The US election is a mess – and markets everywhere love it
The result of the US presidential election may still hang in the balance, but in the markets, pretty much every asset bar the US dollar is having a field day. Dominic Frisby looks at what it means for investors.
John here – quick note before we start this morning: it’s MoneyWeek’s 20th anniversary and we’ve just released a very special video interview between Merryn Somerset Webb and investor and entrepreneur Jim Mellon, who contributed some extremely lucrative investment ideas to our first issue. Find out what Jim’s buying now and what he expects over the next 20 years by watching the video right here.
Three days on, and the 2020 US presidential election is still a mess. It looks as though Democrat Joe Biden, currently with 253 of the 270 seats he needs to win, has shaded it, though by a much smaller margin than anticipated.
Allegations of electoral fraud abound, however, and Republican Donald Trump has threatened to contest the result in court, though we don’t know what he will do until they finish counting the votes.
The Republicans, however, have held the Senate. That means it will be harder to push through the Democrat agenda. The Democrats, on the other hand, have held onto their majority in the lower chamber, the House, albeit with some key losses. A contested outcome was the outcome everybody feared – and markets have loved it.
Everything’s up – except the US dollar (and uranium)
The Dow’s up, the S&P 500 is up, the Nasdaq is up. Bond prices are up (yields are down). Gold and bitcoin prices are flying, the latter especially – we are now through the $15,000 barrier. Metals prices are up. Even oil was up – West Texas Intermediate went from $34 to $39, a 15% rally on the news.
It’s hard to find anything that’s down. Cameco (TSX:CCO, NYSE:CCJ), the world’s largest listed uranium producer, is about all I could find, suggesting that the uranium price will not like the news. Cameco continued a decline that started in the summer and it’s not hard to see why. Uranium is a highly politicised energy source, and not one that Democrats are known for championing.
Jerome Powell, chair of the Federal Reserve, America’s central bank, added some sauce to the mix yesterday by calling for more economic stimulus and issuing a warning to any Republicans who might stand in the way of this, as they did in the 2009 to 2011 period: “All of us lived through the experience of the years after the global financial crisis. And for a number of years there in the middle of the recovery, fiscal policy was pretty tight, and I just would say that we’ll have a stronger recovery if we can just get at least some more fiscal support.”
The 2 November copy of Barron’s magazine hailed Powell as “The Winner”, and if you want to get an idea of just how hubristic central banking has become, get this quote from yesterday: “Further [economic] support is likely to be needed to avoid further spread of the virus.” I’m hoping that’s a slip and he meant the economic damage caused by the virus, not the virus itself. I wasn’t aware economic support stoped viruses.
What would a Biden presidency mean for investors?
We have in Joe Biden a president who will favour fiscal expansion, even more so than Donald Trump. He has called for more than $4trn in tax increases and over $7.3trn in government spending over the next decade. That means greater spending deficits and a larger national debt.
The bulk of his tax increases will come by raising the top marginal tax rate paid by corporations from 21% to 28%. Perhaps some of the many US corporations that have just relocated onshore will move abroad again. I should send Biden a copy of my book! Higher tax rates do not equal greater government revenue, but that’s an argument for another column. Another target source for Biden’s new tax revenue will be a 12.6% Social Security payroll tax on individuals with annual earnings of more than $400,000. He’s after higher earners.
He will spend the money on infrastructure, education, the social safety net, and healthcare. Infrastructure gets $2.trn, while $1.9trn is slated for education – college and university will be tuition-free for children in families with incomes of less than $125,000. Healthcare and the social safety net both get $1.trn.
The Fed, as we have seen, is on board. Powell is calling for continued aggressive fiscal and monetary stimulus. “The Desk is prepared to increase the size and adjust the composition of its purchase operations as needed to sustain the smooth functioning of the Treasury market,” said Powell. In other words, the money is there to be had.
The big question then, is how much of this can Biden get through Congress? But all in all, we can sum it up by saying something we have said on these pages many times: “money printer go brrr”. The US money printer is going to brrr so loudly, you’re going to need ear plugs. The reverberations will be heard all over the globe. No wonder the US dollar tanked this week. No wonder bitcoin went through $15,000.
Britain and Europe will do exactly the same thing.
Asset prices will rise, and the value of money will fall. Those with assets will make good, those on salaries will suffer. The same trend that has been in place since 1971 continues, and it just got that little bit faster.
You can shout, you can scream, you can rant on Twitter. It won’t make any difference. You can’t change anything. But you can protect yourself. Own gold, own bitcoin, own assets. (If you read my column, you will already). Keep your head down, and enjoy the ride.
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.