Reflate, repair and redirect

One of the telling quotes in ‘The Art of the Deal’ (Tony Schwarz and Donald J Trump) goes ‘You don’t reward failure by promoting those responsible for it, because all you get is more failure’.

That might also be the view of the American people, though given the very close-run Presidential election, it is hard to know what is on their minds, and what they define as success or failure. If the COVID-19 outbreak hadn’t happened, we might easily have seen a robust victory for Donald Trump.  

Previously, in the aftermath of contested elections – from 1876 to 2000, a sense of compromise has eventually prevailed. In previous elections, the vanquished candidate respects the ‘majesty of democracy’ as George H Bush put it. This time, as they say, might be different.

There is a small but appreciable risk to markets that the Trump administration and some emboldened Republicans try to thwart the orderly transition that President elect Biden might ordinarily enjoy. If this is so, it may derail the prospects for a generous fiscal stimulus, something that in the short-run could take the steam out of the recent market rally.

Beyond that the Biden team will bring a decisive change in style, that itself will transform the policy landscape and by extension, market trends.

The first of these is that Biden’s presidency will be a restorative one in that it will reintroduce the thread of Democratic policy thought (through Obama to Bill Clinton), and very importantly would restore the competent workings and full staffing of institutions like the State Department.

The idea is that the American machine of state would once again purr into action, and credibility, predictability and technocracy will be restored to the execution of policy. On geopolitical issues such as relations with China and Iran, as well as the potential for a healing in trade relations with Europe, policy will be more clear and closer to orthodoxy. Broadly speaking, this means that policy volatility should fall. This should make the ‘big picture’ less cloudy.

One area where there may be a discernible improvement on the economic side, is international collaboration. Whilst the new administration’s hands may be tied by the Senate, there is enormous scope to re-engage with other countries and to restart collaboration on economic policy. One example might be coordinated action with the EU, Japan and even China, on a global fiscal stimulus program. Ideally, this would fast forward new trade rules and structures (including appointing a chief at the WTO), better organize the distribution of vaccines around the world, and underpin central bank policy on reflation.

Another trend that will soon come more closely into view is values-based policy making. In financial markets, ESG (Environmental, Social and Governance) led investing is short-hand for this. The Biden administration, again mirroring the EU, will likely would likely focus much of its stimulus effort on infrastructure, particularly so in the ‘green’ economy.

The success of Biden’s campaign and the tenor of his potential presidency will rest in good part on the extent of the economic damage ahead. If high unemployment and bankruptcies are a reality into the first half of 2021, notwithstanding the promise of a vaccine and possibility of a fiscal stimulus, then tone of economic policy will tilt much more towards social justice.

What is much less clear is the extent to which they would consider rejigging the tax system to place a greater tax burden on wealthier Americans and corporations. Whilst this will be contested by Republicans and as a policy issue will form the basis for the 2024 presidential election it prefigures an international revolution in tax policy vis a vis global corporations, wealthy individuals, and more specifically tax breaks or asset classes like private equity. The effects of this debate will ripple through the wealth management industry from 2021 onwards.  

Overall, the task of the new Treasury Secretary, and colleagues in the Labor, Commerce and State Departments, not to mention the White House is daunting, but will be best described by – reflate, repair and redirect. Reflate the global economy, repair economic and diplomatic relations and redirect investment to the ‘new economy’.

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