Rabobank: Can One Model What Is Going To Happen Today?…. No

By Michael Every of Rabobank

Déjà Blue

An economist once said to me “We don’t look at politics because we can’t model it.” As Trotsky once said to the world, “You may not be interested in war, but war may be interested in you.” And the same runs true for politics. Because markets are going to be all politics all day, and for many days to come.

Let’s start with Georgia. After a presidential election with a nail-bitingly close result for Biden and persistent allegations of voting irregularities from the Trump camp, the two senatorial races have produced a slim victory for both Democrats, leading to a twin Blue victory…and the same Republican allegations of ‘dirty’ voter rolls, poll watchers being blocked, voting machines going down in Republican counties, new mail-in votes appearing, vote counts being stopped in key areas, generic shenanigans/sour grapes, etc. Shall we call it Deja Blue?

One notable difference from 3 November was that Lin Wood’s “Space alien ninja reverse vampires run the world so don’t bother voting” antic depressed Republican turnout; so did not giving people USD2,000 checks when 75% of people surveyed wanted them; and apparently so did the GOP strategy not to embrace Trumpist working-class populism, or Trump himself until the last possible moment, while instead trying to recapture the lost white suburban vote.

For markets, ‘blue’ is the operative word. They had –like the GOP– presumed the two Georgia seats were in the bag, and only now enter a world where presumptions of US political gridlock go out the window and the government might actually be in the position to do something. Markets don’t like that when it involves anything except dolling out corporate bailouts. For the full fiscal/monetary implications, please see this note from Philp Marey, but expect unhappy equities (“More state spending and higher taxes!”), higher bond yields (“US fiscal reflation!”), and a bigger bid for the likes of Bitcoin (“CTRL-P USD!”).

On the latter, I must interject that cryptocurrency is an entirely *political* play. The market is suddenly full of naive neoclassical economists who can’t model politics who are now embracing elements of Austrian economics without wanting to accept their whole intellectual package. Let’s do the heavy lifting for them then: if one believes Bitcoin is going to soar, then one must also believe the entire fiat system, including US geopolitical hegemony, is going to ultimately collapse. How bullish for just about everything else, right? Talk about “disruption”! And who still has all the biggest guns and jails before that happens? What did the Fed do to gold in the 1930s? On which further note, the first ‘Mad Max’ film was set all the way in the future in….2021. At what point this year will it be acceptable to walk the streets in a combination of studded leather hot pants and a bondage facemask shouting “Gasoline!”? (Some might say it already is – if one was allowed to leave the house while under lockdown.)

Meanwhile, 50 democracy activists have been arrested in Hong Kong for “subversion” under its National Security Law. Most are lawyers, and one is a US citizen. Let’s see how the hegemon reacts: Chinese state banks are already selling CNY to send a “we don’t want too strong a currency” message: might there be risks of a political sting too? (Sidebar: it took a Hong Kong journalist to reveal the EU-China investment deal details won’t be released until mid-January: no transparency was available from the EU side, which has just been embarrassed by these arrests. Rictus grins all round for AM, EM, and VDL no doubt.)

Of course, we aren’t done with politics yet. With the US House narrowly Blue, and the Senate too, today Congress hears and approves the Electoral College votes, so selecting the next president. By precedent this should be a formality: Joe Biden won the majority of the Electoral College, and will officially become President Elect. However, there is 19th century precedent for this process to get wilder.

Around 12 US senators and 130 Representatives are going to officially object to the election results from at least six disputed states. That will, at the minimum, see the House and Senate split off for a two-hour debate before a vote to sustain or reject the objection. Of course, neither the House nor the Senate will sustain an objection to the vote count, so this is all political theatre –albeit embarrassing to Biden– unless this debates drags on to 20 January, after which things get really complicated, constitutionally speaking. (Acting President Pelosi, anyone?) So will this be one two-hour debate, or one for each state, or, as some claim, one for each individual *elector* (20 in Pennsylvania, for example)? If so, this *could* become a massive filibuster.

Also consider what President Trump just released:

”The Vice President and I are in total agreement that the Vice President has the power to act. The November 3rd election was corrupt in contested states, and in particular it was not in accordance with the Constitution in that they made large scale changes to election rules and regulations as dictated by local judges and politicians, not by state legislators. This means it was illegal. Our Vice President has several options under the US Constitution. He can decertify the results or send them back to the states for change and certification. He can also decertify the illegal and corrupt results and send them to the House of Representatives for the one vote for one state tabulation.”   

In short, Trump claims (and constitutional lawyers agree) the VP *could* throw the cat among the political pigeons and end up taking this to a contingent election decided in the House of Representatives, where Trump holds a clear majority of state delegations. Or, we might see the dodge of Congress agreeing to Senator Cruz’s request for a 10-day delay in the approval of the election results to allow for an emergency audit in swing states,…which would then open up a whole new can of worms as it would allow state legislatures more time and greater legitimacy to decertify their results. (And being ultra-cynical, after the Georgia result could the Establishment GOP be more amenable than they were last week? Probably not.)

Can one model what is going to happen today? No. The greatest likelihood is just a major case of sour grapes; but the tail risks are potentially something more disruptive. So, try this, Mr. Market:

• If today proceeds smoothly, we get a “Blue Wave(ette)” with the slimmest Democratic control of all three branches of government. (And the Republican Party is likely to be co-opted into a pure Trumpist force going forwards that markets will hate, or ripped in two so that Democrats have an easy future run);
• Mike Pence *could* open a political can of worms few want to even consider, with massive related uncertainty; and yet
• That would be the only way to end up with the gridlocked government apparently so desired!

In short, there seems no happy ending here the way some have been pricing for. What’s a market to do? Probably blink in confusion and buy Bitcoin, right?