Q4 brings us a US election cycle like none we have seen in our lifetime

Steen Jakobsen
Chief Economist & CIO

We fear that the US election is the biggest political risk we have seen in several decades, as the end of the economic cycle meets inequality, social unrest and a market feeding frenzy driven by the policy response to this deep economic crisis: zero interest rates, infinite government and central bank support. The massive official backstop, with guarantees for demand and jobs in a world of State Capitalism, means that markets and individual freedom have never been more under attack.

In nature, a pandemic or ecological crisis would have resulted in adaptation. But in our human systems, we are providing all manner of artificial injections of stimulus in a vain effort to pretend that things can stay the same. This is brutally reflected in the two choices for US President American voters are presented with in the November 3 election: very old men with no vision for the future.

Being more practical at Saxo Bank Group, we see three distinct paths and probabilities between now and the Inauguration day on January 20 2021:

1) A contested election – probability 40%   
Results:
Spike in volatility
Sell off in equities due to uncertainty
Weaker US Dollar
Strong Gold


2) A clean sweep by Biden – probability 40%
Results:
Sell off in equities, particularly in technology (tax increases, focus on monopolies)
Rally in green stocks
Higher interest rates as ‘power of the purse’ in controlling both houses of Congress creates fiscal bonanza


3) A win by Trump – probability 20%

Results:
Volatility increases – four more years of disruption to global order
Increased China vs. US tension
Relief rally
Two houses most likely split, which will mean little fiscal stimulus ability

At the time of writing, our probabilities are at odds with both polls and bookmakers. The Biden-Harris ticket is odds-on to win the White House, and potentially even get a clean sweep by winning both the Senate and Congress. The math is seriously stacked against President Trump, even more so than it was in 2016, but when talking to investors around the world we get the feeling that a large majority continues to ‘feel’ and think President Trump will come from behind once again. 

We need to side with science, although this kind of science is flawed. Our job is to define consensus vs. reality and here we feel that the market is not properly pricing in both the risks of a contested result – the biggest risk for the markets, whether as a result of the contest itself or Trump’s objections and attempts to cry foul – or a clean sweep by Biden. Since both are a risk, this means volatility could rise dramatically.

The US uses a system of Electoral College votes where the winner needs 270 votes out of a total of 538 to be elected (with two small exceptions, the majority winner in individual states wins all of the electoral votes for that state, which is how Trump won the 2016 election despite losing the popular vote). Presently, the polls indicate that Biden is at 210-230 electoral votes, with Trump at a sure 110 and the remainder in so-called “battleground stakes”. 

President Trump should not be written off as he can make another comeback if he wins the critical states of Wisconsin, Pennsylvania, Florida and Michigan. Some observers say the election is so close that the ten electoral votes in Wisconsin could make all the difference. 

I need not warn you on polls and the dangers of those, which badly missed the final results in key states in 2016. But as Anders Nysteen explains in his election polls rundown, pollsters are supposedly tweaking their techniques this time to adjust for under-represented demographics such as uneducated white males. Time will tell whether the polls prove more accurate this time – one certain difference is that Trump is far more of a known quantity now. 

The US election will be determined by how many voters turn up on election day. Remember, only about 55% of Americans vote in US elections. Should women and, especially, young people – now an even larger demographic than in 2016 – decide to register and then show up to vote, we see the Biden-Harris ticket’s chances rising significantly, similar to the strong results for Democrats in the mid-term elections of 2018.

Our main message is that the US election will come with increased volatility and risk. Whoever wins will not change the US direction much in aggregate. Both would spend huge amounts of money, both would lean on the Fed for supporting easy financing conditions and neither of them would seek deep reform. So to a large extent, the two Presidential candidates are the diametric opposite of what the US needs.

The US Election of 2020 is the sunset of a political cycle driven more by central banks’ ability to maintain the status quo through zero interest rates and negative real rates than real political reform. Central banks are increasingly impotent, which will mean that politicians will be in the hot seat for bringing the structural changes that a world of too much debt and inequality require. Neither of these two candidates and their intended policy mix is up to the task, but change will come whether they like it or not, and this is certain to prove the last US Election in which a non-visionary President prevails.

My hero Groucho Marx defined politics the best: ‘Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies’.

Do enjoy my talented colleagues’ contributions on the US election.

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