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This week: 2020 Election; Market Flywheel; Strongmen; Reading List.
The outcome of the election is likely to be closer than most observers expected only a few weeks ago. In their view at the time, President Trump’s unusual communication style, his management of the pandemic, the poor economy (notwithstanding the stock market) and the urban protests all seemed to point to a Joe Biden victory in November.
Since then, several factors have emerged however:
1- Biden is an uninspiring candidate, even by the reckoning of many Democratic voters. The final stretch of the campaign is not about ideas but about energy and it requires a prodigious amount of it from both candidates and their staffs. Much will hinge on whether Biden can match President Trump’s high energy.
2- Excitement over the choice of Kamala Harris has waned since the announcement. She seems unpopular with some members of minorities due to her tenure as attorney general of California. She may also have alienated suburban moms and pushed them back into Trump’s column where they were in 2016. Harris’s leftism is of the elite-tinted variety and seems far removed from the more traditional working-class and middle-class leftism of Bernie Sanders or Elizabeth Warren. These factors together may impact turnout in a way that damages Democratic prospects.
3- The street protests that could have been partly laid at Trump’s feet have morphed into something inexplicable and destructive, with looting now considered defensible by some opinion leaders. And of course, no one outside of the lunatic fringe wants to defund the police. This change means that street protests that previously conspired in favor of a Biden victory now conspire against it. Law and order is now the number one issue for many voters and Trump is seen as stronger on this issue.
4- Formerly solid Democratic states are now seen in play, notably Minnesota, a state that has not been in the Republican column since Nixon took it in 1972. The odds are still favoring Biden in Minnesota but the fact that this is even a discussion means that Trump could surprise in more than one place, as he did in 2016.
Biden can still win and most pollsters show that he maintains an edge. But the current momentum and trajectory need to change if he is to translate these predictions into reality on November 3rd.
Analysts are tripping over each other in raising their targets on companies that are hitting all time highs. This mass reaction to the bull market has long been one of the more perplexing phenomena on Wall Street. Under normal conditions, once a formerly set target has been reached, a company would be considered fairly valued and the rating would be downgraded. By simple math and logic, there is less upside than there was a month or six months ago.
But a market bubble is more like a flywheel. When prices go up, analysts take their cues from those prices and from their peers and raise their targets to levels that they would have considered crazy or implausible only a few weeks earlier. This in turn pushes prices higher, leading other analysts to follow suit and to feed the frenzy.
The signs that we are now in a bubble for many names are unmistakable, with for example Tesla and Zoom adding $52 and 37 billion respectively to their market caps in a single day. The speed of these increases is at least as significant as their magnitude, revealing a buying frenzy among investors. Tesla is now pricing $100 billion revenues and 30% gross margins, levels that will not be reached for several years if at all. And Zoom is now valued higher than IBM, notwithstanding that the end of lockdowns and the re-opening of the economy may not create a follow through in its revenues and earnings surge.
Contrary to the common view that larger companies are more efficiently valued than smaller ones, they are from time to time largely mispriced due to peer pressure, a feedback loop and an absence of truly independent valuations. There is research from other fields that we can apply to analyst and investor behavior. We wrote on it in 2014 in Large Companies are Widely Mispriced.
The hope and ambition in the 1990s after the fall of the Soviet Union and in the 2000s during the ascendancy of social media were that laissez-faire, democracy and strong institutions would spread to all corners of the world. No one at the time imagined that these heady decades would spawn the return of strongmen as leaders of several countries. So what happened?
Instead of laissez-faire and good governance spreading from the world’s liberal democracies, cronyism and the concentration of wealth and power spread from resource-rich autocratic countries. A slowdown in population growth combined with a rising dependency ratio led to a deceleration in GDP and increased infighting over a stagnating or slow-growing economic pie. The working class blamed the globalized elite and created an opening for populist strongmen to rise to power. At the same time, those elites responded unwittingly with more cronyism (the equivalent of circling the wagons) and through the use of increasingly unconventional tools of statecraft or economic craft, such as Quantitative Easing (QE), Modern Monetary Theory (MMT) and the like.
This period could last for another decade or more because dependency ratios will continue to rise for the foreseeable future (see charts), putting the breaks on economic growth. This then could be for a while longer the age of strongmen. It will not be without geopolitical consequences as we now see with tensions continuing or rising in the Eastern Mediterranean, North Africa, the China Sea, Belarus, Syria and other places.
We tend to ascribe major historic developments to proximate factors but demographics are often the ultimate determinant, even if rarely the only one.
Recently read and recommended:
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