What would a Biden presidency look like?

Posted by Cam Hui -

Joe Biden has officially clinched the Democratic nomination for president, and his odds of winning the Presidency in November have been steadily rising, and he is now at 54% on PredictIt. For the uninitiated, the contract pays off at $1.00 if a candidate wins, so buying the Biden contract at $0.54 implies a 54% of a Biden victory.
 

 

The consensus view has the Democrats retaining control of the House. The PredictIt odds of the Democrats gaining control of the Senate has been steadily improving over the past few months, and now shows a slight edge for the Democrats. In the case of a 50-50 divided Senate, the vice-president casts the tie-breaker and the winner of the White House has control.
 

 

While this is not meant to be an endorsement of any candidate or political party, it is time to contemplate what a Biden victory might mean for the economy and the markets. If Biden were to win, there is also a decent chance that the Democrats might capture control of both chambers of Congress. How should investors react to that outcome?
 

The law and order card

In response to the current bout of unrest, President Trump has played the law and order card to assert control of the situation. This could be evocative of Richard Nixon’s successful 1968 campaign to win the White House based on a similar law and order theme. For those who can remember, 1968 was marked by incredible political turmoil, marked by:

  • The Tet Offensive in the Vietnam War, which broke the illusion of a quick victory.
  • LBJ’s surprising address to the nation, in which he stated that he would not run for another term.
  • The assassination of Martin Luther King, Jr..
  • The assassination of Robert Kennedy.
  • The riots outside the Democratic Convention in Chicago.

Nixon’s gamble worked, and he won. Moreover, the stock market shrugged off most of these events and rose in 1968.
 

 

Could Trump repeat the Nixon experience? Probably not. A recent Morning Consult poll showed that the law and order stance (or at least Trump’s version) is not playing well with the electorate, and an ABC-Ipsos poll came up with similar results. When asked if the respondent approved of President Trump’s handling of the protests and demonstrations in response to the death of George Floyd, the spread between “Excellent/Very Good” and “Only Fair/Poor” among all registered voters was -35%. Even among respondents who already approve of Trump’s performance, the spread was only +29%. Normally, he should be winning this demographics by 50% or more.
 

 

Even among evangelical voters, which have been a bedrock of Republican support, the spread was -13%. Fox News report that 700 Club evangelical leader Pat Roberson chided Trump’s actions.

Evangelical leader Pat Robertson criticized President Trump Tuesday for berating governors and threatening to deploy the military amid the racially charged protests and riots sweeping the nation following the death of George Floyd.

“It seems like now is the time to say, ‘I understand your pain, I want to comfort you, I think it’s time we love each other,'” Robertson said on “The 700 Club.”

“But the president took a different course. He said ‘I am the president of law and order’ and he issued a heads-up. He said, ‘I am ready to send in military troops if the nation’s governors don’t act to quell the violence that has rocked American cities.’ Matter of fact, he spoke of them as being ‘jerks.’ You just don’t do that, Mr. President! It isn’t cool!”

The law and order card isn’t working, and Trump’s support is eroding. There are five months until the election. While five months is a long time is politics, current polling is not favorable for Trump’s electoral chances.
 

Biden’s economic policy

For investors, the most important focus is economic policy. While we don’t know the exact makeup of Biden’s economic team, we can get some clues of the philosophical direction by analyzing the writings of Jared Bernstein, who was Biden’s former chief economist. Bernstein penned a Washington Post OpEd in December outlining what he believed to be the “big economic lessons of the decade”. He followed up with further details in a blog post, with my interpretation in brackets.

  • The unemployment rate can fall a lot lower than most economists thought without triggering inflationary pressures (run a hot economy, keep rates low).
  • Budget deficits cannot be assumed to place upward pressure on interest rates (implicitly supports Modern Monetary Theory, or MMT, which states that a country can borrow in its currency as long as the bond market signals support).
  • Weak worker bargaining power has long been a factor driving inequality. In the last decade, the increasing clout of certain employers has joined the mix (expect the returns to capital to compress, and the returns to labor to rise).
  • Progressive health care reform, wherein the government plays a larger role in coverage and cost control, works (support expansion of Obamacare, and Medicare for All remains an open question).
  • [Lesson re-learned] Trickle-down tax cuts don’t work (watch for higher taxes).
  • Antipoverty programs don’t just reduce poverty today; they improve the outcomes of their beneficiaries many years hence (bad news: higher taxes, good news: more spending by lower income Americans to support growth). .

The most immediate effect of these implicit policy prescriptions is higher taxes and lower operating margins from inequality initiatives. The Trump tax cuts of 2017 boosted earnings by 7-9%. While Biden’s official position is he will unwind some, but not all, of Trump’s corporate tax cuts, expect greater regulatory burden and inequality policies such as higher minimum wage laws to cut into operating margins under a Biden Presidency. Pencil in a $10 to $20 cut to S&P 500 2021 earnings from Biden’s tax policy.
 

 

Longer term, the following are all likely under a Biden presidency, and they are not mutually exclusive.

  • Higher taxes for both individuals and corporations
  • Profit margin compression from higher labor costs
  • Higher GDP and sales growth from a broadened consumer base

Until we know the exact makeup of Congress and the cabinet, it is impossible to forecast the exact magnitude of those factors.
 

The rise of the bomb throwers

Should the Democrats win in a landslide, or Blue Wave, and gain control of the White House, the Senate, and the House of Representatives, there is a distinct possibility of a radical shift in the Overton Window, or the range of acceptable political discourse. A Blue Wave would embolden the progressive wing of the party to bring in the radical thinkers and metaphorical bomb throwers into government.

One of the leading candidates for a bomb thrower to challenge orthodoxy in a Biden administration is Stephanie Kelton, who is a leading advocate of MMT. As I pointed out before, MMT postulates that a country can borrow in its currency as long as the bond market signals support. Instead of asking “how will you pay for that” when proposing a government spending program, the question turns to “can we finance it at a reasonable rate?” When the market is willing to lend to the federal government for 10 years at well under 1%, the question is an easy one to answer. The implementation of MMT as policy will become a Grand Experiment, just as the Laffer Curve was under Reagan. Expect greater expansion of government spending programs. We will find out in a decade whether inflation pressures rise significantly, as the Austrian economists predict, or if the MMTers are right.

A more radical economic bomb thrower is Mariana Mazzucato, who questioned the fundamental question of how value is created, and the policy implications of the answer. This YouTube video of her TED talk raised the following provocative questions:

  • Who are the value creators? Who doesn’t create value, the couch potatoes, the value extractors? 
  • What happens to the economy if it becomes dominated by unproductive value extractors? This begs the question of how you define value extraction.
  • During the agrarian era 300 years, François Quesnay produced the Tableau Economique broke down the value chain into the farmers, or the “productive class”, the merchants, the “proprietors” who effect transactions, and the landowners, the “sterile class”.
  • During the industrial revolution of the 1800s, economists like Smith, Ricardo, and Marx focused on an industrial theory of value. Adam Smith’s landmark book, The Wealth of Nations, had an example of a pin factory where a single worker could produce one pin a day, but sufficient investment into capital equipment and the division of labor could see 10 workers produce 4800 pins a day. Smith went on to define “unproductive” activities as churchmen, lawyers, physicians, men of letters, players, buffoons, musicians, opera singers, and opera dancers.
  • Neo-classical economics came next, and changed the definition of value creation from “objective” to “subjective”. A subjective definition of value is based on an individual’s view of value, individual utility maximization and firm profit maximization. While past thinkers viewed the value creation process objectively by trying to determine value, neo-classical economics determines value from the price of a good or service. Anomalies can arise if you measure GDP when a good or service has a price. Mazzucato cited the examples of someone who marries their babysitter, GDP falls because there is no price is paid for babysitting services; or if a company pollutes, GDP rises because there is a cost to the cleanup.

 

 

Mazzucato believes governments to be more ambitious in ensuring the public good. She cited the as an example difference between airline bailouts in Austria and the UK. Austrian airlines received bailouts on the condition of meeting emissions targets, while the UK government bailed out airlines without no conditionality.

Bottom line: There is a distinct possibility that policy could take a dramatic lurch to the left after the election.
 

Healthcare policy

Biden is on record as stating that healthcare reforms should be made slowly. He would begin by improving on the ACA, or Obamacare, and then by possibly adding a public option. He is pragmatic about Medicare for All, and does not believe the Democrats have the political capital to fight another healthcare battle in the space of 10 years. However, the pandemic induced recession has exposed the cracks in the American system of employer funded health insurance, and that may induce greater popular support for a single-payer or public health insurance option.

Healthcare stocks are currently moving more ore less in lockstep with each other, but a Biden win is likely to put greater downward relative pressure on healthcare providers in particular. At a minimum, investors who want exposure to this sector during the COVID-19 era should focus on the healthcare momentum ETF (PTH)/
 

 

Trade: The silver lining

The one silver lining under a Biden Presidency is trade policy. Biden has made it clear that he does not favor Trump’s America First approach, and he would work with allies through international organizations built since the post-World War II era to resolve trade and other frictions. While that does not necessarily mean a softer line with China, the nature of the dialog will be very different.

As an example, Obama negotiated the Trans Pacific Partnership as a multi-lateral firewall against Chinese trade dominance, and Biden would return to that approach. One of the contradictions in Trump’s trade conflict with China is the tension between lowering the trade deficit and the desire to open the Chinese market to American companies through the protection of intellectual property rights. If China were to fully open its economy to foreign companies, FDI would rise, and American companies would pour into China. American owned Chinese factories would produce goods for export back to the US, and raise the trade deficit. So what does Trump really want, a lower trade deficit, or expanded protection for IP?

The Biden approach would tone down the trade rhetoric, but the strategic competition between the two countries will remain, which has the possibility to turn into a new cold war. However, expect the level of trade friction between the US and other countries and regions like the EU to fall significantly.

The trade war factor, which measures the relative performance of domestic companies to the index, should see a dramatic decline in tensions. While Biden’s tax policy is likely to reduce earnings, his trade policy is the silver lining that lowers uncertainty.
 

 

In conclusion, a Biden victory is expected to be a net mild negative for equity prices. Much depends on the degree of control by the Democrats should Biden win the White House. The chance of a Blue Wave sweep is possible, and it would embolden the progressives within the Democratic Party to steer policy further to the left with bearish consequences for the suppliers of capital.

Stay tuned tomorrow for our tactical market analysis.

 

55 thoughts on “What would a Biden presidency look like?”

  1. I think the polls are terribly slanted for Biden just as they were for Hillary since most are derived by the MSM who are in the Dem camp. Joe Biden also has a serious dementia problem that will become apparent to all as campaigning intensifies and if Biden agrees to debate. I’ll let it go at that.

    But I don’t understand this comment in your post about a Democratic Presidency:

    “• Higher GDP and sales growth from a broadened consumer base”

    1. It might be fairer to say that the MSM is not in the Trump camp. There is a very reasonable amount of criticism that can be levelled at Trump without having to be left or right wing leaning.

      Cam’s comment on the “Laffer Curve” is very intesting – never really thought about taxation that way, but by all accounts, the US can certainly “afford” more taxes, if only to reduce the deficits. Also, it is arguable that the “wealth gap” in the US is an area that needs attention and government taxation and increased service to all (health care, education, infrastructure improvement, social safety nets, etc) can go a long way towards reducing the wealth gap.

      But, I think that the concept of “taxation is theft by the government” is quite deep in the US populations’s psyche. That thought process may be a large barrier to improving the social situation in the US. So, even if the Dems win, it won’t be all sweetness and light as they roll out their economic policies from taxation to health care to “green solutions”.

      We watch with interest!!

      1. Remember when President Johnson created the Great Society and liberals passed all those laws that would eliminate poverty? Well, they don’t work. Poverty is the same or higher than it was then. People are poor because they are lazy or they would rather stay in that life style than put forth the effort to change.

        And, about saying there is reasonable criticism that can be leveled at Trump, I find every one of his policies are exactly what I think the President should be trying to do. Only the Democrats and the media attack him for trying to help America and Americans.

        Also, a recent poll shows that 40% of blacks support the President. If that turns into 40% of the black vote, Joe Biden cannot win.

        1. Can you show me that poll? Most polls I have seen indicate that Blacks are heavily D. They just didn’t turn out in 2016 for HRC the way they did for Obama.

          1. I don’t have a link but it was a recent Fox News poll. I’m not sure who did the polling for them.

        4. Wally, your comment that people are poor because they are lazy or prefer that life to change is incredibly simplistic and ignorant. Especially in this moment, it is incredible you are not becoming more enlightened to the effects of systemic inequalities and racism in our system. The bootstraps theory is largely a myth perpetuated by those that were not dealt the same cards as many who are stuck in poverty.

    2. When you tax the rich and give to the low income group as well as legislate higher wages, the extra income gets spent in the real economy. The old saying is “The rich can only eat one steak.”

      1. I think that is true to a point. As mentioned by a prominent Democrat they will try to help the poor from making bad decisions with the money they are given. Unfortunately, you cannot legislate good spending decisions rather than spending on more drugs and other contraband type of purchases. Where as the rich would put that excess money into investment that help grow the economy and provide jobs.

        1. …and you can’t legislate people with Robinhood accounts from chasing shares of companies in Chapter 11 either…

          C’est la vie.

    3. See Ken’s comment. The rich have a lower propensity to spend, but when you give money to the poor, they’ll spend it all because they need it to survive.

      1. But, they don’t need it to survive. The basics are pretty much taken care of in America.

        1. Regardless of whether they are well taken care of, they’ll still spend it all if you give them income support.

          That’s why sales and GDP rises – because they will spend it all. (Remember I am answering your original question).

          2. As I think about that – you are implying then that the Democrats will increase taxes on the rich and the not so rich like me to give to the 49% who pay no income taxes? In other words, they will go further into the Redistribution-Of-Wealth rat hole?

        2. “As I think about that – you are implying then that the Democrats will increase taxes on the rich and the not so rich like me to give to the 49% who pay no income taxes? In other words, they will go further into the Redistribution-Of-Wealth rat hole”?

          Yes, Wally, we are back to the eternal American argument of who pays taxes and how much. Bottom line, if democrats win, win, win, bank on a tax and spend economy! Lol.

        3. Dude – dig deeper. You’re spewing right wing talking points that are simply wrong. Do trickle down economics next…

  2. 1968! Most Boomers will remember where they were and what they were doing when major news events unfolded. The assassinations of MLK and JFK inspired Dion’s beautiful ballad ‘Abraham, Martin and John:’

    https://www.youtube.com/watch?v=a5hFMy4pTrs

    Anyone remember Presidential candidates Eugene McCarthy or George Wallace? The civil rights movement introduced many changes in legislation/ the way things are done – but based on what still takes place today perhaps not so much in prevailing attitudes/ the way people think.

    No one had a clue what we were getting into with Richard Nixon, who ushered in an era of conflict and disillusionment. Four years later I dropped out of my freshman year at Michigan and hitchhiked with a roommate from Ann Arbor to Bakersfield (we spent our first night sleeping underneath an overpass outside Joliet in the midst of a snowstorm). The following morning we were picked up by a two guys from Boston – one had just walked out on his wife and other was a newly-unemployed lawyer – who drove us down 66 to Texas. A pot-smoking dude driving a converted church bus full of other travelers with few plans (and a non-stop sound system playing the best of progressive music) took us across the Panhandle, throught the Southwest and finally dropped us off in California. I would spend the better part of the next year and a half living and working with what Adam Smith apparently considers truly ‘productive’ Americans.

    2020 will go down as the year SARS-CoV-2 redefined the global economy, and perhaps another era of disillusionment sparked by empty campuses, job losses, and failing businesses. To a great extent the election will be won on social media – something Trump understands and Biden has yet to embrace. If I were starting today, I’d probably opt to wait a year.

    I’m surprised to hear the odds of a Biden win are 54%. I have yet to hear his name come up in a single conversation with family/friends/colleagues. They undoubtedly have more pressing concerns right now. But we know the market looks out six months, right ;). What’s it predicting right now?

    1. The market is predicting economic recovery or irrational exuberance. Darned if I can figure out which.

      1. I hear that bars/ salons/ gyms will reopen next week. Photos of the Vegas reopen this week – apart from the presence of thermal scanners and masks, to my eye they look pretty similar to the old Vegas!

        Re markets – the change in sentiment is remarkable. There is still talk of a ‘retest-‘ but now it’s whether we retest the February highs!

    2. ‘No one had a clue what we were getting into with Richard Nixon, who ushered in an era of conflict and disillusionment. ‘

      What.

      I was home sick from school when Kennedy was assassinated. I expected to watch three days of cartoons, instead got three days of funeral preparations. Major disappointment.

      Johnson brought us the ‘Great Society’ and ‘guns and butter’. And the quagmire in Vietnam. Conflict and disillusionment? There was none of the perfunctory ‘thank you for your service’ declarations for returning vets that you see today, they were ‘war pigs’ and roundly abused by their non-serving peers.

      Johnson was so popular, he elected not to run for a second term.

      America knew exactly what it was getting when it voting for Nixon. He had been in government for decades, was Ike’s VP. Narrowly lost to Kennedy thanks to voter fraud in Chicago. He overwhelmingly trounced McGovern. He was a fool for getting ensnared in Watergate, obviously.

      1. (a) Did LBJ elect not to run for a second term, or did he withdraw from the ’68 race after a disappointing finish at the New Hampshire primary?

        (b) There may have been a few clues re Nixon’s character (‘You won’t have Richard Nixon to kick around anymore’) earlier in his career, but I don’t think anyone saw Watergate coming.

        (c) I would agree it’s unfortunate that anti-war sentiment grew to the point that returning vets were maligned. It was probably the mid-Seventies before classmates who had served in Vietnam were able to openly talk about it.

  4. As far as discussing politics or religion, I think it’s appropriate to talk about who might win and the stock market implications. But I don’t think this forum is about saying why one candidate SHOULD or SHOULDN’T win.

    Maybe Cam should weigh in on this. If it’s a political cage match, I’m in. Just don’t bring a knife. Hair pulling and fingers in eyes, quite all right.

    1. I hope I didn’t start a political fracas here. If so, I apologize and will shut my trap. I do tend to get opinionated.

      2. No, Wally, you, Len-g, Rxchen2 have given valuable insights into what happened back in the day and a whole lot else that people like me were too young to experience (!), including free love, Woodstock and what not. Yes, there is a political slant to some of the stuff, but I do not think it is necessarily bad.
        More seriously, though, we could, just could be on the cusp of another 1968, again! Did anyone see in 1967, what 1968 would hold? Same thing here, did anyone see in 2019 what 2020 would hold for them?
        I see the point that we could be in for a Blue wave, based on the numbers today. That said, there are other predictions of this nature that are not new either. It has been predicted that it takes about two decades for the rest of the US to follow California. From the late 1990s, when California flipped democratic, we are seemingly on that cusp, when the nation as a whole would catch up to California. This was the premise of a recent book, the name of which I forget. Perhaps someone reading this may remind me the name of this recent book.
        Anti immigrant Prop 187 in 1994 California elections is credited with an immigrant backlash, and one wonders if are living through the same in 2020. What I have written here should not be construed as politics. It is how history was, and is being written as I write this.

        1. Hey, D.V., there were some of us who, for what ever reason, missed out on all of that free love back then. Too ugly, too dumb, too naive, too picky or whatever. I just remember hearing that I lived through this period and would ask myself, “where was I? I don’t remember it.” LOL

          2. LOL. No, I was a straight arrow Nebraska kid. I didn’t go to Woodstock, didn’t smoke pot, respected returning Vietnam vets and my passion was Nebraska football.

            The only hair raising thing I recall back then was when the guys I sometimes rode my motorcycle with decided to take a ride to 24th & Lake in Omaha (center of the black part of town) on the Sunday after MLK was killed. We found ourselves going head-on right trough an unlicensed MLK parade going down the street. Cops almost ran over a couple of us trying to stop us as they were following the parade to prevent any violence. One guy was ticketed for no baffles. The next day we were in the paper as a destructive out of town motorcycle gang harassing the black people. LOL Yeah, right.

  5. As much as I wish Stephanie Kelton and others in the progressive movement would be allowed in to the Biden camp for humanitarian reasons due to extreme inequality and poverty in the U.S., respectfully I really don’t think so. I supported one of the progressives in the primary, and their staff didn’t overlap with Biden at all. Biden camp has private calls with Wall St execs and tons of Wall St donors. He’s not a progressive. A Biden presidency would be very Wall St. friendly, probably not as extreme and unsustainable as Trump’s was. But Obama/ Biden were very stabilizing for markets. Powell appointment was probably the best thing Trump did for markets– credit where due. However the market had multiple downturns and volatile periods on Trump’s watch that would be less likely with a democratic moderate.

      1. Possibly, but there was not all that posturing about trade wars etc.
        I don’t think progressives will make up any part of the Biden administration– this is a major rift in the party and I know all about it after volunteering for one of the leading progressive potus candidates so do not need to speculate. However Congress probably will vote in progressives in this cycle and beyond irrespective of who wins POTUS.

        1. No coattails for whom ever wins the Presidency? I feel the coattails are going to be big this election cycle.

          1. No– Biden is most decidedly not progressive and is not making any big outreach gestures toward the progressive wing of the party, especially with regard to economic policy. He and his team are conservative, corporate-friendly Dems.

  6. Lively review of a book about the far left political violence that characterized the 68-74 time frame.

    Long article, but you need only read the first half for the historical perspective.

    The remainder is a discussion of current left/right political violence potential, and why the left is likely to win, even though the right has more guns.

    https://status451.com/2017/01/20/days-of-rage/

    Remember that mass communication was not nearly the well-developed disease vector that we now live with. The evening news was 30 minutes. Life or Look Magazine once a week. If you weren’t at ground zero where these events occurred, they might as well have been happening on another planet. At least, if you grew up in small mid-west towns, as I did.

    1. Len G – We are trying to have an investment discussion here in order to understand the asset price implications of different political scenarios. This is not the forum for political discourse.

  7. Cam, any chance you could write about the other scenario? Namely, Trump somehow wins (maybe even in a landslide?) and Rs retake House, cuz you know, what happened in 2016 despite of what every poll said. Thanks.

    1. Trump is already a known quantity. That would be interpreted as net bullish, though there would be the usual concerns about ongoing trade wars.

    2. a few months ago, Cam posted that the markets actually react pretty positively to fascism, until things get out of hand. Germany 1930-1939 was a fine place to invest.

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