再談末日者論

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MR. MICHAEL CEMBALEST:  Good afternoon everybody.  This is the Thanksgiving Eye on the Market Podcast.  Welcome.  So about a year ago I wrote a piece on the Armageddonists which are the market watchers, forecasters, money managers, all the people whose apocalyptically bearish comment tend to spread like wildfire in print and in the online financial news.  And as we looked at last year anybody following these Armageddonists over the last decade to the end of last year had large opportunity losses if they had been listening to them and were sheltering in low risk assets, given how well equity markets performed.

So the question is, now we’ll take a look at another Thanksgiving, did the COVID virus selloff rescue these Armageddonists by finally causing the market collapse they were anticipating and the answer is no.  Even if we give them credit for including pandemics in their panoply of disasters, the selloff last March didn’t erase the cumulative fund performance of the portfolios that we created that match up to their views.  And the selloff that took place last March was so quickly reversed that you would almost have had to rebalance immediately into riskier assets to even recover part of the prior losses.

So COVID didn’t rescue the Armageddonists from underperformance purgatory and now the markets are at all-time highs again.  And one of the things you can see, we have a little chart in this week’s piece, that plots a new batch of Armageddonists comments that were made in March and April, pretty close to the market bottom.  And we show you a little table of what those comments were. 

Why have these Armageddonist-driven portfolios done so badly?  You know in fairness to them, monetary and fiscal stimulus explains a lot.  The problem is as investors you have to deal with the world that you live in rather than the world that you would like to see.  So there’s been a lot of fiscal and monetary stimulus, a lot of these Armageddonist types are either gold bugs or they follow the Mises Institute on very tight money.  And you know this disturbs them.

The last decade has seen the longest period of negative interest rates in recorded history other than during the three wars.  And more recently the COVID stimulus was two times the levels that was provided during the financial crisis and was delivered four times faster.  There are some other technical factors involved.  There’s been a shortage of investable publicly traded equities given all the buybacks and M&A activity. 

And in fairness to the corporate sector, corporate profits have been much more resilient than these Armageddonists may have expected.  In Q3 earnings were expected at one point to be down 25%, they turned out only to be down 8%.  And almost the entire earnings contraction in the quarter was just from airlines, travel-related businesses and energy.

You know the free cash flow for the core of the market was actually up.  And so despite the latest surge in infections and mortality in the developed world which is a very scary thing, and obviously we’re tracking all these developments on our Coronavirus website, we anticipate a further recovery in spending, inventory building, capital investment, corporate profits, et cetera next year fueled by central banks buying another $3 trillion of assets and also by the eventual benefit of the vaccine and labor force participation and mobility. 

So far we’ve had some good Phase 3 results from Pfizer and Moderna.  I would expect Novavax, J&J and Astra Zeneca to follow.  The one thing I would note that was a little puzzling was the infection rate that took place in the placebo groups in Pfizer and Moderna were only about half the overall level of infection in society.  So I still think the results are very meaningful but it was puzzling that the placebo groups had an infection level that was around half of the organic infection rate taking place around which suggests that maybe the vaccine candidate people did a little bit more social distancing than the average person even if they were placebo types. 

In any case it’s very good news and there are CDC guidelines on who gets vaccinated when.  20 million healthcare workers in Q1, maybe another 30 million essential service workers, police, fire, water, electricity, wastewater handling, things like that in Q2.  And then the rest of the population starting in Q3.  So that’s what the rollout looks like. 

One last virus note, Michigan now has 7 times more infections than it did in March and both hospitalizations, mortality are rising pretty sharply.  The response from radiologists and Trump Coronavirus advisor Scott Atlas to the renewed restrictions in Michigan was “the only way to stop this is if people rise up - you get what you accept”.  Only the best people we were promised.

Okay.  So with the latest news on the markets, it looks like the Armageddonists got this wrong again.  But I can think of one thing that could rescue them with a selloff and that would be the perception by the market that it’s an unorthodox transition of power as this election process unfolds.  And we go into some detail for anybody that’s really interested in how all the rules actually work at this end of this Eye on the Market, a couple of pages. 

Let me make it clear ‘cause I’ve gotten some negative feedback on this, democracies can and should enforce the rule of law to make sure that only lawfully cast ballots are counted.  I agree with that 100%.  For investors and for financial markets the devil is in the detail of how this is achieved.  To what aims?  How is it done?  When is it done?  And do people play by the rules?

And the United States is the world’s reserve currency nation. If it’s seen as sliding down a path towards electoral illegitimacy that could have an impact.  We have a chart in this week’s piece showing - you know and this is a very generalized discussion - but the countries that have more constraints on government power tend to trade at higher valuations.  And so if the US rolls down the curve of perceived electoral legitimacy and rule of law, in the long run, you could end up in a derating of US equities. 

So what are all the things that we get into here?  We discuss the issue about competing slates of electors.  Extremely rare, only happened one time in the 20th Century in Hawaii in 1960. 

The bottom line is that a variety of entities whether it’s the legislature, governor, secretary of state, could conceivably submit a competing slate of electors to whatever slate of electors are certified by the state.  If they’re against the popular vote they could be invalid under some Federal Election Day statutes, they may violate the Voting Rights, the Supreme Court actually did recognize in Bush V.  Gore but the courts would sort all of that out at one point. 

And then the real way that gets sorted out is through the Electoral Count Act.  It was passed in 1887 after 10 years of debate, after a pretty scary situation in 1876 where you almost had dueling inaugurations because the House and the Senate disagreed on who won.  And the Electoral Count Act in the case of a split Congress which we may have in terms of Democrats controlling the House, Republicans controlling the Senate. 

The tiebreakers go to the governors.  And the governors in Michigan, Pennsylvania, Wisconsin, Nevada are Democrats.  And in Georgia and Arizona, they’re Republicans.  So if the Electoral Count Act is respected, there’s a clear process in terms of how Congress would deal with competing slates through gubernatorial tiebreakers. 

There was an article from a Harvard historian who usually focuses on U.S.-China relations that the Republicans could just dispense with the Electoral Count Act and proceed under the 12th Amendment which would give Vice President Pence as the presiding office in the joint session on January 6th the ability to cast the deciding vote.  This is a theoretical argument. 

And in this nightmare scenario you know the Senate ignored the Electoral Count Act, they let Pence cast the deciding votes, they figure out a way to flip three states in favor of Trump.  The Democrats disagree.  They don’t participate in the January 6th session and you end up with the potential for dueling inaugurations on January 20th.  This is all highly unlikely.  But the purpose of today’s note is to discuss some of the issues involved. 

Allison’s scenario assumes that the Senate Republicans just discard the Electoral Count Act.  And how many would it take to prevent them from doing that if two or more GOP Senators actually respect the Electoral Count Act then those gubernatorial tiebreakers would work because irrespective of the runoff elections, the Democrats would have at least 50 votes in the Senate and then the situation would play out as expected. 

We also talked to in this week’s piece the risk of what the Attorney General might do in terms of seizing or impounding election records, recounts.  The bottom line is that a lot of very unorthodox things would have to happen for Trump to be reelected based on the uncertified vote results so far.  Trump would have to either reverse or impede the results in three states to prevent Biden from reaching 270 electoral votes so you we explain the math and how it works and how we got there. 

How remote are these risks?  Most of the election law, constitutional election experts I’ve been talking to say they’re extremely low.  Essentially because of the high hurdle needed for the Republicans to prove or the Trump campaign specifically to prove sufficient levels of unlawful ballots in a state for either courts to set aside the outcome or for state legislatures to decide that they’re going to overrule what was reported as the popular vote. 

So they don’t believe it could happen.  I’m not going to rule anything out.  The Trump campaign has been filing lawsuits to prevent state certification of results.  The RNC hasn’t signed on to many of these things but anything is possible. 

I did notice that a senior Department of Justice official who’s been there for many, many years who oversees voting investigations stepped down from his seat after Attorney General Barr authorized US attorneys to start probing election fraud.  And he wrote an email to his clients that said that the new policy abrogates a 40-year old noninterference policy.  So there was some strange things going on in the Department of Justice and I am not going to rule anything out at this point. 

We also discuss what steps the Supreme Court might take in terms of state challenges or challenges to the constitutionality of the Electoral Count Act.  The bottom line is that it’s extremely unlikely that all of these things come to pass, in particular since you need three states to flip, for Biden not to reach 270 electoral votes.  But that is the one scenario I can think of right now that would derail what looks like a pretty positive outlook for US equities over the next few months.

One last thing.  My brother-in-law has been sending me videos and links to internet news sources asserting all sorts of proof of widespread fraud from election hackers and cybersecurity malware.  He tends to do this kind of thing.  I spent a few hours of my life that I’ll never get back responding to him with sources that clearly refute a lot of these theories.  I’m not sure it’s going to have much of an impact on him.  But if you are going to be celebrating Thanksgiving either in person or remotely with family members, and you need to refute some of this whacky stuff, I have done the homework for you and I have a link at the end of this week’s Eye on the Market that you can use. 

So please be safe everyone.  Please obey all the laws that exist at the federal level and at the state and local level.  And I look forward to speaking with all of you again soon.

RECORDING:  Michael Cembalest, Eye on the Market, offers a unique perspective on the economy, current events, markets, and investment portfolios and is a production of JPMorgan Asset and Wealth Management.  Michael Cembalest is the Chairman of Market and Investment Strategy for JPMorgan Asset Management and is one of our most renowned and provocative speakers.  For more information please subscribe to the Eye on the Market by contacting your JPMorgan representative. 

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