Setting Up for a 2021 BOOM

Happy Friday, 

We wish the First Couple a speedy recovery from Covid-19. Assuming full recovery, the bigger political news is debate/stimulus driven. The debate was a disaster for the President & may have sealed his political fate. Post-debate polling moved sharply in favor of both a Biden W and a Democratic sweep of the Presidency, House, and Senate.

Thus all the angst over when the election results will be known (well deserved given the President's comments) may well be for naught as the bigger the Biden margin of victory, the less likely any drawn out affair. With a month to go and voting underway in many states, a quarantined president is unlikely to make up lost ground.

Odds are rising that the results will be known either the night of Nov 3rd or on the 4th… as we said last week, watch Fla - if it goes for Biden, then the electoral math doesn't work for Pres. Trump. The Green Energy complex in the US is already starting to price in a Biden win. Check out this week’s action in QCLN, ICLN, BLNK, etc.

Turning to the stimulus talks, the failure to agree is eye opening as passage would seem critical for the President’s chances. The House passed a $2.2T bill but Senate Republicans are balking which begs the Q of whether they are cutting the President loose. It also begs the question of what they are going to campaign on.

Near term, this may matter - longer term we don't think it will. We expect post election stimulus regardless of the victor, coupled with rapid testing/therapeutics and a vaccine in the coming 3-6 months. (Recent reading suggests that infectious disease vaccines in stage 3 trials have an 85% chance of approval).

A synchronized global economic recovery coupled with record setting liquidity & awaiting a vaccine could set off BOOM conditions next year.

The divergent results between a goods producing recovery & stagnating services remain something to watch. It's important to note that durable goods data reflect both lack of inventory as well as surging demand for homes, furnishings & autos, especially in the US. Demand which has much greater multiplier effects on the broad economy than do services.

We continue to be on the lookout for US inflation signals as pent up demand (US personal savings rate @ 14%, record household net worth, household debt as % of disposable income at 20 yr. low, etc.) meets inventory shortfall.

This scenario suggests long US rates are at riskto asharp backup; risk-reward seems quite unappealing - today’s selloff on Trump news & weak jobs # is telling. The MOVE index (UST volatility) hit a 20 yr. low last week - unsustainable…next elevator up?

 A vaccine or Dem sweep would do the job. Rates are the fulcrum for the Rotation Trade, the upending of risk - parity, 60-40, etc. Higher rates catalyze the Equity Rotation Trade (from Tech to Finance) & capsize the historic Sovereign long bond rally.

Furthermore, banks have been huge buyers of UST - as the economy improves & credit demand grows, their UST appetite will fall while supply remains gigantic. The days of stocks & bonds rallying together are over.A 10 yr. UST rate over 1% & 30 yr. approaching 2% by YE is quite feasible.

The next non-US data point to watch is China travel and spending over the National Day holiday week which should give a real-time update of the Chinese service/consumer segment. August retail sales in both Germany and Holland were quite strong while September EU econ conf #s hit a 6 month high - 2nd wave headlines over the top?

Speaking of Europe, the latest inflation data suggests the ECB is not joking when it says it is thinking about joining the Fed in the Alternative Inflation Targeting (AIT) regime. EU Core inflation hit +0.2% y/y last month, a new record low. The RMB might end up being the only strong FX around...

Enjoy the Bloomberg TV clip - in case you need more support for the “Screaming buy” thesis note that HSBC, EUFN’s 2nd largest holding, is sporting a double-digit dividend yield (assuming ECB allows for dividend pay out next yr.).

Please note no Musings next week - will be ruminating among the mountains on a Fall foliage trip!

TGIF!