The Breakdown - What the Stock Market is Predicting Around the Elections

Episode Date: October 13, 2020

Today on the Brief: Market rally to highest point in six weeks BTC and ETH up in part on Grayscale ETH trust becoming an SEC reporting company (Grayscale, like CoinDesk, is a unit of DCG.) CBDCs (and CBDC skepticism) on the rise Our main discussion: How markets are trading the U.S. presidential election in November.  A look at what different stock and other market preferences suggests about who Wall Street expects to win, including:  Energy Private prisons Student loans Health care  Infrastructure Dollar Bitcoin

Frankly, the biggest expectation is that the base case, regardless of who wins, is more stimulus, more spending, more debt monetization. And really the question is just what people want to spend it on. That's the difference between the two parties. It's not whether they want to print or not. It's what they want to use that printing for. Chimath Palahapitia was on Squawk Box this week and said basically exactly this and reiterated his case for Bitcoin. The reality is that they have printed so much money that the last, likelihood is that we're going to continue to see asset price inflation independent of who's in the White House. The reality is Bitcoin's fundamentally not correlated with stock markets, because it is

underpinned by a set of beliefs that are completely orthogonal to the orthodoxy that runs the world today, and it is completely the inverse of how the financial infrastructure of the world operates. Put separately, I think that if you are a Bitcoin hoddler, if that's your big play, it seems that the forces that are making that an interesting bet are so big that they are independent of which party takes the White House. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Crypto.com, nexo.io, an elliptic, and produced and distributed

by CoinDesk. What's going on, guys? Monday, October 12th, and today we're talking about how investors are trading the election. First, however, let's do the brief. First up on the brief today, a big stock rally this morning, with stocks climbing to their highest level in almost six weeks. The S&P, for example, was up 1.5%. Big Tech led the way with Amazon in anticipation of Prime Day, Twitter outperforming, and just in just in general a real strong showing from tech companies. So what are the narratives on this particular move?

Well, first, we've got earnings season coming up and big bank earnings are kicking it off and they're expected to be high, suggesting that we've come a long way in terms of the economic recovery. There is also some more optimism around a stimulus bill being passed, even though it sort of seems like it's stuck right now. There is finally the market settling into the narrative. of an expected blue wave and stimulus on the other side of that, as we'll get into a little bit later. Next up on the brief today, Bitcoin and ETH are both up as well. Bitcoin is up 1.3% in the last 24 hours and ETH is up 3.17%. One of the explanations that people seem to be pointing to is that grayscale investments Ethereum Trust has just become an SEC reporting company.

That means that they'll regularly disclose how much money is flowing through the instrument, which means more trust, and more trust means more potential buyers, especially from the institutional asset classes. This is the second grayscale vehicle to do this after their Bitcoin trust did it in January. Last up on the brief today, CBDCs heat up, but some aren't buying it. On the one hand, there is no denying the amount of chatter around central bank digital currencies. At a virtual IMF event today, ECB President Christine Lagarde said the ECB is, quote, very seriously looking at the creation of a digital euro.

This was blasted out over all the wire services and got a bunch of buzz. Also in the news today was Japan saying that they're going to start CBDC experiments in spring, as well as a People's Bank of China officials saying that the digital yuan rollout should actually be sped up. This is basically an inescapable part of the geopolitical and economic narrative right now. On the other hand, some are skeptical. The Wall Street Journal published its highly influential herd on the street column all about why central banks hadn't really proven the need for central bank digital currencies just yet. Their biggest argument, it seems to me, was that these types of assets could really hurt commercial banks.

Basically, if people assume that the most secure place to keep their money is with the central bank in the central bank digital currency, then commercial bank deposits could go down, and those deposits are bank's most stable source of funding. I do think this is a real concern. It's one of the reasons that the digital dollar proposal in some of the early stimulus plans didn't have a chance of getting out of committee, basically, when they were proposed. The other argument that the Wall Street Journal makes is that although security and privacy could be benefits for CBDCs, they sort of run counter to their AML goals, which I also agree with. I think, in fact, as you'll see from the episode last week where I asked whether CBDCs were the

end of privacy and money, I think that that is one of the biggest central challenges, one of the things that we should be most nervous about as it relates to central bank currencies. So I think it's interesting and probably important that as these things come closer to fruition, you're starting to see some market actors really push back and say, are these really necessary? With that, however, let's go to our main discussion, which is how investors are trading the election. In a recent episode, I said that I would be covering the election, but really only from a market's context. Just a few weeks out now, market narratives are tightening around the election and shaping a lot of the other things happening as well. So even if you don't care, even if you don't think there's really a difference on the other side of either

of these candidates, I do believe that understanding what the markets think is a relevant exercise. What's more, you're just going to be seeing a lot more of this type of analysis in mainstream media. In fact, the specific timing of today's podcast was inspired by a long piece about the same subject in the Wall Street Journal. Now, I think one important caveat for any discussion of what markets think about an election is that we don't necessarily have the best track record of markets really understanding or being able to predict elections. Or more importantly, being able to predict what would happen when people actually got into office. For example, on election night in 2016, stock futures actually tumbled.

Investors were worried because the newly elected President Trump was so unpredictable. They weren't sure what he was going to actually do. The one thing that they did feel like they had clarity on is that he was going to throw up barriers to trade. Obviously, markets wouldn't take too long to get over this, particularly when the 2017 tax cuts came. This episode is brought to you by Crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the Crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the Crypto.com app today.

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Visit elliptic.co slash coin desk to talk to a crypto compliance expert today. That's elliptic.com slash coin desk. So with that, let's also move to who are markets betting on to win. And this isn't exactly from the stock markets, but according to election betting odds, which aggregates some of the betting platforms, including FTC and predict it, Biden's sitting right now at 65.2% chance to win the election,

which is up 1.65% in the last day. President Trump, meanwhile, is just at 32% to remain president. When it comes to Senate control, the Dems are at 62.2% with the GOP at 37.7%. There's any good news for the GOP that's up about 1% in the last day. House control, meanwhile, is at 85.8% chance for the Dems, with only 14.1% chance for the GOP. So basically, these election betters are predicting a blue wave, as we've heard. Second, what are we seeing in the volatility markets? Truth be told, there was a lot more action at the end of September, going into Trump saying

that he wouldn't necessarily go, he wouldn't necessarily accept an election at the debate. On September 27th, the journal published an article, investors ramp up bets on market turmoil around election, and it was basically showing how CBOE volatility futures were showing that investors were thinking that turmoil and indecision could last even into December. But now let's look to what specific assets are performing well and what are struggling and how this might give some insight into what markets think is going to happen on November 3rd. One of the ways that you can track this is that Wall Street basically builds election baskets of stocks that would be associated with each political party winning. Analysts then watch the performance of those baskets to create probability

forecasts for elections. Strategies research partners has been doing this, and right now they're seeing 60% for Biden and 40% for Trump. One additional, very big caveat is that this is the same as it was at this period in 2016, and we know how that turned out, so I don't think you can take that as fully predictive, but it's an important note nonetheless. Now let's look at some of the specific sectors that find their way into these baskets. First, let's look at energy, which has perhaps the easiest to track difference between the two candidates. In the Democrat basket are things like Sun Run, Next Era Energy, Tesla, I shares global clean

energy ETF, basically anything clean energy, anything clean energy infrastructure. This anticipates a huge emphasis on climate change and clean energy in a potential Biden administration. On the flip side, the Republican baskets include things like oil and gas. Christina Hooper from Invesco said, quote, Energy really is the sector where we would likely see the market's expectations about the election priced in. It is such a clear-cut difference between the two candidates' policies. On the one hand, I agree with that.

But on the other hand, there's lots of other reasons that oil and gas are down right now, specifically the historic low demand coming off of COVID-19 shutdown. So it seems to me at least a little bit harder to ascribe that downward motion in oil and gas as strictly election-related. Next up, let's look at anticipations around tax policy. So it seems likely if Biden is elected that he will work to roll back many of the cuts from the 2017 Tax Cuts and Jobs Act, including moving the corporate tax rate up from 21% to 28%. Goldman Sachs put together a basket of stocks that benefited the most from tax cuts. and said that that basket has trailed stocks that didn't gain as much from the bill.

So, again, maybe this would suggest that people are anticipating a Biden win. That said, this is a much more muted area when it comes to inferring much from stock performance. Many think that the bigger factors in stock performance are going to be about economic support in the context of post-crisis recovery. In other words, more stimulus, low interest rates, these things that are going to happen regardless of administration, are likely to keep things high no matter who wins when it comes to stock market prices. A couple more areas that suggest that markets are anticipating a Biden win. Private prisons and student loan servicing companies. Private prison stocks went up a significant amount

under Trump, but have slid more than 30% this year under concerns about Biden who has pledged to end using them at a federal level. Student loan servicing companies have also gone down, and people think that that projects a dumb victory because of an anticipation of more stringent regulations or even because a big portion of student debt could be outright cancelled. These strike me as more interesting tea leaves because they don't normally get a lot of investor attention. What about when it comes to the dollar? Well, right now, Goldman is saying sell. On Friday, strategist wrote a note that said,

quote, the risks are skewed towards dollar weakness, and we see relatively low odds of the most dollar. dollar positive outcome, a win by Mr. Trump combined with a meaningful vaccine delay. A, quote, blue wave U.S. election and favorable news on the vaccine timeline could return the trade weighted dollar and DXY index to their 2018 lows. UBS and Invesco have both said similar things. So when it comes to the dollar, these big investment houses are saying, look, Biden probably wins, and that means the dollar's not likely to go up. Now, what about areas that are really, really blurry? Well, stocks in general, as we mentioned,

are likely to have that sort of stimulus force and tailwind going on. Trade is hard to read as a specific indicator, because both of these candidates are trying to sort of out-compete one another on being tough on China, with really the only difference being about how inclusive of allies Biden is and the strategy that he wants to use to go about isolating China more in bringing business back home to America. Infrastructure is seeing sort of the same thing. Both parties have advocated for much more spending on this area. And when it comes to health care right now,

markets don't seem like they feel like they can really tell what would happen under a Biden administration. So that's really a wash as well. So overall, like I said, when it comes to these indexes, people like Strategies Research Partners are suggesting a Biden not a Trump win. It seems to be what the markets are anticipating. I think on top of that you have something we've been noticing over the last week or so, which is this narrative shift to, hey, you know what, a blue wave is good because it's going to

pump a ton of stimulus money into the stock markets, which is going to raise asset prices and be good to stock investors. But then I guess this brings up one more question, which is, what does it mean for Bitcoin? Frankly, the biggest expectation is that the base case, regardless of who wins, is more stimulus, more spending, more debt monetization. And really the question is just what people want to spend it on. That's the difference between the two parties. It's not whether they want to print or not. It's what they want to use that printing for. Chemath Palahapatia was on Squawk Box this week and said basically exactly this and reiterated his case for Bitcoin. The reality is that they have printed

so much money that the likelihood is that we're going to continue to see asset price inflation independent of who's in the White House. The reality is Bitcoin's fundamentally not correlated with stock markets because it is underpinned by a set of beliefs that are completely orthogonal to the orthodoxy that runs the world today. And it is completely the inverse of how the financial infrastructure of the world operates. Put separately, I think that if you are a Bitcoin hodler, if that's your big play, it seems that the forces that are making that an interesting bet

are so big that they are independent of which party takes. the White House. This is something that I'm going to keep a watch on. I'm really interested in how much this narrative might shift over the course of the next few weeks. I think that all of us deserve to have a little bit more skepticism around conventional wisdom a few weeks out from elections given what we saw in 2016, so I know that it's going to get crazy, but it'll be really interesting to watch as well. Hit me up on Twitter, let me know what you think at NLW, and until tomorrow, guys, be safe and take care of each other. Peace. Hey folks, I'm Adam B Levine, podcast editor here at CoinDesk.

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