis if a single state feels it is not being served well enough by the constraints or norms of the federal system. This is an underappreciated risk.

The ongoing civil war within the two US political parties
It is clear to me that both parties in this election have a serious viability problem. In the case of the Republicans, Trump’s persona has so dominated the party that it is entirely unclear to me what the party becomes after he has left the scene, especially if he receives a thorough drubbing in the Election. But the dedication and enthusiasm of his supporters will remain and get channeled somewhere. Certainly, a new populist right leader will appear and take the mantle abandoned by Trump, and he/she will assume a similar narrative, and who knows, might be more ideologically consistent and less persona-driven. Or was that mostly what Trump is – someone who mostly just makes his followers happy about themselves and angry at those who put them down?

On the left, the Democrats face a civil war as well. It is so painfully obvious that Biden is a compromise candidate of whatever is left of the center of US politics – but those centrist votes are still required to keep the party competitive in a national election. Far to Biden’s left, the progressives will be clamoring for influence, especially if not only a Blue Wave, but a Blue Tsunami is the outcome after the vote. If the progressives over-reach, they could quickly scare the center into abandoning ship, leaving a new partisan environment of the New Republican Party vs. the Progressive Party. Policy making by even a Democratic majority, in other words, may prove far more difficult than many believe.

People call this election an existential one – but maybe the next elections, staring as soon as the 2022 midterms, are likely to be even more existential as we march into what Steen calls the stagflationary “endgame” of the arc of policy from Greenspan through Powell.

US-China disengagement risks
Plenty more on this topic another day as my time has run out – but beyond a possible brief “relief trade” in Chinese and Asian stocks and possibly FX on a Biden victory, we will have to be highly attuned to signals from an eventual Biden administration on all things China and the seemingly inevitable dis-engagement that will unfold in coming year between the two great powers. There are plenty of angles that left populists can also take in deepening disengagement – it is not the exclusive preserve of the right populist.

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