The Macro Themes That Matter, Part 1

I want to take the most macro view possible today. We have a major US election upon us. And we are also experiencing significant increases in Covid-19 infections in Europe and North America. These are events with a wide dispersion of potential social, economic and market outcomes. So I want to frame the macro themes that matter by separating them into eight buckets.

Three of the issues will be in the political economy including the election. Two will be strictly about the economy and a further three relate to financial markets. I will outline the first three on the political economy today and work to round out the rest in the coming days.

The US Election

We have two starkly different styles and visions for America on display from Donald Trump and Joe Biden. I think it is an historic pivot point that will shape world history for decades to come in terms of US domestic policy, foreign policy, healthcare, you name it. And so, it is perhaps even more important a macro issue than the Covid-19 pandemic.

What makes me nervous: Joe Biden has released detailed policy positions as traditional politicians have done for decades in the US. But Donald Trump has not. We know the Trump playbook from the first term. But, there’s no guarantee that a second term would look like the first.

Talking point: Let me give you an example. Yesterday, Axios ran a story about Trump’s desire to fire the heads of the CIA, FBI and Department of Defense, if he wins re-election. Buried in that story was this nugget making the rounds here in the DC area:

Trump last week signed an executive order that set off alarm bells as a means to politicize the civil service. An administration official said the order “is a really big deal” that would make it easier for presidents to get rid of career government officials.

My take: Trump has had a high level of turnover in key positions during his first term. So, it’s no surprise he has a list of high profile administration officials he wants replaced. What is very different, however, is the sense that he now wants to go deeper into the civil and foreign service to begin a purge.

To my mind, it is reminiscent of Recep Tayyip Erdoğan, who, when able to foil a coup d’etat, went on the offensive and purged government agencies and universities of dissidents. And arguably, Turkey is no longer a western-style democracy as a result. It is a country with governance closer to the Russian model than the EU model.

Big question: What would a Trump second term look like once he is a ‘lame duck’, unshackled from the need to be re-elected?

I believe Trump would look to aggressively ‘prosecute’ all of his festering grievances. And that would mean charges against political opponents, dismantling of big tech, and a crackdown on media organizations at a minimum. People will be very surprised at what Trump does and how boldly he acts once he gets a second mandate.

Case in point: I have been listening to the Bob Woodward book “Rage” on audiotape. It certainly helps me understand why Trump has grievances and which ones matter most to him. But, one grievance people underestimate is the degree to which China ‘wrecked his economy’.

Trump’s position is that the US economy was doing better than it has in a very long while before Covid-19 hit. And he believes he was sure to get re-elected as a result. The pandemic wrecked all that and he puts the blame firmly on China, which is why he calls Covid-19 “the China virus”.

What does Trump do about it if he can remain in office through January 2025.

Covid and policy response

Right now, we are seeing record levels of positive Covid-19 diagnoses in the US and Europe. And while much of this is due to increased testing, the increased hospitalization rates are a sign that death rates are sure to rise in the coming days, weeks and months.

The known unknown:  How much will the hospitalization rise? And what will the policy response be? We don’t know what will happen here. But, rolling lockdowns in Europe are a sign that this wave will have large social and economic consequences.

What makes me nervous: There is the potential for this next  coronavirus wave to be large – much larger than most people are prepared for.

On Twitter, Cardiologist Marcio Bittencourt recently observed the following:

Given that Eastern Europe had lower mortality early this year and they have a larger population than western Europe, it is very likely the wave 2 will have a larger mortality in Europe than wave 1. Same has happened at least in 1918, 1968, 2009 influenza pandemics.

The WHO is warning that daily death tolls in Europe alone could be five times as high as the April peak. And given that the US is experiencing another wave just as Europe is, it makes sense to be prepared for similarly apocalyptic outcomes in the US.

Biggest downside risks: We are back into an economy vs. public health tension, with significant downside on one or both fronts.

Talking point: For example, White House Chief of Staff Mark Meadows told CNN yesterday that the novel coronavirus can’t be contained (video here).

My take: Meadows may be preparing us for the Trump Administration ‘choosing the economy over public health’. he seems to be saying that the virus is so uncontrollable, we have to accept bad public health outcomes and focus on the economy. Meadows is laying the groundwork for the US accepting a massive spike in infection and deaths without shutting down as Europe is doing.

The big risk here is that consumers move first – meaning that consumers see the death tolls and change behavior markedly, sending the economy into a tailspin because of the lack of lockdown leading to deaths as opposed to in spite of the lack of lockdown.


The big idea: hysteresis is a phenomenon where what happens in the future is dependent on what’s happened in the past because a ‘system’  changes in reaction to events. And if the events are big enough, the changes are big enough to create a ‘doom loop’.

An example of this in finance is when high default rates frighten both lenders and borrowers looking to avoid future defaults. If the reaction is great enough, it could freeze the credit market and actual cause defaults rather than avoid them.

What makes me nervous: we have no idea how people will react going forward after this massive economic and public health shock. We are now experiencing perhaps the most important social and economic event since World War 2. And it has changed the way people live, work, socialize, travel and consume.

My take: No one knows how durable these changes are. But if there is any hysteresis, where the impact of the pandemic is so traumatizing that behaviors change permanently, it is going to have a big unknowable future economic impact. This is yet another variable that falls into the known unknowns category. And because we are about to experience a significant coronavirus death wave, the hysteresis could be large.

Closing thoughts

I am going to leave it there for now. I don’t want to write a 2,000 word tome. But just reviewing the political economy pieces, I would say there is a large dispersion in possible outcomes. We know that Trump and Biden have very different visions about how to wield power. And, ultimately, I think that’s going to have huge social, economic and geopolitical implications. But the pandemic is also about to hit the turbo button. And the impact of what happens this fall and winter is not clear.

For example, as I write this Montana, a state with a contestable Senate election, is experiencing some of the biggest per capita infections rate the US has seen in this pandemic. That has the potential to alter the composition of the Senate, which is important in determining future US policy responses. The composition of the US Senate is almost as important a political factor as who wins the presidency this year.

And how difficult this fall and winter is on the public health front may help determine how deeply ingrained pandemic-induced behavioral changes are.

I still have another 5 topics to cover. On the economic front it’s jobs and consumers. On the market front, it will be credit, the  growth vs value paradigm and questions around bond yields and inflation. All of this is coming in the next few newsletters. Stay tuned.

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