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MICHAEL CEMBALEST:  Good morning everybody. This is the October Eye on the market podcast. We have 3 topics this week that we’ve written about. The first is a quick discussion of U.S. tech IPO performance. The second takes a look at what’s happening with the trade war in China as it wears out its welcome in DC. And then the third is a special Eye on the market section on the full contour of progressive democratic policy proposals given the rise of Senator Warren in the polls. First on, on the tech IPO situation, there’s been a lot of headlines recently on struggles of certain technology companies in the IPO market and in the pre IPO market. And those, those headlines are justifiable for the situations they’re describing. What I think got lost in the shuffle here is that most technology IPOs are doing just fine. And what are struggling are tangential tech companies that are included in the broad tech category but which are not really technology. If you look at them more closely. So we have a chart here that looks at all the different technology IPO’s in 2018 and 19. And what you see is that the companies that deliver software as a service model, usually on a B to B basis and cloud-based, deliver their products at close to 0 marginal cost and have sharply increasing returns to scale and most of those IPOs are doing quite well. The marketplace companies which have a transactional sales model and a lot of usually substantial ecosystem third party costs, subcontracted sales forces, subcontracted workforces. Those are the companies that are, that are struggling a little bit. So take a look at the chart. I think it speaks for itself, but I think the headlines recently have obscured a little bit of what’s going on in the underlying tech IPO market which is pretty good performance of real software technology companies. Then on, after Labor Day we wrote an Eye on the market on the trade war and Trumpism. And our conclusion is that we think equity markets are range bound by what the president is doing and that the upper end of that range is around 3000 on the S & P. So the latest news I think confirms that because, A, we’re starting to see even more policy proposals that are negative for global trade and, B, we’re actually starting to see actual economic data confirm the impact of the trade war on some global manufacturing data. So, on the policy front, the latest thing that’s happened, that I don’t know if it’ll actually get enacted, but it’s just a sign of the times, Senator Rubio proposed delisting Chinese companies that don’t comply with US accounting regs. And of course in 2013, the Chinese had signed that agreement allowing U.S. regulators to get audit working papers from Chinese companies and that, of course, never got enacted. And Rubio also proposed banning any federal retirement account from investing in portfolios that have benchmarks with Chinese exposure. So, the conclusion on this front is that the most important chart that we may have in here on the trade is the one showing that with 2 decades since China joined the World Trade Organization, it’s still the most mercantile country in the world. And at this point, they have very few friends left in Washington on either side of the aisle to defend them. And they’ve got a lot of detractors in the private sector as well. So the best outcome I can imagine for now is a narrow deal sometime early next year, mostly based on agriculture given all the problems that China is having in its agricultural sector. And by the way, in another blow to global trade, the WTO has now authorized the U.S. to put tariffs on a small amount, about 8 billion, of European goods to compensate the U.S. for unfair EU subsidies to Airbus. So, again, it’s a small number but there’s always the risk that there could be some retaliation by the EU. On the hard data side, we’re seeing a weakness in CEO confidence manufacturing surveys around the world, but we’re seeing a lot more strength in the U.S. consumer and the US service sector. And so that’s a dichotomy that I don’t think can last forever. And I think Trump’s playing with fire here’ cause we actually started seeing both in the U.S. and Germany for the first time in the cycle. Some weakness in manufacturing capital spending is now flowing through into the service sector. So I, I still don’t expect a recession in the United States in 2020. But there are increasing signs that this trade war is hurting not just the manufacturing sector, but maybe starting to bleed into services as well. We’ll see. As for China, one of the growth trackers that we look at, that looks at electricity production, and exports, and highway traffic, was running at about 7% growth in just a year and a half ago and is now down to 4%. So, this trade war is hurting China as well. So as it relates to the special section in the Eye on the market this month we were going to call it the Warren commission, but we decided on Warren Peace. President, Senator Warren has risen both in the polls and also in betting odds markets. Warren has almost a 50 % share in an aggregation of betting markets compared to 20 % for Biden and 10 % percent for Sanders. So, I thought it was a good idea to review the broad range of democratic progressive policy proposals that have been advanced by Senator Warren and others which she might adopt along the way. So there is a whole bunch of charts and tables in here that look through those policies, including a deep dive we’ve done on the proposal to tax unrealized capital gains each year. But one thing is clear, and this is a chart we at first included last December for the first time. If you look at the history of congressional voting records, since the very, since the beginning of the 20th century and you can go all the way back to the first Congress in the 1780s. And we looked at it over the last, let’s say 120 years. Senator Warren occupies a place on this empirically derived chart that is considerably to the left of any democratic president and also to the left of Democrats that aspired to become president as well, including people like Walter Mondell, McGovern and Humphrey. Anyway, take a look at this chart, take a look at the table. It walks through progressive policy proposals on taxation, the corporate sector, labor market, student debt, energy, healthcare, anti-trust, et cetera. And so we put a lot of effort in trying to capture the broad contours of these things. It was a really interesting discussion on how the federal government might tax unrealized capital gains each year, how they would deal with non-tradable assets like residential commercial real estate. We discussed as well the potential impact of a day 1 federal ban on hydraulic fracturing, which has to be put into the context of the fact that the U.S. now gets 60 to 80% of all its oil and natural gas and natural gas liquids from hydraulic fracturing processes and that they collectively account for around 40% of total U.S. primary energy consumption. So anybody proposing a ban on hydraulic fracturing, would probably need to have a pretty robust plan of what would they would do on day 2. We take a look at antitrust in the tech sector, specifically. There has been a really, up until about a year ago, the rate of FTC and Department of Justice antitrust enforcement on the tech sector was much lower than all other sectors and there is a lot of signs that that may be changing. And so that’s something that we need to understand. And then lastly, we take a look, a closer look at the prospects of a repeal in the U.S. corporate tax rates and additional windfall taxes on the corporate sector and the impact that that could have on the equity markets and corporate inversions. So, obviously we’ll be tracking more of this in the years ahead. I saw one thing that was an interesting reminder about how to be cautious with early polls. I think in 2003, the leader in the Democratic polls at this point in the process was Wesley Clark. In 2008, the leaders in the leader in the Republican Party was Giuliani and leader in the Democratic Party was Hillary Clinton. And then in 2011, the leader in the polls in the Republican Party was Rick Perry. So, we’re early in the process. But somehow I think the dynamic is a little bit different this time and it’s time to take a close look at the Senator Warren’s proposals, which is what we do in this week’s notes. So, thank you for listening and we will talk to you again next time.

FEMALE VOICE:  Michael Cembalest, Eye on the market, offers a unique perspective on the economy, current events, markets and investment portfolios. And is a production of J.P. Morgan Asset and Wealth Management. Michael Cembalest is the chairman of market and investment strategy for J.P. Morgan 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 J.P. Morgan representative. If you’d like to hear more, please explore episodes on iTunes or on our website. This podcast is intended for informational purposes only and is a communication on behalf of J.P. Morgan institutional investments, Incorporated. Views may not be suitable for all investors and are not intended as personal investment advice or a solicitation or recommendation. Outlooks in past performance are never guarantees of future results. This is not investment research. Please read other important information which can be found at www.JP Morgan.com/disclaimer-EOTM.


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Equity markets are still stuck in the Trumpism range we outlined in our last piece as evidence mounts that the trade war is having an adverse impact. Given these rising uncertainties and Senator Warren’s rise in the polls, we take a broad look at Progressive policy proposals on taxation, energy, labor, investment, healthcare and anti-trust, including a deep dive into proposals to tax unrealized capital gains on an annual basis. As anti-trust momentum builds, we also take a look at recent tech IPOs. The underperformers are often “tangential tech”: transactional marketplace companies with substantial third party ecosystem costs, and a subcontracted work/sales force. Most pure technology IPOs with scalable B2B offerings continue to perform well. Read more here

Real tech IPOs are doing just fine

Source: Bloomberg, Company financials, Stratechery.com, JPMAM. Oct 2, 2019.
Bar chart showing the performance of technology companies relative to their 2018/2019 IPO price. Companies are divided into pure tech (software as a service model, usually B2B and cloud based, delivered at close to zero marginal cost with increased returns to scale); marketplace companies (transactional sales model, often reliant on sub-contracted sales or workforce and substantial ecosystem third party costs); hardware (upfront sales of equipment with little to no follow on revenue); hardware/software blend (upfront hardware sale and software subscription); and social media. The chart shows that real technology companies are doing fine while “tangential technology” companies are struggling.

Presidential administration ideology and a look at 2020

Source: Voteview Roll Call Votes database, JPMAM, 2019.
Please see page 11 in PDF for details on this chart and construction of administration scores.
Scatter plot showing the year of different US presidential administrations along the Y axis, and UCLA Voteview Liberal-Conservative scores along the X axis. Liberal-Conservative scores are based on the voting records of presidents and their administration members during their terms in congress. The liberal-conservative scores range from 1 to -1, with 1 being extremely conservative, -1 being extremely liberal, and 0 being centrist. The chart shows that since 1916, presidents and their administrations have become either increasingly liberal or conservative, and have strayed further from a score of 0. Elizabeth Warren is also plotted on the chart, and she currently holds the most liberal score, around -.75. Trump’s administration, by contrast, has the most conservative score on the chart, at around .55.