Post-election market thoughts

I try not to get too political in my commentaries and prefer to stick with economics, demographics, and the effects of all that on the markets. But this time I need to stray a little bit. For those whose political leanings are far to the left or right, I’m not trying to start a fight or a debate. I’m just making some observations, so try not to get your knickers in a knot. What you do with my thoughts is up to you. For those who want to send me hate mail, I should point out a little key on your computer that says “delete.” It works like a charm.

As I write this (mid-November), the election is over and it appears the Biden/Harris ticket has won. I can’t say that I’m particularly happy about the outcome, but I’m at least glad that it is over. The sun seems to be still coming up each morning, the world didn’t end and life will go on. Our country has gone through many political ups and downs in its history, and this will be no different. Of course, there are lawsuits pending on various claims of ballot irregularities, and we’ll soon see how that works out. Barring a pretty big surprise, it would appear that Joe Biden will be the 46^th US President.

There was no clear mandate for either party and the country is literally evenly divided politically. If this wasn’t the closest presidential election in US history, it certainly was among the top few. The so-called “blue wave” never materialized, but the “red wave” couldn’t come up with the numbers either. Many who voted for Biden were actually voting against Trump more than for Biden. The Republicans lost two Senate seats (as I write this) and even picked up a few seats in the House. A traditional Wall Street saying is that gridlock is good for markets because neither side has enough votes to do anything too crazy. Even Will Rogers once said something to the effect that the best time for Congress was when they were not in session because they couldn’t pass anything. Gridlock is generally good for the markets.

In my opinion, Joe Biden will be a weak, caretaker president with not much in the way of a mandate. Deep down, he is a moderate Democrat. He sold his soul to every wing of the Democratic Party to put together enough of a coalition to beat Donald Trump, but he will never be able to deliver on most of those promises. After all the talk about promised changes, the ones made in the next two years will be more for show and with little substance.

I don’t think there will be any substantial tax increases, at least not the kind where congressional approval is needed, and there will be no “green new deal.” Even most of the moderate Democrats can’t live with that one. There will only be spending increases of the sort that Republicans in the Senate approve of. Of course, the Republicans haven’t been too shy lately about spending drunken sailors either. (With all due respect to drunken sailors, at least they quit spending when they run out of money.) The administrative state will take on a new life, and the guessing game will begin.

Without spending too much time on this topic, I should point out that the polls were wrong by a lot. There were national polls showing Biden with margins of 14, 16, and 18 points, with less than a month to go. I’ll leave it to the political scientists to figure that one out. My job is to figure out what the effect of all this will be on the markets, and, therefore, your investments and financial future.

Everyone seems to be breathing a sigh of relief that the loony left didn’t take over the machinery of government. There is certainly some satisfaction in that. But a Biden administration still has the ability and the willingness to radically intervene in the financial sector through Biden’s choice of Treasury Secretary and the composition of the Fed.

Biden recently said that he will not name senators to positions in his cabinet. That would seem to rule out Elizabeth Warren, but you never know. With limited or no ability to raise marginal tax rates, the new Treasury Secretary will turn to the investigative and enforcement powers of the IRS to shake more tax revenue from the money tree. My advice to all of you is to be less casual with your tax returns going forward. There may be a new sheriff in town.

From a macro standpoint, the Treasury Secretary is in charge of U.S. debt issuance, and we certainly have issued a lot of it, with almost no consequences since interest rates are low.  However, the average maturity of our debt is incredibly short. Most of the issuance in the last year (to pay for stimulus, etc.) has been done in shorter term instruments, which must be refinanced periodically. I’m sure these treasury people are probably smarter than I am. But I have never been able to figure out why they can’t issue much longer-term bonds with interest rates at historic lows.

They say there is no demand for longer term bonds. I say nonsense. Out of all the G10 countries, we are the only one with significantly positive interest rates. The pickup in yield from ultra-long maturities would be more than sufficient to attract foreign buyers. Ultra long-term bonds are essentially permanent capital. Why not lock it in at 2.25 percent? That’s why many people do 30-year mortgages on their houses. They are not worried about ever paying it off. They simply want to keep the payment low. Nobody is spending a lot of time thinking about interest expense right now, but someday they might. This will be especially true when rates go up on our out-of-control national debt. Just sayin’.

As President, Joe Biden also has the ability to alter the composition of the Fed, although it is hard to imagine how you could make it any more dovish than it already is. But I’m sure they will find a way. There will, no doubt, be some changes in store. Maybe they’ll do what Barclays did when they took over Lehman Brothers. The first thing they did was change the color of the carpets from green to blue. Cosmetics always come first.

Other than a lot of talk, there won’t be any dramatic changes initially because they don’t control the Senate. And the stock market loves the gridlock because they can’t screw things up too badly. The real drama will be in 2022, when a billion dollars pours into Senate races to try to turn it from red to blue. Then the tax hikes will be large and ideological. Until then, buckle up for a wild ride. Thanks for reading.