Holiday Eye on the Market: The Winter of Our Discontent

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MR. MICHAEL CEMBALEST:  Good morning, this is the Eye on the Market holiday version of the podcast.  At this time of the year, I send something out that's a little bit more personal to clients.  And if you don't like this kind of thing or are easily offended by certain things, please stop listening to this podcast immediately and listen to something else.  Otherwise, listen, keep going. 

So the title of the holiday piece is called The Winter of Our Discontent.  You might be able to guess about some of what I wrote about today.  That passage from Richard the III is about a harsh winter that's coming to an end, and now the good things are on the way.  The actual passage is, "Now is the winter of our discontent, made glorious summer by the sun of York."  And it's about the fact that this terrible season is ending and something good is coming.  And I think that's true.  A lot of hospital systems in the United States are overwhelmed, and COVID deaths are elevated right now.  But the vaccine trials suggest that better days are coming.  

A COVID vaccine was never a foregone conclusion here.  There's no AIDS vaccine still.  And a lot of traditional vaccines that use dead and attenuated viruses take years to develop.  And then the MRNA and vector vaccine approaches that Pfizer, Moderna, and AstraZeneca have come up with have never been approved for use before in the developed world.  So the fact that it looks like they work is kind of remarkable.  

A few months ago, in March when Mary and I did a webcast, I said that the world could be 70 to 80% back to normal a year later.  And my rationale was based on two things, the rapid pace of medical advances that were culminating and global efforts to defeat the virus, and also markets were pricing in at five, seven, ten-year drawn-out economic recovery.  That's the kind of thing that usually follows a war.  And so we thought the recovery would be faster with lots of monetary and fiscal stimulus, and also since pandemics are more closely related to national disasters than economic depressions.  

We have a table in here that looks at a bunch of economic indicators for the US.  Most of them are at least 60% recovered from, in terms of the percentage of the decline.  It's now been recovered, whether it's certain kinds of employment, production, spending, housing, retail sales, capital goods shipments, things like that.  And some of them are 70% recovered, and some of them are fully recovered.  So our forecast for the spring of 2021 is still on track.  And again, as I mentioned, there are some very overcrowded hospital systems that are kind of terrifying, and we have charts in here to show which ones they are. 

That said, it's very hard to escape this winter of our discontent.  Many of you are now aware of what's going on.  There have been allegations of election fraud.  There's been pressure from Congress and the executive branch on state legislators to submit uncertified slates of electors to the Electoral College.  Bunches of legislators are supporting this approach.  You had the lawsuit from the attorney general of Texas suing four other states for failing to conduct safe and secure elections.  And then 20 states and at least 120 GOP House reps filed amicus briefs or actually sought to become co-plaintiffs.  We've had calls from General Flynn and others for martial law, suspension of habeas corpus, and military tribunals.  There have been physical threats against election and appointed officials.  And then also counter-allegations of voter suppression, given what happened with the postal service, voter purges, drop box rules.  So this has been a difficult period here.  

The judiciary has been pretty clear so far that the Trump campaign lawyers have lost 30 to 40 lawsuits depending on how you count them.  There's 10 or 15 still pending and either zero or one clear wins.  Even with those judgements from the judiciary being so clear, I think it would be interesting if an objective policy shop or an academic team itemized a lot of the fraud and legal process allegations and provided a list of explanations for laypeople.  I think that would be helpful.  We've just had an election where we've had a bunch of states going from 5 or 8% absentee ballot shares to 25%, 40%, even 60% in the case of Michigan.  And you have highly gerrymandered and polarized voting districts that can lead to some weird lumpy outcomes.  

And I think there's a lot of interesting work that academics and other policy people that follow this kind of thing can explain so that the rest of us can understand the basis for a lot of these fraud allegations and why they either do or don't make sense.  And I think this would be helpful, particularly if this is how future elections will take place with very high absentee ballot shares.  Certainly Pennsylvania, Michigan, and Wisconsin should join the rest of the states and allow absentee ballots to be processed well before Election Day, and I think it's a fair question to ask why they haven't done that.   

To be clear, there have been very few documented instances of voter fraud.  There's a Brennan Center for Justice that has A Myth of Voter Fraud website.  And they've got a bunch of academic analyses and judicial decisions from 2000 to 2017 on all sorts of voter impersonation, list matching, list maintenance issues.  And they found .0025% instances of voter fraud.  And even the Heritage Foundation, which has a lot of history on commentary, only cites about 1,300 cases of voter fraud in its database, which begins in the year 2000, of all the elections they've covered since then. 

But what Brennan and Heritage analyzed are a little bit different from the ballot handling and data dump allegations in this year's election.  And so I still think it would be interesting for, as I mentioned, some policy shops and some academics to take a look at what happened, if only to allay the concerns of such large blocks of the population that don't trust the results.  

Now for people that are concerned about election fraud, remember this.  In February of 2020, Senate Republicans blocked three bills on election security, including election security funding, and a proposal to ban the voting machines from being connected to the Internet, which is one of the issues that's actually been cited by certain people as why they believe that there may have been certain instances of malfeasance this year. 

In any case, to add some lightheartedness to what's otherwise a pretty dour holiday piece, I noted in the piece how I fed some information on voter data news stories and Twitter feeds into our neural network model and showed what it came out with.  You'll have to look at the exhibit.  All I will say on this podcast is that there's a picture of Hugo Chavez, Michelangelo's statue of David, the octopus from my octopus teacher, a minion, and Mr. Crabs from Sponge Bob.  You'll have to take a look.  

And for everybody that looks at it, do me a favor.  Please don't get all upset; this is obviously satire.  I believe that a good postmortem on this election would make sense.  And I'd also like the Supreme Court to clarify what state legislators can and can't do regarding election law changes.  That's the essence of what the attorney general of Ohio did last week.  He filed an amicus brief where he angered everybody, which I thought was a pretty courageous thing to do, since he denied that Texas had standing to sue the other states for election handling, but also supported the need for some kind of judicial clarification on election law changes. 

In any case, all the states have now certified their results.  And the next step is the January 6th joint session of Congress, in which the electoral votes get counted.  Is there a chance that Trump remains president, even though today is the Electoral College admission deadline?  Yes, technically, but it would take a really bizarre series of highly unlikely events.  And if you want to understand the gory details, you'll just have to look on the appendix on page seven of today's piece, because it requires a detailed understanding of the Electoral Count Act, which was passed in 1887, and which is the process by which Congress has to sort out the issues of completing slates or challenges to the official slates of electors.  This is not an issue for the courts to determine.  This is an issue for Congress, and the Electoral Count Act, which was passed over 100 years ago, explains how that will take place.   

I do think that the courts may eventually grant some victories to the Trump campaign on extensions that were mandated by courts instead of state legislatures and on some equal protection issues in places like Wisconsin, where there may have been selective application in different counties of ballot curing and ID requirements.  But I don't think, and I haven't found anybody else that believes that even if the courts are going to find in favor of the Trump lawyers, that they're not going to provide the requested remedies, which is either reallocating or decertifying the electors in those states.   

One of my favorite shows as a kid was The Bob Newhart Show.  And I have always liked politicians that remind me of Bob Newhart.  Unfortunately, politicians like that are pretty rare and may become rarer if there's a GOP purge of politicians who were not supportive of the Texas lawsuit.  And in many states, that appears to be what's happening. 

I conclude the piece today with some observations.  You've got to see some of these charts to believe them.  The share of Congressional moderates has plummeted.  And as this has happened, growth rates in the United States have declined.  And there's a lot of reasons that growth rates have declined.  A lot of it's demographics and longevity.  But I believe that the growth rates have declined as well with the decline of Congressional moderates because you get these violent swings in both directions, in terms of all sorts of policy issues that prevent the country and specifically businesses and CEOs from making long-term plans on anything related to trade, energy, net neutrality, and things like that, that keep getting punted back and forth, immigration.  

A growing percentage of people in both parties see the other side as immoral, not just wrong, but immoral.  And for the first time ever, more people vote based on antipathy for the opposing party than based on support for their own party.  And we're actually at the stage here where you've got people who support the elimination of the Electoral College entirely in favor of a popular vote.  Now of course, Constitutional amendments are going to make that very, very difficult to happen. 

But that state, it would reflect the aggregate national preference but disenfranchise a lot of the states that for example, produce the food and energy that allow giant urban centers to exist in the first place.  And even more immediately, important as it relates to what may happen from the runoffs in Georgia, you've got a lot of people that are pushing Schumer as potentially the Senate majority leader if the Democrats win both seats to eliminate the Senate filibuster, which has been around since the early 1800s.  

That would give President Biden the chance to preside over a unified government, with one of the narrowest Congressional majorities ever, essentially 51/50 in the Senate, using the VP as a tiebreaker, and eight to ten seats in the House. 

If they eliminate the filibuster to pass major legislation that would impact the country for decades without any consent or support from the opposing party, it would continue a very disturbing trend.  And we have a chart in here on how over the last hundred years, major 20th century legislation almost always had some kind of bipartisan support, civil rights, immigration, war powers, deregulation, labor issues, trade expansion, the Patriot Act, the most controversial bills had substantial levels of bipartisan support.  And that era ended with the hyper-partisan passage of the recovery bill in 2009, the Affordable Care Act, Dodd-Frank, and then Trump's tax cuts, which was the single most partisan major bill in history.

So all I can tell you is if moderate politicians keep losing elections, and voters like us or like me, let's say, have to increasingly pick between the two extremes, I'm not happy about it, but I know which choice I'm going to make.  Anyway, I hope to see many of you in 2021.  Our Eye on the Market 2021 outlook is going to be released as usual on January 1st.  And I hope that all of you have a safe and happy holiday season.  

FEMALE VOICE 1:  Michael Cembalest's "Eye on the Market" offers a unique perspective on the economy, current events, markets, and investment portfolios, and is a production of JP Morgan Asset and Wealth management. 

Michael Cembalest is the chairman of market and investment strategy for JP Morgan Asset Management and is one of our most renowned and provocative speakers.

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