Big Stakes
1880 words – a 5 minute read.
Halloween is almost upon us and as we wrote last week in Spooky Season the swirl of dis/misinformation continues. One thing is pretty clear though, there are big stakes at play. The obvious one (to an American at least) is the fate of our democracy is up for grabs on Nov 5th. I am excited to note I will be guest hosting on BTV’s Election Night Special from 11-12 pm so will have a ring side seat.
But that’s not all that’s at stake as we enter November. China’s National Peoples Congress (NPC) meeting is set for Nov 5-8th and given this is the body that has the power to pass the fiscal spending measures investors are looking for its high stakes indeed. Thus the world’s two biggest economies are facing big moments.
Less heralded but still important is Japan’s Lower Diet elections this weekend which are not expected to bring about material change. We do expect a read on the current state of voter appetite for the policy changes needed to cement the country’s exit from deflation. $/Yen has rallied roughly 8% MTD which is the biggest monthly move in almost 30 years – stretched city.
Finally, there is earnings season to consider, what we at TPW Advisory think is perhaps the most important stake of all for investors, if not citizens. Yes, it’s all about the E as we never tire of noting. So far, this earnings seasons continues to support equities with a 75% beat ratio for S&P 500 members with EPS growth at roughly 4-6% Y/Y. Next week brings some 40% of the S&P index constituents into the reporting booth where investors will vote on whether the outlook is good or bad.
Notwithstanding all the knife edge, too close to call and tied into the final week media spin we continue to expect VP Harris to win handily. We expect her to win the popular vote in a landslide & by a wider margin than Pres. Biden did 4 years ago. The Electoral College vote remains more important and more difficult to handicap. If you think the market knows all John Kolovos at MRA notes: “Using data back to 1900, gains in October typically result in the incumbent party winning.”
We continue to expect Harris to win a number of the swing states including NC, Ga, PA and Florida. Early voting polls suggest significant independent voters for Harris across Arizona, Georgia & North Carolina with both parties reporting strong early voting across the swing states. I was in NC last weekend and visited a buddy in Cary. En route I saw 25 Harris signs to one Trump sign; the word on Duke’s campus is student energy and voting intent is high. Keep in mind that this year there are roughly 15 M more potential Gen Z /Millennial voters than Boomers.
It remains to be seen how much we will know on Election Night. Recent history suggests we might not have a definitive call for a day or two though much could change if the turnout is as robust as we expect. Note 2020 was called for Biden after 4 days, 2016 called for Trump after one day. Here’s an interesting data point from Republican strategist Bruce Mehleman: “Recounts Are Rare and They Rarely Reverse Outcomes. 99.5% of statewide races do not get recounted. Of the 0.5% that are recounted, 92% don’t reverse the initial outcome. So if Trump or Harris is leading by more than 0.1% after the initial count, the odds are overwhelming (99.957%) their lead will hold.”
The policy differences between the two candidates are quite broad with Harris continuing the Biden Harris public private partnership mix that brought about the Chips Act, Infrastructure Act and IRA, all of which have had and will continue to have big impacts on the US competitive position. The WSJ: “According to the IMF, U.S. gross fixed capital formation—a broad measure of investment—will rise 4.5% this year from 2023, more than triple the rate for all advanced economies.”
More concretely, TSMC just announced that its new Arizona fab plant is running AHEAD of its domestic Taiwanese production quality, something quite unexpected. We also note the Biden Admin’s announcement this week of AI as a national security imperative. This reinforces our long held position that “sovereign AI” is something every major country has to have and thus will spend large amounts of money on, along with Climate mitigation and Defense, reinforcing the new industrial policy age we discussed in our 2025 Outlook.
The Trump policy mix on the other hand has been subjected to a fair amount of scrutiny and the results are not pretty. Bloomberg noted this week that the Trump policy mix would explode the deficit, spike inflation and crush growth. The growth crush is huge, namely a reduction in GDP of almost 9% over the next several years driven mainly by the mass deportation strategy that will upend the labor market coupled with blow out deficits & spiking tariff rates; all of which will lead to sharply higher inflation and interest rates. To put that 9% GDP decline in perspective its roughly twice what happened in the GFC. Beyond all the fascist rhetoric, its quite hard to see the appeal.
We noted the betting markets and Economist cover curse last week. Here’s a bit more on both. John Arthurs of Bloomberg notes on Polymarket. “Think of it this way: If Trump is trading less than 66%... toss up. In football, he has less than a three-point lead (so a stop and Harris field goal wins). Trump has not traded above 66% in any market since Biden quit (he did in the days before Biden dropped out).”
Her's Dr.Ed Yardeni on a study of the Economist cover curse: “They selected 44 cover stories that had either an optimistic or a pessimistic point. They found that impactful covers with a strong visual bias proved after one year to be contrarian 68% of the time. That’s high enough to suggest that market watchers should keep the front-cover curse on their radar.” Recall our reference was to the recent USD rocket cover. We’ll take the contrarian side.
From a market POV, two assets that seem to be moving on supposed rising chances of a Trump win are the USD and Bitcoin. The dollar is up almost 4% over the past month which is among its best moves in the past two years (DXY). This has a lot to do with the spike in long rates with the 10 yr moving from 3.6% to almost 4.2% in just a month or so in line with Trump Polymarket odds which suggests at least a few folks have looked at the Trump policy mix.
We have the view that a Trump W could crack the USD given how massively oveowned and expensive it is with foreign investors having piled into USD assets over the past few years fleeing the chaos. This is a distinct minority view as many see the set up described above as dollar positive with most big Wall St firms saying a Trump W = USD strength. JPM expects a 7% USD TWI pop on a Trump win and a 5% decline if Trump loses.
We can debate that but what is quite likely given the USD rally of late is that a Trump L will likely cause rates to fall, the USD to weaken as well as some BTC weakness. Given our long cycle view and continued global liquidity a BTC selloff could present an opportunity while rate declines & USD weakness would support our thematics, EM debt and equity positions. Dr. Ed notes: “While EM currencies have slipped against the dollar in the past few weeks, they're still stronger than at any time in history.”
More broadly there has been a ton of work done on post election market movement and how to play it as an investor etc. We are not sure how much validity these efforts have given the unique characteristics of the huge policy gap between the continuity presented by a Harris win vs the policy discontinuity not to mention the chaos likely to be unleashed by a Trump W.
As such we want to stick to our existing outlook for economic, political and policy continuity across the Tri Polar World as a solid backdrop for a maturing equity bull market. We note the typical 3rd yr rest period for US equities which suggests a great setup for ROW equity as we discussed last week.
This is where China and its big stakes NPC meeting come in. We believe Pres. Xi realizes an export dependent economy is not ideal when a “Tariff is my favorite word” US Presidential candidate could take office. Its very clear what China needs policy wise to sustain its growth path. BBG notes: “The recent policy pivot centers around three aspects: The government is planning to improve municipal finances and fire up local fiscal power, buy unsold homes to stabilize property prices, and capitalize big banks so they are willing to lend in a weak economy.”
We believe that policy shift is under way to a more demand driven, consumption based Chinese economy. BoFA notes: “China consumption as % of GDP very low 39% vs EM peers (Mexico 70%, Brazil 63%, India 60%)”. We believe it’s a scale & speed question not an if question. As such left tail risk has been eliminated and valuations remain compelling, especially in the China tech space.
At the end of the day the path of global equities is tied most closely to earnings and here we expect the news to remain positive. Not just in the US but globally. 12 Month Forward EPS for the US and Asia continue to suggest double digit EPS growth while Europe is in the high single digits. Hard to see material equity weakness with that backdrop, 2025 outlook key.
With global growth running at 3% or so (sounds low but not when one remembers G7 potential growth is 2% or below), low inflation, rising liquidity and a global rate cutting cycle we like the backdrop. Add in new forces like AI driving potential productivity growth & sustaining the high corporate margins which underpin high US PE, we look expect a solid outlook for global risk assets in 2025.
Our focus remains on US Cyclicals & SCs, non US equities and credit together with laggards such as thematics and Commodities. With November’s arrival comes the best 6 months to own stocks – tail wind while over the past 30 years ( ex 08) the VIX has averaged under 14 at YE (19 now). JPM notes that: “even in election years, the fourth quarter is still the second best-performing quarter on average.” Stay the course.
TPW Advisory will be travelling next week so no Musings next Friday. Check us out on BTV Nov 5th at 11 pm thru midnight.
Big Duke football game Saturday night under the lights at Wallace Wade when top 20 SMU comes to the Bull City. A W here and a 7-1 record might even mean some respect from the national pollsters and a Top 25 ranking for the Duke Blue Devils! LFG!