Wednesday Briefs – 23 September 2020

A weekly commentary on current events. Follow populyst to receive notification.

This week: Coronavirus – Europe and USA; Supreme Court options; Markets in the fall; Reading List.

Coronavirus – Europe and USA

Nearly all European countries are experiencing another wave of coronavirus cases. In Spain, daily cases have reached the March peak of 10,000+ and are now fading back. The UK and Austria are at or near their spring highs. In France, daily cases have far surpassed the spring levels and now stand near 13,000. The increases in Italy, Germany and Switzerland are more subdued than in the spring but are still ongoing. More reassuring, the number of daily deaths in all these countries remains very small (even accounting for a time lag), from single-digits in many places to a few dozens in Spain and France, compared to hundreds daily in the spring.

In the Nordic countries, Denmark, Finland and Norway have seen case increases but Sweden so far has not (see chart). It is too early to draw conclusions but it is possible that Sweden’s policy of avoiding lockdowns in the spring is now paying off, if the country has achieved a higher degree of immunity than its neighbors.

In the July 29th Wednesday Briefs, we speculated that a typical wave lasts five to seven weeks from onset to peak. If this is so, most of these countries should be peaking in the not so distant future.

In Eastern Europe, Russia and Poland are seeing small increases since the beginning of September, while the Czech Republic is seeing more cases this month than previously.

The US is entering the fall season with the lowest positivity rate (those testing positive as percent of all tests) since June, a helpful starting point if we are destined for another wave when temperatures cool. New York State looks good so far with a positivity rate around 0.9% but the real test will come in late September and early October after public schools reopen on 29th September for partial on-site teaching. That date has been pushed twice and could be pushed again. Meanwhile, thousands of private school students have already been back in their school buildings for several weeks with no visible impact on infection rates so far, an encouraging but inconclusive sign.

Supreme Court Options

The passing of Supreme Court Justice Ruth Bader Ginzburg raises the temperature in the current electoral campaign. The President has already stated that his choice to succeed her “would probably be a woman”. Among possible nominees are Justices Amy Barrett and Barbara Lagoa. Here is a brief report on both from Reuters:

Barrett is a devout Catholic and mother of seven and was a law clerk for the late Antonin Scalia with whom she is seen as ideologically aligned. Lagoa hails from Florida where she served on the Supreme Court before becoming a Federal judge. In our view, the more likely nominee is Lagoa because she is from Florida, a crucial swing state, and would play better with late-deciding independents. Although Barrett has more appeal for the Republican base, naming her could backfire on Trump by galvanizing and drawing to the ballot larger numbers of Democratic voters.

We wrote on the closeness of the Florida race in last week’s Wednesday Briefs and in this county analysis.

Markets in the Fall

The market sell-off that we foresaw in the September 2nd Briefs is continuing. The S&P 500 is now barely positive in 2020, after being up 5% year to date (ytd) in February, then down 32% ytd (a 35% drawdown from peak) in March then up 11% ytd (a 63% surge from bottom) in early September. Meanwhile the Nasdaq is now still up 20% in 2020, after being up 11% ytd in February, then down 24% ytd (a 31% drawdown) in March then up 42% ytd (an 86% surge) in early September.

The tech giants that led the March to September rally have all retreated over 10% since their summer highs but they are still positive ytd.

It is unlikely that a full recovery will take place before the outcome of the presidential election is known. The race is close enough that a Biden victory is a very real possibility, an event that would lead to a market sell-off at least in the near-term. The longer-term path will be easier to project after all results are known, the most market-negative combination being a Biden win and a Democrat-majority senate.

The increase in mail-in ballots, in part driven by the pandemic, adds another complication. With President Trump stating repeatedly his lack of confidence in the integrity of these votes, it is not difficult to paint a scenario of a contested outcome.

Another upcoming milestone will be the results of phase 3 trials for vaccines likely to be released before the election. Obviously, success would be supportive of the market, albeit to a limited extent because success is already largely assumed and priced in. On the other hand, disappointment would lead to more downside and a sense of disorientation among investors because our ability to get past the pandemic would be delayed by many months.

With all the uncertainty and possible erosion of trust, it is easy to see gold making new highs in the coming months. The near-term may be clouded by margin calls and “sell what you can” trading as we saw on some recent days but Ron Swanson may yet smile to the end of the year or beyond.

Recently read and recommended:

From curfews to calling in the army, here’s what Europe is doing to tackle its coronavirus surge

Airbus reveals new zero-emission concept aircraft

Xbox Game Pass subscribers jump 50 percent to 15 million in less than six months

Trump administration announces $13 billion in additional aid to Puerto Rico

Blank-check firms look to raise $2 billion through IPOs

Growing number of airlines offer ‘flights to nowhere’

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Florida in the Election

A French version of this article appears in L’Express.

Former mayor Mike Bloomberg has announced that he would spend as much as $100 million of his own money to help Vice-President Biden prevail in Florida on Election Day. This underscores once again the importance of Florida in this and every presidential contest.

Florida has a good track record of picking the winner in a presidential election. With the messy 2000 contest between George W. Bush and Al Gore, the state gained prominence as the ultimate prize and must-win battleground. To be sure, it is not a perfect track record, given that Florida favored George H. W. Bush in 1992 and Richard Nixon in 1960 over winners Bill Clinton and John Kennedy. If you go to earlier times, you also find that Floridians misfired with John Davis and James Cox in 1924 and 1920, two unknowns today except among aficionados of electoral history. But in sum, four misses out of 25 elections over a century can indeed be called a strong track record.

The stakes are high in 2020 given the state’s 29 Electoral College votes and the tightness of the race according to the polls. Vice President Biden is now nominally ahead by 1 to 3%, an insignificant gap that can easily close or widen in the remaining days of the campaign, depending on a slew of factors, not least the performance of each candidate in the upcoming debates.

In 2016, candidate Trump won the state by a plurality of 48.6% to Hillary Clinton’s 47.4%, a lead so slim that it would not be deemed meaningful in a poll today. In the same pattern seen across other states, Clinton carried the large urbanized counties encompassing the Miami-West Palm Beach corridor, Orlando, Gainesville (home to the University of Florida), Tampa and Tallahassee while Trump swept all rural states and also managed to prevail in some smaller cities such as St Petersburg, Fort Myers and Jacksonville. In 2008 and 2012, Obama won Florida by margins of 2.5% over John McCain and 0.9% over Mitt Romney, with roughly the same urban-rural divide as in 2016. There is little doubt that the map will look the same in 2020, with some variances that may or may not in the aggregate tip the state to the Democrats.

2020 vs. 2016

The questions then are what has changed since 2016 and are these changes important enough to overcome other factors?

ONE, the population of Florida has grown by about 5% from 20.6 million in 2016 to an estimated 21.6 million in 2020, with over 90% of this growth coming from migration from other states and from foreign immigration. Owing to the large number of older people, Florida’s natural growth rate (births minus deaths) only adds about 20,000 to the population annually. The overall population growth is neutral or marginally positive for Biden as most migration originates from blue Northeastern states or from Puerto Rico and Latin America.

It is estimated that over 100,000 Puerto Ricans relocated to Florida (and many more to other states) after hurricane Maria devastated the island in 2017. Assuming that they vote, they could make a difference for Biden in a close election, given that not all are pleased with President Trump’s handling of Puerto Rico in the days after Maria. More broadly in other US states, the Hispanic vote would favor Democrats but the case of Florida is complicated by a large contingent of Cuban-Americans who generally prefer the harder line Republican stance towards the Cuban regime.

TWO, the number of people aged 64 and over has grown faster than other age groups, which means that Florida has gotten older since 2016 and will continue to get older. In theory, this would benefit the President because he usually polls better with older age groups but the change does not seem significant enough to neutralize the margin of error or other factors. Still, it can be considered a net plus for Trump on the margin. And in Florida, everything on the margin can make a difference.

THREE, the number of people declaring no party affiliation has continued to grow, an indication that independents could weigh more in this and future elections. They tend to make up their minds in the final weeks of the campaign in October and early November, a delay that increases the possibility of earlier polls being wide off the mark. This is of no particular advantage to either candidate but adds uncertainty to the current polls.

New Factors

Among non-demographic factors is of course the coronavirus pandemic. It hit Florida severely in the summer and has caused nearly 13,000 deaths so far. Because the state sees over 200,000 deaths in a typical year, these excess pandemic deaths add 6 to 7% to the total, an incidence that is tragic for the next of kin but that can go largely unnoticed by the vast majority of people whose families were untouched. In addition, a sizable segment of Trump supporters see the pandemic as a hoax or at least an exaggeration, a stance that binds them to the President whom they see as a bulwark against the spread of conspiracies by the nefarious (in their view) elite media. In the end, the pandemic is likely to prove neutral for both candidates, with each constituency looking at it through its own political lens.

More important are the economic consequences of the pandemic. Florida was hurt by the shuttering of several sectors, not least travel and hospitality, two of the pillars of the state economy. But here again, some people will blame the President for mishandling the crisis while others will blame alarmist elements of the media and elites for encouraging a lockdown in this or other parts of the country. The notion that the lockdowns were more damaging to the economy than the pandemic has many adherents in Florida and other states, including among some well-heeled researchers and academics. Because Trump is blamed by some for the mishandling of the pandemic and Biden is seen by others as more likely to impose future lockdowns, the impact of the pandemic economy on electoral choices is likely a wash.

Taxation policy may shave some points off the Biden appeal since Florida is known as a state where people go not only to retire but also to save on their tax bill. The Democrats’ proposals to raise income tax rates and in particular their plan to make capital gains tax rates equal to those on earned income will not make many fans among older Floridians living off their investment portfolios. Tax policy is a likely negative for candidate Biden.

County by county

Looking at 2016 for more granularity, we find that racial identity was significantly correlated with a county’s results, tempered in a few cases by the county’s percent of college graduates. In 2016, the percentage of non-Hispanic whites correlated with the county’s vote: if it was over 55%, the county went to Trump; under 55%, it went to Clinton. In the table below therefore, the red line is the 55% demarcation. In theory, all counties above the line would have gone to Clinton and all below to Trump.

There were 10 exceptions that did not conform with this rule however. In 9 of them, there was another important correlation and it was to education. Trump won seven of these counties (yellow in the table), or where the percentage of college graduates is well below Florida’s average. Whether by instinct or through campaign analytics, Trump was right to “love the poorly educated” as he had said in Nevada in 2016. Meanwhile, Clinton won the two counties (green in the table) where that percentage is well above the state average. The remaining one exception (blue in the table) is Duval county (city of Jacksonville) where a concentration of military bases and of veterans helped Trump prevail by a thin margin.

(click on the table to enlarge).

Projecting these results on 2020, we can assume that the percentage of non-Hispanic whites in any given county will again correlate strongly with that county’s results. Whether the demarcating number will still be 55% depends on whether Trump’s appeal has gained or lost ground among this group since 2016. If this dividing number turns out to be closer to 60% this time around, Trump would lose many voters in populous counties such as St. Lucie, Leon, Polk and Collier. On the other hand, if the demarcation is closer to 50%, Trump’s lead would end up higher in 2020 than in 2016 in particular by reducing the Democrat lead in Palm Beach county.

Further, in 2016, the poorest counties all went for Trump. Of all counties where the poverty rate is higher than 20%, Hillary Clinton won only Leon where the percentage of college graduates is very high at 45.7% and Gadsden where the percentage of African-Americans at 56% is the highest of any county in the state. Biden’s brand of politics is more populist and working-class than Clinton’s and it will likely reduce Trump’s margin in the poorest counties.

It is unlikely that the counties marked in yellow and green in the table will switch parties from 2016 because Trump’s and Clinton’s margins of victory in these counties were significant. However, it is likely that Trump’s margins will erode in the yellow counties, owing to Biden’s greater appeal to the working class compared to Hillary Clinton’s. Trump’s margin in Duval county was thin in 2016 and his comments about the military (whether true or not) may switch enough votes to turn Duval into a Biden county.

Using the table above on Election night, we can try to make an early call on the Florida result by looking at the ratio of Trump to Biden votes in each county and comparing it to the Trump/Clinton ratio shown in the right hand column. Higher ratios in any county would mean that Trump is doing better than in 2016 and vice-versa. This straight math assumes that third party candidates garner roughly the same percentages.

All in, Florida has many moving parts and the outcome hinges on independents making their decisions in the final few weeks. Biden’s appeal is in theory broader across the various demographics than Clinton’s was. But Trump’s may be deeper in the places where it counts.

More on the demographics of Florida in this table. Click to enlarge.

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2020 Election: Democrats Heading to a Brokered Convention?

An occasional commentary on the 2020 US Presidential Election in which demographics and identity politics play a bigger role than ever before. Here, we explain why primary and convention rules make it difficult for a frontrunner to emerge in a crowded field.

Today, President’s Day, is as good as any to draw some lessons from the early contests in Iowa and New Hampshire.

Crowded Field

FIRST, the Democrats do not yet have a candidate with proven national appeal. Although Bernie Sanders and Pete Buttigieg ranked first and second in both states, they have yet to show that they can do well in states that are more ethnically diverse. Iowa is only 4% African-American and 6.2% Hispanic/Latino, and New Hampshire only 1.7% and 3.9% respectively. The United States overall is 13.4% African-American and 18.3% Hispanic/Latino.

Sanders-021507-18335- 0004

For Bernie and Pete therefore, the test of national appeal will come in South Carolina and on Super Tuesday when several states with large minority populations will hold their primaries.

Although Bernie came first in New Hampshire with 25.7% of the vote, that result was as much cause for concern as for celebration. In 2016, running against only Hillary Clinton, Bernie had won New Hampshire with 60.1% of the vote. Of course, the lesser draw this year is explained by a more crowded field. Nonetheless, it showed that 74.3% of New Hampshire Democrats preferred someone else over Bernie, so long as her name was not Hillary Clinton. Read more