Talking your book is an old Wall Street phrase. It began in the days when specialists on the floor of the New York Stock Exchange had a book—literally a paper book—of buy and sell orders plus their own positions. Talking your book involves touting what you own in an attempt to make others pay up for it. Specialists were renown for it. In the current era, traders and portfolio managers have adopted the practice as it applies to their proprietary holdings. They may or may not believe in the merits of their thesis, but surely want others to. Look at the public relations efforts of a number of the hedge fund and activist managers as recent examples.
That phrase, talking your book, is what investment banks—Goldman and Bank of America prominent among them—seem to be doing currently when they predict a market boom if there is a Democratic sweep. Wall Street likes rising stock prices. Rising prices increase trading volume, deals and asset-based fees. We Wall Streeters like all of those things. So we sometimes talk our own book in any attempt to create a self-fulfilling prophecy. We aren’t lying. It’s just that we sometimes create a plausible fabric that fits our wishes. We earn more when portfolios are plump.
The notion that a Democratic executive branch plus control of both houses of Congress would be good for equities defies reason or rationale. Biden is not a bomb thrower; he is on the more conservative side of his party. Still, higher corporate taxes cut earnings/earnings per share. Reduced after-tax earnings for the affluent (who are the largest individual purchasers of stocks) cut sharply into the capital available to buy shares. Elimination of the stepped up basis will force portfolio liquidations following death. And the psychology of a substantially less pro-business atmosphere will weigh on multiples. Those are facts, and none are arguments for a rout of the Republicans being the catalyst for a bull market, or the continuation of one. It would damage the fundamentals.
The investment strategy being articulated by many banks and money managers is that a Democratic government would spend mightily to stimulate the economy. That, they say, would create jobs, prosperity and drive the markets upward. The costs would be covered by expanded borrowing and higher taxes. However, the consequence, although not said explicitly, is that deficits would be even larger and the government would take a greater share of earnings, the earnings of both corporations and households. Their supporting thesis rests in substantial part on the tenets of Modern Monetary Theory, which include the belief in the (almost) unlimited ability of countries to borrow. The premise is that as long as there is excess capacity in the economy, there will be little or at least only modest inflation. Central governments, it is suggested, can spend their way to enduring prosperity.
The flaws in that ointment are several. To begin with, stimulus is a temporary thing. An ER patient can benefit from a shot of adrenaline. Continued shots of it will kill him or her before long. Our bodies have to learn to live on their own. Similarly, economies develop lasting vibrancy and growth from the productivity of the people who comprise them. There is no exogenous magic bullet. Moreover, strong economies quickly reach the point of full capacity. After that, inflation ensues. The Fed can run the electronic monetary creation printing presses forever. However, at some near point, the currency is debased, loses value and “the system” itself becomes suspect. Once out of control, inflation is extremely difficult to harness, and then only at an extreme cost.
In other words, artificial means of augmenting incomes and jobs can work for the short term, but only the short term. Extra spending is a good idea, today for example, when a factor like Covid creates unforeseen distortions and hardships. That said, steps like the CAREs Act only kick the can of the problem down the road a short bit and can (same word, different meaning) be effective for a short while only. They are palliatives, not cures.
Hence, the statement that a single-partied, less free-market friendly, Congress and Presidency would be a plus for equity prices is a wish, not a supportable premise. It seems likely that the Wall Street bias in favor of strong stock markets—a bias I share—has fueled the numerous strategy pieces saying that a Democratic tidal wave would be good for stocks. They hope it is true. The logic behind that suggestion is like looking for the Emperor’s clothes; it isn’t there.
One may validly believe that a bland Biden would be better for the country overall than a bloviating Trump. That is a different question than what administration would be preferable from a purely equity fundamental value perspective. However, the strategy pieces expounding the market consequences of a Democratic landside sound like, well, talking your book.
George Ball is chief executive officer of Sanders Morris Harris in Houston.