Trump – Biden what to watch for tonight

Here are the possible outcomes tonight

  1. Biden big win (70%)
  2. Biden moderate to narrow win (20%)
  3. Trump narrow win (10%)

Below is the election forecast from Nate Silver’s 538 website. He helpfully produces a snake of all of the States in order of the current polling – deep red for Trump and deep blue for Biden.

The tipping point state is Pennsylvania and polls show Biden ahead not only there but in many more states than he needs to simply win. This is why the most likely outcome is a big win for Biden.

Some simplifying observations:

  • For Biden to win he needs to win the Rust Belt i.e. Pennsylvania, Michigan, Wisconsin
  • For Trump to win he needs some of the Rust Belt but also ALL of the Sun Belt i.e. Texas, Georgia, N Carolina, Florida, Arizona
  • If Biden picks up some of the Sun Belt then he is heading for a big win.

By coincidence these States also split neatly in these categories by how they are processing votes. See below for a nice summary from the FT.

We will know the results tonight from the Sun Belt but the Rust Belt may be less clear, especially if it is close.

Drawing it together:

  • If Biden wins some of the Sun Belt – then we know he has won big and the delay in the Rust Belt does not matter
  • If Trump wins all the Sun Belt – then the election looks closer than the polls suggested. It’s likely the Rust Belt will also be closer meaning that we will genuinely have to wait until all the Mail-in ballots are counted. Even if Biden is still the winner this will be enough for Trump to contest the election and we may have prolonged chaos and conflict.

What to watch for

Florida will release results around 8pm ET / 1am UK time. If Biden is a clear winner then I think it is all over. If Trump wins then it could be a long night/week/month.

Regeneron – Has Trump found a cure for Covid?

I have followed Trump’s Covid case very closely and it has been very confusing as the timeline of symptoms and treatment has not matched up to what we know about the progression of this virus. I am left thinking that the main difference between the particular case of Trump and others was his use of Regeneron. He claims it is a cure, I’m thinking it may have made him worse.

Timeline

  • Tuesday Sep 29th – We see Trump debate for 90 minutes. I see no signs of any symptoms.
  • Thursday Oct 1st – He tests positive. The only symptoms are reports of fatigue on the Wednesday and Thursday, but clearly not severe as he attended a fundraiser without major incident.
  • Friday am Oct 2nd – Trump personally requests and takes “Regeneron”, supplied by his golf buddy from the company Trump has held shares in. This is an experimental drug not approved by the FDA, but he gets emergency clearance to take it and Dr Conley agrees to administer it. His doctor then reports that his only symptom is mild fatigue.
  • Friday evening Oct 2nd – Trump has a rapid drop in his oxygen levels and takes a helicopter to hospital. Scans show signs of lung damage (i.e. pneumonia) and he is seen by a team of world class pulmonary experts. He is treated with remdesivir and notably the strong steroid dexamethasone.
  • Over next week – only very sketchy and misleading medical reports. From his videos we can see indications of pneumonia with a cough and shortage of breath. However he does appear to be improving and so the reason for the lack of transparency is not obvious.
  • Oct 13th Trump appears much improved, reportedly testing negative for Covid.

Is this a normal timeline?

It really isn’t. The onset of mild symptoms and rapid recovery would imply that he had a mild case of Covid, which is the most common outcome, even for people of his age and weight.

The hospital admission, lung damage and use of dexamethasone prescribed by highly regarded experts in their field can only mean that he was genuinely very ill and in real physical stress. For this to have been caused by Covid, it would imply a much more serious case – but in a Covid case these more serious symptoms typically occur 7 days after the onset of symptoms because they are caused by the overstimulation of the immune system going into overdrive. Further, if it had been caused by Covid, then it would not make sense that he could be released from hospital after only 3 days.

The evidence of serious illness is certainly clear, but the timeline is not consistent with it being caused by Covid.

How to reconcile this inconsistency?

Trump’s explanation that Regeneron cured him fits his view of himself as a genius who can treat himself better than anyone. He asked for this specific drug just as he asked for Hydroxychloroquine earlier this year, which Dr Conley also agreed to administer to him. But the timeline is exactly the wrong way round. He took the Regeneron before the emergence of the lung damage and drop in oxygen levels so it is hard to see it as the cure.

A common theory is that Trump had Covid for a week before he admitted to having it, and so the emergence of the overactive immune response is still the correct timeline. This does not reconcile with his rapid recovery unless we combine the theory that he had been sick for week with the theory that the Regeneron helped shorten his illness. This does not explain why he had no visible symptoms all week, whilst having a severe case of Covid which was about to get much worse.

I am left wondering if it was the Regeneron that caused the problems. In this hypothesis, Trump has a mild case of Covid but takes a massive dose (8g) of monoclonal antibodies which strongly stimulate his immune response. This overstimulation might have lead to pneumonia which is then treated by dexamethasone, after which he is recovering well. Trump does not want to admit that he caused the problems which would explain why he did not allow his doctors to give details on his condition.

Perhaps his Covid case was always mild and so it would have gone away without much intervention.

Breaking news

Eli Lilly has a very similar drug to Regeneron. Their trial has been paused due to safety concerns.

https://edition.cnn.com/2020/10/13/health/eli-lilly-pauses-trial-monoclonal-antibody-coronavirus/index.html

Would I take Regeneron?

I do not want to make a judgement from such sketchy information on a new drug. I would prefer to wait until clinical trials are completed and then we can see if it works or not.

Brexit – what is Boris’ next U-turn?

If there is one behaviour which has characterised Boris as Prime Minister, is the frequency of U-turns. The major one last year was giving in to the EU on Ireland so he could get a Withdrawal Agreement passed. This year they have mainly been on Covid and exams for schools but I am now wondering what his Brexit U-Turn could look like.


Current Brexit situation

Without an agreement on the terms of a trading relationship, we will have a no-deal Brexit at the end of this year. This is not as serious as a no-deal Brexit would have been last year because now we have the Withdrawal Agreement. While we would not have trade agreements with the EU or any of the countries with whom we trade under EU’s trade agreements, we would also not be a rogue state reneging on our international obligations and agreements.


Pervious Brexit negotiations

The UK is acting like there can be a last-minute deal and the way to get there is brinksmanship. This was the case last year with the Withdrawal Agreement which the EU had already drafted. Talks were taken to the brink requiring either the EU to back down, the UK to back down or we go over the cliff edge. In this instance it was the UK that caved in, agreeing to a border in the Irish Sea and some commitment to EU’s level playing field rules in any future trade agreement. The EU had a draft we could sign, and Boris eventually signed it claiming victory and that the EU backed down.


Can the UK just cave-in again?

One path that many think likely is that Boris takes negotiations to the brink, then at the last-minute U-turns, agrees with the EU’s position, signs an agreement and claims victory.

But there is a serious problem with this idea. In contrast to the Withdrawal Agreement, there is nothing to agree to. There is no such draft of a trade agreement and there is not going to be one. The negotiations are the method by which the draft can be written, and these are not happening.

Why are talks making no progress?

The sticking point is the level playing field rules.

The UK signed up to them in principle in the political declaration of the Withdrawal Agreement but is now saying that they did not really mean it. The EU takes the declaration seriously and has based its negotiating position with it as a starting point.

Another way to think about this is that the UK and EU want to have very different types of agreement. The EU wants an overall governance structure into which all the detailed issues can be placed and resolved. The UK wants piecemeal agreements with much less overall governance or enforcement structure.

What deals are possible?

The table below lays out how I think the EU sees the options:

screenshot_2

  • Status quo is the one they want to negotiate. Zero tariffs, zero impediments to trade (such as regulatory and standards barriers) with a full level-playing field agreement.
  • No Deal is another simple option on the table, without level-playing field agreement, and the UK operates as a 3rd party country under WTO rules.
  • Canada-style agreement with some level-playing field provisions and some reduction in tariffs and barriers to trade is another option. The EU’s position is, given the geographical proximity of the UK, the level-playing field provisions would need to be more stringent that they are with Canada. The process of negotiating such a mixed deal is very complicated with many technical issues and perhaps even more complex political ones. For example, the Canada deal negotiations with the EU started in 2009 and are only recently being finally ratified. This timeframe is common for this type of deals as we saw with the Trans-Pacific Partnership deal which started in 2008, was agreed in 2015 and then Trump withdrew the US before it was implemented.

What does the UK appear to want?

The UK’s position appears to be zero tariff, zero impediments to trade and zero level-playing field.
(The ‘have cake and eat it’ option)
This is not something the EU is willing to entertain which is why the negotiations are stuck.

Which way will Boris jump?

If Boris is going to do another U-turn and agree to the EU’s framework then he needs to do it soon. This is not something that can be drafted and ratified in December. By all accounts Boris is not focusing on this issue and in this regard no-deal looks the most likely outcome.

Has the US stock market disconnected from the real economy? Part 4

In my previous three posts, I examined the pricing fundamentals of the US stock market. In this post I will look at possible explanations for the pricing.

  1. Don’t fight the Fed

The argument here is that the Fed is active in monetary policy to offset the negative effects of the recession. In the recessions of 2001 and 2008, interest rates were around 6% and could be slashed giving a huge boost to the economy. In addition, in 2008, the Fed began its expansion of its balance sheet and continued it with QE in 2010.

In the recession of 2020, the Fed’s tools are more limited but it is fair to say they are using them as aggressively as they can and have managed to get long term interest rates to fall despite the vast surge in government debt issuance. The question remains of why the Fed will be so much more effective now than in previous recessions as the forecasts and pricing suggest.

The argument that yields have fallen and so the yield on all assets should follow is decent and intuitive but doesn’t explain why pricing is so much more optimistic than in previous recessions. In the other recessions of 2001 and 2008, we also saw sharp falls in interest rates but the impact of the drop in growth and thus earnings vastly overwhelmed this. The argument to justify the current situation would have to be rather different, that earnings will not drop very much (unlike previous recessions) and that Fed intervention will be huge and long-lasting, despite a rapid recovery of the economy.

It is true that Fed intervention this time around is truly monumental, the increase in the size of their balance sheet is over $3trn in the past quarter alone. If you can remember as far back as the Global Financial Crisis, the increase of $1trn in the balance sheet was seen by many as dangerous and would inevitably lead to hyperinflation. It may indeed be true that this huge intervention has flowed through to other asset markets, driving this stock market rally, but I do not expect the rise to be permanent. I do not expect the Fed to keep buying $3trn a quarter in financial assets to support the markets, particularly if the analysts are correct in expecting profits to immediately bounce back.

  1. Private investors

This is an argument I find rather appealing. Fiscal transfers from the US government, in response to Covid, have been massive but poorly targeted. For example, the PPP (Payroll Protection Programme) came in the form of forgivable loans which did not have to be fully spent on payroll. Much of $500bn PPP has been in effect gifts to affluent people who do not need it to support spending.

Overall transfers from the government have been over $1trn, whilst spending has fallen by nearly $400bn. This leaves a lot of extra cash sitting in the bank accounts of affluent people and since they are not spending it, they are investing it. I would suggest in equities and putting that much money into the US market in a short time is going to have a large impact on the price.

Looking more closely at the typical small investor in the US, there has been a recent move to choosing their own stocks. They will tend to pick stocks they have heard of, that has been rising rapidly, that is sexy. They buy tech stocks like Amazon, Apple, Google, and Facebook. They even buy Tesla because Elon Musk is so often in the headlines and he makes it sound like a tech stock.

This is a classic bubble environment. A rapid influx of new money causes a spike in prices, whether it is art, vintage cars, fine wines, or stock markets. Tesla is now worth more than all the other car manufacturers in the world combined while producing less than 1% of the cars. It takes a lot of effort to find a fundamental rationale for that.