‘Almost Indecent’

Last week, I lamented the state of America’s democracy, and suggested that while the election has the potential to usher in four years of stability, a Joe Biden presidency won’t cure what was ailing the country prior to Donald Trump’s tumultuous tenure in the Oval Office.

The point wasn’t to deride Biden. I tried to make that clear at the outset, without much success, judging by some of the feedback.

Rather, the goal was to underscore the fact that America’s trust in government was waning prior to 2016, and recent events have exacerbated that crisis of confidence. Without game-changing leadership, the situation will invariably deteriorate further.

Read more: And Now, Back To Your Regularly Scheduled Political Decay

What’s crucial for Americans to come to terms with is that in addition to the well-documented factors that contributed to Trump’s rise (e.g., pent-up anger among a disaffected white working class increasingly convinced that globalization is to blame for a diminishing standard of living), myriad additional economic trends and societal undercurrents were steadily eroding faith in the country’s institutions.

Those trends and undercurrents include the perception that elected officials are inept, persistent gridlock inside the Beltway, regulatory capture, influence peddling, racial injustice, and an ever widening wealth gap, which has contributed to rampant distrust of capitalism in some corners.

All of those trends were entrenched prior to Trump’s presidency. While he made almost all of them worse, his exit (whether in November or in 2024) will not lead to their disappearance in the absence of visionary leadership. Biden is not a visionary.

One of the most dangerous aspects of COVID-19 in America is that the failure (and you can blame whatever level of government you like, and/or whichever party you like) to control the outbreak will further undermine the public’s faith in government, with serious ramifications at an already delicate juncture.

“In the last months we have seen the US taking a descent into chaos”, Rabobank’s senior US strategist Philip Marey wrote, in a note dated July 14, decrying the discordant character of the virus containment effort, the lack of a coherent federal plan, and protests against measures aimed at getting the virus under control.

As documented in these pages on too many occasions to count since March, this crisis has served to magnify racial and economic inequality.

“Long-standing systemic health and social inequities have put some members of racial and ethnic minority groups at increased risk of getting COVID-19 or experiencing severe illness, regardless of age”, the CDC says, in a section of their website devoted to analyzing the effects of the virus on racial and ethnic minority groups.

Those disparities (figure above) mirror inequities in the economic realm.

For example, the chart below (which I’ve used previously) shows that the vast majority of US stocks are concentrated in the hands of white Americans.

As you ponder the juxtaposition between, on one hand, protests against pervasive inequality, and, on the other, a stock market that’s poised to recoup all pandemic-related losses, consider that African Americans owned just a 1.4% share of equities held outright or in mutual funds as of December 31, 2019. For Hispanic Americans, the figure was 1.7%.

Those groups are far more likely to be hospitalized as virus cases mount, and far less likely to benefit as stock prices recover.

Although US equity benchmarks may well be back to record highs by the time the election rolls around (the Nasdaq is already there), there is virtually no chance that the virus will have disappeared completely.

The read-through: the dynamics mentioned above will likely be even more pervasive on election day, and they will continue to perpetuate themselves after that.

Biden’s plan to raise corporate taxes may reduce the return on capital, but certainly not enough to push it below the level of expected growth in the US, which will be negative this year and subdued, at best, in 2021. When the rate of return on capital is higher than the rate of growth, inequality almost invariably rises.

There was no shortage of outrage (both real and feigned) on social media recently when Ilhan Omar suggested the entire economic system needed an overhaul. Of course, her comments were taken out of context, as usual. Here is the actual quote:

As long as our economy and political systems prioritize profit without considering who is profiting, who is being shut out, we will perpetuate this inequality. So we cannot stop at [the] criminal justice system. We must begin the work of dismantling the whole system of oppression, wherever we find it.

Anyone who has listened to Ray Dalio recently (or read anything he’s written over the past two years) will note the similarities. Although I’m sure he wouldn’t admit it, Jamie Dimon has conveyed the same message as Rep. Omar, only using starkly different terminology.

The likes of Dalio and Dimon are acutely aware of the extent to which the setup as it currently exists is teetering precariously on the brink. The pandemic may or may not have been the proverbial shove over the cliff, but if it wasn’t, something else will come along eventually. At that point, those who see the system as irredeemable will take to the streets again, only next time, they won’t stop (and they really haven’t stopped this time).

“At the moment there is [a] sharp contrast between the economic data and stock price levels on the Bloomberg screens and the images and discussions on TV”, Rabobank’s Marey went on to say this week, adding that “both types of protests we mentioned, against COVID-19 measures and against racism, reflect a lack of trust in US institutions that predates the outbreak of the virus”.

Trust in the federal government has been falling for decades in the US, and there is no reason to believe the trend will improve.

“In terms of economics, institutions are not working for Americans, unless you are one of the 1%”, Rabobank said flatly.

On top of all this, polarization in the country has reached extreme levels in recent years. This is showing up in attitudes about the virus, a subject around which there should be broad consensus considering it is not, at heart, a political issue. It is a fight against a biological threat that does not care about party affiliation, even as it does discriminate based on ethnicity due in part to societal trends which have made minority groups more susceptible to infection.

Needless to say, a polarized nation is not conducive to institutional legitimacy. “In a polarized society, trust in institutions is likely to be vulnerable”, Rabobank’s Marey remarked, towards the end of the note cited above.

His conclusion is similar to that I came to earlier this month and on multiple occasions previous. “No matter who wins the election, the turbulence in US politics and society is not likely to pass”, he warned. “In fact, what we are seeing now may be only the beginning”.

In a sign of the times, Goldman reported blockbuster earnings on Wednesday that were so good, it gave some observers pause.

Octavio Marenzi, CEO of capital markets consultancy Opimas, called the bank’s results “too good – almost indecent”.


 

 

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3 thoughts on “‘Almost Indecent’

  1. We seem to assume that a populist reaction will come from the left. But in the US we have a long, proud history of right wing populism.

    It was not so long ago that The Rev. Charles E. Coughlin ruled the radio waves, showing the way for Rush Limbaugh and his ilk.

    My father once spoke of socialist presidential candidate Norman Thomas coming to his economically devastated mill town in the depths of the recession. The local priests exhorted the impoverished immigrant faithful to pelt the man with eggs when he arrived.

    I long believed that, thanks to the weighting given to southern and rural voters, the US was more likely to rally around a right-wing demagogue than a socialist. Like George Wallace, for instance. However the popularity of Bernie Sanders did call that into question.

  2. H-Man, Congrats on dusting off that degree in political science and focusing on those issues. It maybe time to resurrect your teaching career on the island at the JC. You would enjoy that while diving on business issues.

  3. Honestly, “indecent” might become my favorite word to describe most of what I witness in our political landscape and markets these days. Talking of indecent, it is also an apt description for GS’s price action today after their quarter for the ages.

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