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Editor's Note:

Investors may be cursed to be living in interesting times, but they may have taken their eye off the ball that matters. In today’s Macro Briefing Cornerstone Macro argues that investors are looking at the wrong risk as far the US election is concerned, and that with Trump effectively out of contention, they should be focusing on the extent of a Biden win. Ollari Consulting also raises doubts over the Trump’s latest attempt to shift blame and throw the race into turmoil by scrapping talks over further fiscal stimulus, arguing it is a risky strategy that is likely to fail. Meanwhile, TrendMacro have hosted a call with Richard Pildes of the NYU Law School, to talk about what might still happen between now and election day from a constitutional and legal angle while Goldman Sachs looks at the interaction between the election and the availability of a vaccine and what it means for asset allocation. Elsewhere, MI2 Partners follows up with their work on tightening credit conditions in the US, this time focussing on Europe where signs of optimism in the eurozone economy could spell the end for decades of US exceptionalism.      
  1. Ollari Consulting

    1. Wild foxes run fast – and even faster when on steroids

    Christophe Ollari at Ollari Consulting has given his take on Donald Trump’s declaration that US stimulus talks are dead just three days after imploring lawmakers to strike a deal. He says Trump would have found it too tempting not to create chaos given his increasingly desperate situation just four weeks out from the election – not to mention pass up an opportunity to try and blame the Democrats, and in particular Nancy Pelosi, for the impasse.  However, with the announcement coming just hours after Federal Reserve chairman Jerome Powell issued a clear warning over the dire consequences for the economy if more stimulus didn’t materialise, Ollari says Trump’s desperate attempt to turn the election boat by creating chaos and looking to deflect blame is a risky strategy that is likely to fail. He says the comments do not change his view that in the medium term a partnership between the Fed and the US government and the delivery of more fiscal stimulus is inevitable, but in the meantime with just four weeks to go before the election investors should expect the unexpected from an erratic – and steroid driven president – which likely points to a bumpy road ahead for investors.

    The key risks, says Ollari, are more permanent damage and private economic agents exiting COVID in a much more leveraged state, therefore raising the balance sheet’s recessionary Damocles Sword (post-crisis forced deleverage) with a banking system limited in its ability to provide credit to a recovering economy. There are three certainties though, says Ollari. No fiscal now means much more fiscal after with the FED forced to keep rates as low as possible for longer (reducing debt servicing burden) whilst also avoiding any bond tantrum, requiring a gigantic warehouse for public and private debt. That means only one thing, the Fed’s balance sheet is set to rise even more.

  2. US presidential elections Cornerstone Macro

    2. Challenging the shifting election consensus

    In a note published prior to Trump cancelling the Phase 4 Cornerstone Macro’s Andy Laperriere wrote that investors are focused on the wrong post-election risks. These include far-fetched scenarios of the president sending in the army to seize disputed ballots, GOP state legislatures trying to seat pro-Trump electoral college slates in states he lost, or the president refusing to relinquish power, which he says are nonsense. In the note Laperriere says Trump is going to be defeated decisively. The real post-election uncertainty according to him is likely to focus on whether Democrats have a majority in the Senate and, if so, how big the majority might be. He notes more and more clients believe a Democratic sweep scenario will be good for financial markets, and concedes it is possible the market could rally after a Democratic sweep in the expectation of large fiscal stimulus and misguided hopes Democrats won’t follow through with the tax increases on corporations, investment income, and upper income individuals. Such thinking is likely to eventually confront some uncomfortable arithmetic, however, according to Laperriere. Regardless of the short-term market reaction, he says, a Democratic sweep is very likely to greatly reduce the after-tax return of owning stocks, which should put downward pressure on stock prices. In a follow up note today, Laperriere says he has significantly lowered the odds that President Trump will win reelection and has raised his odds of a Democratic sweep to over 50/50.  Meanwhile, the odds of a phase four economic package coming together before the election have declined dramatically, obviously.
  3. US presidential elections TrendMacro

    3. Us elections and constitutional questions

    TrendMacro have been hosting a series of expert calls on the US elections recently with their latest held today, where they hosted Professor Richard Pildes of the NYU Law School to talk about what might still happen between now and election day if any of the presidential or vice-presidential candidates had to be removed from the ticket. He’ll also talk about issues in the election itself, such as heavy reliance on mail-in ballots, and new voting structures such as Maine’s controversial “ranked-choice voting” system – and, of course, what would happen if this election is recounted, contested, litigated and delayed. Click below to reach out to Trend Macro directly if you’d like access to the recording of the event.
  4. COVID vaccines US presidential elections Goldman Sachs

    4. A cross-asset view of the impact of vaccines and the election

    Dominic Wilson at Goldman Sachs has produced a simple, stylised approach to analysing the risks across key markets from the two main events that are likely to dominate markets from here to year end: a potential COVID-19 vaccine and the US presidential election. His analysis suggests there is significant further upside risk to equities and cyclical currencies from an early vaccine approval, but real downside risk should early vaccine not materialise, given the extent to which it has already been priced into markets. Asset outcomes vary across election scenarios and sequencing of policy priorities, according to Wilson. His results show that a continuation of the status quo results in modest dollar strength and higher equities, a Democratic sweep where the market prices in the cyclical boost from fiscal stimulus results in higher equities and longer-dated-yields, and broad dollar weakness, and that a Democratic sweep where the market does not initially give credit for fiscal stimulus leads to modestly weaker equities, and broad dollar weakness. Early vaccine approval could ultimately dominate the election outcome, adds Wilson, whose results when looking at joint outcomes across both risks show higher equity values for all election variants in which early vaccine approval comes and lower equity values in all in which a vaccine is delayed.  Click here to contact the provider for the full report, including the likely effect on emerging markets.
  5. credit conditions Europe MI2 Partners

    5. While credit vice tightens in the US, in Europe….

    Late last month, we highlighted the work of Julian Brigden from MI2 Partners that chronicled the multiple pinch points in the US credit system where conditions were tightening and threatened to snuff out the recovery. Brigden is back with his analysis on Europe, where he has produced a pictorial overview of the eurozone economy at a potentially pivotal time for global markets. The eurozone, he says, is no Xanadu, but after a decade in which, on virtually any metric, US assets have outperformed their peers, if this were about to change, the implications would be profound. Indeed, Brigden says all that is needed to shift investor preference and undermine US exceptionalism is for a bout of relative eurozone outperformance. There are, he says, clearly areas of concern in the eurozone, especially in terms of the domestic economy and the risk that unemployment starts to move higher. However, Brigden says there is no question that into 2021, the export-orientated economies of Northern Europe are likely to deliver a real punch. He says it is also true that perversely, thanks to the existing weakness in the eurozone banking system, the ECB has already been forced to “socialise” lending and as a result, private-sector lending, while slowing, hasn’t collapsed. That’s in marked contrast to the US, notes Brigden, where the credit contraction looks as sharp as during the GFC. He says this suggests a continued narrowing of US/eurozone growth differentials and is likely to raise further questions about the sustainability of the US exceptionalism trade.