If you had duration, flatteners, and long growth/short value on as election hedges against what, by late last month, had become a consensus “blue sweep”/reflation narrative, congratulations.
Bloomberg captured it well with a headline that read “Reflation Is First Casualty as Big Fiscal Stimulus Bet Unravels.” I called it the “blue fade,” although I won’t pretend I was the only one to roll out that rather obvious punchline on Wednesday.
As ever, Nomura’s Charlie McElligott delivered perhaps the most spot-on take in terms of capturing myriad dynamics in a single thought.
“Now that a ‘Red Senate’ has removed the ‘Blue Wave’ macro regime change catalyst, all of that ‘reflation’ thesis built around untethered government spending and issuance expectations going forward, along with thoughts of multi-trillion dollar stimulus, infrastructure and UBI as a paradigm-shift for a world without cyclical gearing, are yet again proving to be another reflationary siren-song,” he said, in a second Wednesday note. Have a look at Momentum:
I’m sure you can guess what that entails for Value.
Sometime just after lunch on the east coast, Sara Gideon called Susan Collins and conceded Maine.
The assumption now is that we’re likely headed right back into the same “slow-flation” macro regime that’s dominated for most of the post-GFC era. That is: We’re headed back into “lower for longer” rates, persistently flat curves, and structural disinflation, as central banks are forced to operate without a sustained fiscal kicker.
At the same time, the GOP’s likely hold on the Senate reduces the odds of a more onerous tax regime and similarly suggests re-regulation risk is now materially lower. Those are bullish catalysts for equities, even if the demand-side stimulus proponents among you will (quite plausibly) argue that this dooms us to a slow-growth environment in virtual perpetuity.
On Wednesday afternoon, Donald Trump sued to stop the Michigan vote count. Wisconsin was called for Joe Biden. Trump will probably try to contest that too.
For markets, though, The White House may no longer matter.
“The delayed outcome of the presidential election at this point is now effectively a ‘red herring’ in my eyes,” Nomura’s McElligott remarked. “The market is satisfied that the macroeconomic and thematic left-tail shock of a progressive ‘Blue Wave’ takeover has been avoided, which is the qualitative reason why stocks are ripping higher.”
Markets have forgotten their essential Yogi Berra “its never over until its over”
Regulations often are promulgated by the executive branch. Up to a point, anyway. So who is sitting in the White House does matter in that regard.
Or simply put, “the rich get richer and the poor get poorer.” No wonder the market loves the outcome.
Overall, the most federally dependent states — receiving “NET” federal money, are mostly Republican: New Mexico, North Dakota, Kentucky, South Carolina, West Virginia, Mississippi, Alaska, Indiana, and Alabama. And those paying net more in taxes as opposed to received, are the Democratic-voting states: Delaware, New Jersey, Illinois, Massachusetts, New York, Ohio, and California. There are exceptions in the rule, but you get the point.
Same goes within states with state money.
The state I live in heavily subsidizes one side with surplus from the other. Any time there is whining from the other side about how unfair life is, I call my state representatives and ask them to turn down the valve on the siphon that moves the funds to pay for the nice roads and bridges they have over there.
Thank you for reminding us of this. Republican areas, dependent on federal government largesse ever since the Civil War, love to lecture the people who funded their very existence about self-reliance.
As @runamok notes below, on a local level it’s time to stop funding “cap in hand” right wing districts. Let them take care of themselves.
Too bad about your local hospital shutting down. I no longer care.
Republicans love fiscal and socialist spending just as long as it benefits the rich and rural.
With the “Red Senate,” we might as well start referring to the dawning economic policy as “austerity.” …austerity in the midst of what might easily in retrospect, if not now by some pundits already, be judged a depression.
(Just a personal anecdote here; my household is basically planning on spending $0 on Xmas. Tighten the hatches as it were.)
Bye, bye, global economic leadership role for the US. What a pity. We had so much going for us, being the sole, global hegemon.
No matter which way this goes the market loves it and it’s a bullish event as long as the uncertainty is gone and it all occurs peacefully..One way or the other the Trillion Dollar cart of money will be upended once again and that is what everyone likes until it has negative consequences…