Corrections
Correction posted at 8:41 PM PT, November 2 – Our original post earlier this evening assigned too many EC votes to Michigan, 26 instead of the correct 16. We have now corrected the mistake and made the appropriate edits. Correction posted 11:56 AM PT, November 3 – A friend pointed out this morning we had Rhode Island, the bluest of blue states, in the worng colunm for Trump. We have moved the states 4 EC votes over to Biden and made the appropriate edits.
I will never forget the election-eve of four years ago. The members of my debate club had been making predictions on the outcome of the presidential elections going back the last 12 years.
I held out making mine until the last minute and popped into Barnes & Noble just before they were closing. I noticed the “Madame President” magazines had already been placed on the racks. Bad omen, I thought.
I emailed my prediction when I got home.
“Trump wins electoral college, Hillary the popular vote.”
The skeptical emails came back, “are you sure?”
Ironically, from the same people that are trashing the election prediction that my daughter and I came up with tonight as part of a thought experiment for her government class.
Huge Increase In Turnout
Given the huge early voting, close to 100 million, 75 percent of the total 2016 vote, as we write, we project total turnout will increase by 20 percent over 2016’s total vote to 163 million.
Though these numbers are distorted by the COVID pandemic and thus lots of noise, we think much of the new turnout will come from the younger generations, who overwhelmingly support Biden; and from those coming out to vote against the President, not to reaffirm his presidency.
Our Projections & Analysis
Biden wins 350 EC votes and 51.4 percent of the popular vote, beating Trump by 7.8 percent.
This is not that far from the predictions we made in April.
We suspect a Blue 1980-ish outcome in the popular vote where Trump wins around 41 percent of the popular vote (close to where he is currently polling), which is about the same percentage as President Carter won, but wins a bit more than the six states than Carter did in the electoral college.
For example, if Trump loses Michigan (65% prob), Pennsylvania (61% prob), Arizona (54% prob), and Florida (47% prob) and manages to hold all the other 26 states he took in 2016, that puts him at 228 electoral votes, well short of the 270 needed for reelection. – GMM, April 13, 2020
We also think this may be even too conservative and Biden could take Ohio and Texas, which would give him 412 electoral votes versus 126 for Trump.
Of course, we will be off and wrong on many of the numbers below but we’re in the arena, folks. Heed the words of TR and hold your stones before casting them at those who stumble in the arena.
The fifth plenum, China’s major policy meeting, took place behind closed doors in Beijing from October 26-29, 2020. The 200-member strong Central Committee, the top decision-making body of the ruling party, delivered a work report, a draft five-year plan and a document outlining China’s long-term objectives up to 2035. The 14th five-year plan’s key targets were disclosed in a communique that was issued after the plenum on October 29. The plan for the coming years includes measures to identify policy priorities for keeping the economy growing amid the Covid-19 pandemic, supply chain disruptions, toxic relations with the West and the looming global economic downturn. More detailed drafts of the five-year plan will be released in the coming weeks. It will be approved by China’s top lawmaking body, the National People’s Congress, in March 2021.
S&P futures are getting schmoked at 11:38 pm PT, down almost 70 points, and approaching the 3200 critical support level. The futures could bounce there, or before there, but we seriously doubt it holds. The S&P will move into correction mode – down 10 percent – from its ATH at 3226.
The market is playing out just as Carol K. expected in her post a few weeks ago.
…we at GMM believe the U.S. stock market is extraordinarily overvalued. Coupled with the political event risk, we expect a sharp correction, similar to last March and the 2018 “nightmare before Christmas” downturn, which will allow me to get back into these positions much cheaper. I am also putting a shopping list together. – Carol K., October 15th
To paraphrase King Solomon, who wrote almost 3,000 years ago,
There is a time for everything, and a season for every activity under the heavens:
a time to buy and a time to sell
I don’t think you need an Apple watch to know what time it is.
After finally getting back on the property for the first time several days later, this was the only thing I could recognize, a Jack-o-lantern my oldest daughter carved from clay and fired back in her first-grade class. She is getting her Master’s in December.
Hey, it’s only stuff but these are the little things I am gonna miss
I flew the Concorde a couple times. Took off from London at 7 pm and landed at JFK at 5:30 pm, the closest I have come to time travel!
It’s been almost 20 years since the Concorde was retired, putting an end to commercial supersonic flight for the very rich. But out in Colorado, the startup Boom Technology has raised $160 million in its quest to build a replacement, one that should be cheaper, more comfortable and able to fly more routes. Here’s an exclusive first look at Boom’s prototype test plane, the XB-1. – Bloomberg QuickTake
We are not taking a victory lap yet but we have been warning President Trump’s focus on the stock market was not only bad economics but also a losing political proposition. Next Tuesday the option expires.
But the juxtaposition of a weak economy with high asset prices that result from low interest rates could provoke public anger, especially if it coincides with unemployment concentrated among poorly paid service-sector workers. – Economist, October 8, 2020
We will get a record-shattering 30 percent plus Q3 GDP release tomorrow but don’t forget the downside-upside asymmetry. If the economy falls 50 percent, it takes a 100 percent increase to get back to even.
And a stock market clinging close to its highs with an unemployment rate that has nearly tripled will reopen the wounds of the Great Financial Crisis (GFC) that the “fat cats” were once again bailed out at the expense of Main Street.
…Moreover, a narrative is beginning to take shape that the Trump administration and his Republicans are more of a Trojan Horse for the 1 percent and Greenwich set. That is, tax cuts for the wealthy and large corporations while cutting social services and healthcare for the middle class and pumping up and bailing out stocks at the expense of Main Street, where the top 10 percent directly hold almost 90 percent of total stock wealth while the bottom 90 percent have only a little over 10 percent.
At the same time, the Trump administration presents itself as sort of a dysfunctional Honey Boo Boo reality show to entertain its base. Though what some may perceive as a nice circus act but not quite exactly the savior of the working and middle class that many voted for. – GMM, May 2020
401(K)s
We hear a lot these days the term “Trojan Horse” applied to the current administration. You did hear that here first, by the way.
Trump’s focus on the stock market was misplaced. He talks about how everyone’s 401k skyrocketing. Really?
In 2019, the average 401(k) account balance was $92,148, according to Vanguard data.
Each year, the investment company analyzes account data from 5 million retirement accounts. Across these accounts, the typical account balance varies widely by the method used to calculate it — while the average 401(k) savings balance is over $90,000, the median account balance is much less at $22,217, according to Vanguard’s latest data, which was calculated in 2019. – Business Insider
Most people just don’t have much direct exposure to equities even if they have had their 401(K)s maxed out in the FANG stocks. Moreover, the median 401k could barely pay a half year’s rent in any decent size city in the United States.
Not Feeling It
The bottom line is most people haven’t and don’t feel the stock bull market, if, that is, we are still in a bull market. The S&P peaked on September 2nd at 3588.11 and is off almost 8.9 percent from the high.
The following exchange took place between President Reagan and reporters after the market close on Black Monday, October 19, 1987. Leaving to visit the First Lady in the hospital, President Reagan spoke just after the market lost over 20 percent of its value on the day.
Q: What about the market? Tomorrow will it go down again? President Reagan: I don’t know. You tell me.
Q: Is the market your fault? President Reagan: Is it my fault? For what, taking cookies to my wife?
Q: Reaganomics?
President Reagan: I just told you. Good Lord, we reduced the deficit over last year by $70 billion. And all the other things I’ve told you about the economy are as solid as I told you. So, no, I have no more knowledge of why it took place than you have.
Thirty-three years ago today, now infamously known as Black Monday, my grandfather, M. Peter McPherson, was Deputy Secretary of the U.S. Treasury and acting Secretary that day, while Treasury Secretary James Baker was in the air traveling to Europe. McPherson was the most senior Treasury official left in Washington to handle the crisis.
The stock market had already peaked in August after an almost 100 percent rally in the prior two years. By late August, the DJIA had gained 44 percent in a matter of seven months, raising concerns of an asset bubble, and had become very volatile as interest rates had been rising rapidly since bottoming in September of the prior year.
Similar to 1929, where the stock market peaked in early September, the markets had already begun to unravel, foreshadowing the record losses that would develop that Monday in October.
As the markets around the world began to crash, my grandfather convened with the U.S. Treasury’s Undersecretary of Domestic Finance and the Department Chief of Staff to discuss the government’s appropriate response. The Dow Jones eventually closed 508 points down, or a 22.61 percent, almost double the historic Crash of 1929, where the Dow fell 12.8 percent in one day.
Government Kicks Into Action
According to my grandfather, the situation demanded that his team put together a plan to calm the markets. The economy was doing fine, and there were no signs of recession. Real GDP growth came in at 3.5 percent in 1987.
Jitters about the U.S. trade deficit, rising interest rates, and the path of the U.S. dollar during the Plaza Accord are oft-cited as the fundamental reasons that triggered the crash, but nobody knows for sure. Trees don’t grow to the sky, and neither do markets. Stocks markets do what stocks markets do, keep their own schedule, and march to their own drummer.
The team’s conclusion at Treasury that day was the market was under severe strain for technical reasons and complicated by the new computerized program trading related to portfolio insurance. Nevertheless, the steep losses were causing significant dislocations in the financial markets.
Many large firms were under heavy liquidity pressure and were dangerously close to not making their margin calls and on the brink of failure.
My grandfather and his team placed a call to the then-new Federal Reserve Chairman, Alan Greenspan, only two months into the job, to encourage the issuance of a Fed statement that it would do whatever it takes to provide the liquidity to keep markets functioning.
It wasn’t the time to think about the policy’s broader economic implications, such as the potential moral hazard, as the plane was on fire and going down and desperately needed a rescue plan.
It was also clear Greenspan had been thinking along similar lines.
Fed officials drafted much longer statements for release, but Greenspan reasoned that a short, clear message would do the most to stabilize markets.
It is also important to point out that when Secretary Baker arrived in Europe late that day, he immediately began communicating with key finance ministers, such as those from Germany, Japan, France, and the UK to coordinate a global response to the financial crisis.
October 20
Greenspan issued his statement the next morning, October 20,
“The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” – FRB
In typical Greenspan fashion, the statement was vague in methodology yet resolute in purpose.
The market opened down and continued falling, there were no buyers and it appeared, at one point, the global financial system was headed for a complete meltdown.
“Tuesday was the most dangerous day we had in 50 years,” says Felix Rohatyn, a general partner in Lazard Freres & Co. “I think we came within an hour” of a disintegration of the stock market, he says. “The fact we didn’t have a meltdown doesn’t mean we didn’t have a breakdown. – WSJ
Then at about 12:38 pm, with many stocks not trading and pressure growing to close the markets a miracle seemed to happen.
With the closing of the Big Board seemingly imminent and the market in disarray, with virtually all options and futures trading halted, something happened that some later described as a miracle: In the space of about five or six minutes, the Major Market Index futures contract, the only viable surrogate for the Dow Jones Industrial Average and the only major index still trading, staged the most powerful rally in its history. The MMI rose on the Chicago Board of Trade from a discount of nearly 60 points to a premium of about 12 points. Because each point represents about five in the industrial average, the rally was the equivalent of a lightning-like 360-point rise in the Dow. Some believe that this extraordinary move set the stage for the salvation of the world’s markets. – WSJ
The rest, as they say, is history.
My grandfather felt that the Treasury’s phone call contributed to Greenspan’s thinking and as he made the decision to issue a statement to calm the market. The statement was the most critical event in stabilizing the markets and preventing substantial economic damage to the U.S. and the global economy.
My grandfather spoke about how the simplicity of the message prevented speculation while instilling confidence. Not unlike ECB President Mario Draghi’s, “whatever it takes” July 2012 speech, which saved the Euro currency, the European banking system, and ultimately the European Union during their debt crisis in 2011-12.
The Birth Of Stock Market Moral Hazard
Some argue, including one of the regular authors on this website, the Fed’s response to Black Monday ushered in a new era of faux investor confidence and the moral hazard that the central bank will always backstop falling markets. Thus, forever distorting market risk and real price discovery and contributing to the current boom-bust asset market cycle the global economy now experiences and will be extremely difficult to reverse.
Global Macro Monitor (GMM) often argues, which is not necessarily my own opinion, what was supposed to be a one-off market intervention in 1987 has now become the norm, which monetary policymakers will find it impossible to extract itself from, ultimately resulting in a major market and economic dislocation. We shall see.
President Reagan’s Confidence And Sense of Calm
During the crisis, President Reagan, whose administration my grandfather served several key roles in, was an excellent communicator and never once conveyed a sense of panic in October 1987.
Though not having a financial background, President Reagan did have a degree in economics and understood the nature of markets and how they coveted a sense of calm and leadership from the government during such a crisis.
The following video is President Reagan speaking to the press at the White House on Black Monday as he is preparing to board Marine One to visit the First Lady in the hospital.
Skip to the dialogue, which starts 5:40 minutes in.
Note President Reagan’s incredibly calm demeanor and sense of confidence after the most massive stock market crash in U.S. history.
Global Macro Monitor 