Quantitative & Strategy Cam Hui, CFA [email protected] WHAT WOULD A BIDEN PRESIDENCY LOOK LIKE? June 8, 2020 Table of Contents EXECUTIVE SUMMARY Joe Biden has officially clinched the Democratic nomination for president, and his odds of Discounting a Biden Win .......................... 2 winning the Presidency in November have been steadily rising, and he is now at 54% on PredictIt. As well, the consensus view has the Democrats retaining control of the House. The Law and Order Card.......................... 4 The PredictIt odds the Democrats gaining control of the Senate has been steadily improving over the past few months, and now shows a slight edge for the Democrats. In Biden’s Economic Policy .......................... 6 the case of a 50–50 divided Senate, the Vice President casts the tie-breaker and the winner of the White House has control. The Rise of the Bomb Throwers ............... 8 While this is not meant to be an endorsement of any candidate or political party, it is time Health Care Policy ................................. 10 to contemplate what a Biden victory might mean for the economy and the markets. If Biden were to win, there is also a decent chance that the Democrats might capture control of both Trade: The Silver Lining ......................... 11 chambers of Congress. How should investors react to that outcome? We believe a Biden victory should be a net mild negative for equity prices. Much depends on the degree of control by the Democrats should Biden win the White House. The chance of a Blue Wave sweep is possible, and it would embolden the progressives within the Democratic Party to steer policy further to the left with bearish consequences for the suppliers of capital. Confidential — Do not duplicate or distribute without written permission from Pennock Idea Hub Cam Hui, CFA | [email protected] Page 1 June 8, 2020 Quantitative & Strategy Discounting a Biden Win Joe Biden has officially clinched the Democratic nomination for president, and his odds of winning the Presidency in November have been steadily rising, and he is now at 54% on PredictIt. For the uninitiated, the contract pays off at $1.00 if a candidate wins, so buying the Biden contract at $0.54 implies a 54% of a Biden victory. Exhibit 1: Presidency Betting Odds Source: PredictIt The consensus view has the Democrats retaining control of the House. The PredictIt odds of the Democrats gaining control of the Senate has been steadily improving over the past few months, and now shows a slight edge for the Democrats. In case of a tie, the Vice President casts the tie-breaker and the winner of the White House has control. Cam Hui, CFA | [email protected] Page 2 June 8, 2020 Quantitative & Strategy Exhibit 2: Senate Control Betting Market Source: PredictIt While this is not meant to be an endorsement of any candidate or political party, it is time to contemplate what a Biden victory might mean for the economy and the markets. If Biden were to win, there is also a decent chance that the Democrats might capture control of both chambers of Congress. How should investors react to that outcome? Cam Hui, CFA | [email protected] Page 3 June 8, 2020 Quantitative & Strategy The Law and Order Card In response to the current bout of unrest, President Trump has played the law and order card to assert control of the situation. This could be evocative of Richard Nixon’s successful 1968 campaign to win the White House based on a similar law and order theme. For those who can remember, 1968 was marked by incredible political turmoil, marked by: The Tet Offensive in the Vietnam War, which broke the illusion of a quick victory. LBJ’s surprising address to the nation, in which he stated that he would not run for another term. The assassination of Martin Luther King, Jr. The assassination of Robert Kennedy. The riots outside the Democratic Convention in Chicago. Nixon’s gamble worked, and he won. Moreover, the stock market shrugged off most of these events and rose in 1968. Exhibit 3: The S&P 500 Shrugged Off Political Turmoil in 1968 Source: StockCharts Could Trump repeat the Nixon experience? Probably not. A recent Morning Consult poll showed that the law and order stance (or at least Trump’s version) is not playing well with the electorate, and an ABC-Ipsos poll came up with similar results . When asked if the respondent approved of President Trump’s handling of the protests and demonstrations in response to the death of George Floyd, the spread between “Excellent/Very Good” and “Only Fair/Poor” among all registered voters was -35%. Even among respondents who already approve of Trump’s performance the spread was only +29%. Normally, he should be winning this demographics by 50% or more. Cam Hui, CFA | [email protected] Page 4 June 8, 2020 Quantitative & Strategy Exhibit 4: Approval Rating of Trump’s Handling of the Protests Source: Morning Consult Even among evangelical voters, which have been a bedrock of Republican support, the spread was -13%. Fox News report that 700 Club evangelical leader Pat Roberson chided Trump’s actions as “not cool”. Evangelical leader Pat Robertson criticized President Trump Tuesday for berating governors and threatening to deploy the military amid the racially charged protests and riots sweeping the nation following the death of George Floyd. “It seems like now is the time to say, ‘I understand your pain, I want to comfort you, I think it’s time we love each other,’” Robertson said on “The 700 Club.” “But the president took a different course. He said “I am the president of law and order” and he issued a heads-up. He said, “I am ready to send in military troops if the nation’s governors don’t act to quell the violence that has rocked American cities.” Matter of fact, he spoke of them as being “jerks.” You just don’t do that, Mr. President! It isn’t cool!” The law and order card isn’t working, and Trump’s support is eroding. There are five months until the election. While five months is a long time in politics, current polling is not favourable for Trump’s electoral chances. Cam Hui, CFA | [email protected] Page 5 June 8, 2020 Quantitative & Strategy Biden’s Economic Policy For investors, the most important focus is economic policy. While we don’t know the exact makeup of Biden’s economic team, we can get some clues of the philosophical direction by analyzing the writings of Jared Bernstein, who was Biden’s former chief economist. Bernstein penned a Washington Post OpEd in December outlining what he believed to be the “big economic lessons of the decade”. He followed up with further details in a blog post, with our interpretation in brackets. The unemployment rate can fall a lot lower than most economists thought without triggering inflationary pressures (run a hot economy, keep rates low). Budget deficits cannot be assumed to place upward pressure on interest rates (implicitly supports Modern Monetary Theory, or MMT, which states that a country can borrow in its currency as long as the bond market signals support). Weak worker bargaining power has long been a factor driving inequality. In the last decade, the increasing clout of certain employers has joined the mix (expect the returns to capital to compress, and the returns to labor to rise). Progressive health care reform, wherein the government plays a larger role in coverage and cost control, works (support expansion of Obamacare, and Medicare for All remains an open question). [Lesson re-learned] Trickle-down tax cuts don’t work (watch for higher taxes). Antipoverty programs don’t just reduce poverty today; they improve the outcomes of their beneficiaries many years hence (bad news: higher taxes, good news: more spending by lower income Americans to support growth). The most immediate effect of these implicit policy prescriptions is higher taxes and lower operating margins from inequality initiatives. The Trump tax cuts of 2017 boosted earnings by 7–9%. While Biden’s official position is he will unwind some, but not all, of Trump’s corporate tax cuts, expect greater regulatory burden and inequality policies such as higher minimum wage laws to cut into operating margins under a Biden Presidency. Pencil in a $10–$20 cut to S&P 500 2021 earnings from Biden’s tax policy. Cam Hui, CFA | [email protected] Page 6 June 8, 2020 Quantitative & Strategy Exhibit 5: Trump 2017 Tax Cuts Will Be Largely Unwound Source: FactSet Information Systems, Pennock Idea Hub Longer term, the following are all likely under a Biden presidency, and they are not mutually exclusive. Higher taxes for both individuals and corporations Profit margin compression from higher labour costs Higher GDP and sales growth from a broadened consumer base Until we know the exact makeup of Congress and the cabinet, it is impossible to forecast the exact magnitude of those factors. Cam Hui, CFA | [email protected] Page 7 June 8, 2020 Quantitative & Strategy The Rise of the Bomb Throwers Should the Democrats win in a landslide, or Blue Wave, and gain control of the White House, the Senate and the House of Representatives, there is a distinct possibility of a radical shift in the Overton Window, or the range of acceptable political discourse. A Blue Wave would embolden the progressive wing of the party to bring in the radical thinkers and metaphorical bomb throwers into government. One of the leading candidates for a bomb thrower to challenge orthodoxy in a Biden administration is Stephanie Kelton, who is a leading advocate of MMT. As I pointed out before, MMT postulates that a country can borrow in its currency as long as the bond market signals support.