Then, more important than any of the purely political factors, Biden will be greeted by the coronavirus, which hasn’t gone away. If it mutates, or gains ferocity during the winter, he won’t be able do much in terms of solving America’s longer-term problems.
Finally, there is the nagging feeling that divided government can have its place, but this is one time when a clear-cut plan involving spending some money would have been a really good idea. The rate of change is what matters to markets, and the U.S. economy is still improving. But as Torsten Slok, now of Apollo Global Management, shows in this chart, employment remains far below its level from a year ago, and improvement is slowing:
You don’t need to be Alexandria Ocasio-Cortez to think that this is the time to throw some money at the problem. There are worrying indications that U.S. economic activity is beginning to slow in the face of the latest Covid-19 wave. Jeremy Grantham, the sage who founded the GMO fund management group, even suggests a need for a new Marshall Plan. Not all will agree with what follows, but bear in mind that Grantham is no AOC:
A program modeled on the Marshall Plan would help address growing inequality. Typical workers – as we are all beginning to realize – have been hung out to dry, really since the mid-1970s. Much of the spending on new infrastructure would be industrial and labor-intensive. It would have the same effect as a major onshoring of manufacturing, providing hundreds of thousands of jobs and raising wages for both skilled and unskilled labor. (Although, certainly, retraining and improving skills will remain a priority given the changing economy.)
It would also help challenge the growing dominance of China in the energy and industrial technologies of the next century. Under current trends, that dominance could soon become unassailable. For one example, the U.S. has 400 electric buses, while China has 400,000! Green energy and industry will be not just economically important in coming decades, but, like oil was before, incredibly geopolitically important. A major new infrastructure program would help the U.S. – still the most innovative country in the world – catch up to China's lead.
He wrote these perfectly sensible words before the election. Nothing like this is going to happen. Meanwhile, the odds are that under divided government the U.S. slips further into “Japanification,” possibly including negative nominal yields. Another British sage, Societe Generale SA’s bearish investment strategist Albert Edwards, commented over the weekend that he no longer feels alone in predicting negative yields. Even Scott Minerd, the well-known CIO of Guggenheim Partners, has now joined him.
Negative real yields might turn out to be necessary. They haven’t been a boon for investors in Japan or the euro zone.
Put differently, a Biden-McConnell government will be good for bond vigilantes, who care about government deficits, but there aren’t many of those around. Instead, it is “stock vigilantes” who need to be appeased. A big collapse in asset prices would do nobody any good, and it would be less likely to happen under united government. I strongly agree with this verdict, from TS Lombard’s chief U.S. economist, Steve Blitz:
The old saw that markets like divided government because it leaves everyone in checkmate, a “do no harm” mode for the economy, is fair when things are going well, but fool’s gold when they are not. The Fed is stuck with a reactive position because there are no more rate cuts to be had, leaving them to manage the size and maturity of their balance sheet in case equity markets crumble. We expect the current rebound to top out soon enough, barring a vaccine, because the level of activity is ultimately squelched by what the virus has impaired – and the impact is worse without a Covid-relief package.
It’s easy to see why my liberal neighbors in Washington Heights are celebrating. It’s much harder to see why the stock markets are doing the same.
Survival Tips
Not all readers will find Biden’s victory a reason to celebrate. But for the many who do, I’d like to offer some songs that have accompanied the weekend’s party in Washington Heights. Arcade Fire released this song on Steven Colbert’s show on election night; the chorus is “I can’t wait,” and it works as a great hymn to impatience. I first learned of the election result when I heard people singing this song in the street. And the boomboxes in the street confirm that at times like this you can’t beat ‘70s disco: Try Good Times by Chic, and Celebration by Kool & the Gang. And if you don’t happen to feel like celebrating, I hope this will take you back to when you last did. Have a good week.
John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of The Fearful Rise of Markets and other books.