November 2020

Worldwide fiscal and monetary stimulus to offset the second wave of Covid-19. Uncertainties around upcoming US election.

Parts of Europe are already in lockdown as governments fight the second wave of Covid-19. The US lags Europe in terms of the second wave but will probably soon[NP1]  see a sharp rise in infection rates and be forced to implement new restrictions. Thus it is only a matter of time before additional fiscal and monetary stimulus is launched on a worldwide basis. (In the case of the US, probably “soon” after the elections.)

 

“A new Bretton Woods moment”

The IMF is currently working on proposals for a faster, and globally coordinated, fiscal and monetary policy response to the economic consequences of issues such as Covid-19 and global warming. Kristalina Georgieva, the IMF’s Managing Director, gave a speech on the subject which can be found on the IMF’s website by clicking here.

 

We have already seen massive stimulative packages

According to Mrs. Georgieva, “We have seen global fiscal actions of $12 trillion. Major central banks have expanded balance sheets by $7.5 trillion. These synchronized measures have prevented the destructive macro-financial feedback we saw in previous crises”.

 

Further stimuli are in the pipeline

Furthermore, “support remains essential for some time—withdrawing it too early risks grave and unwarranted economic harm”.

 

The need for restructuring is also stressed

“Beyond this, where debt is unsustainable, it should be restructured without delay. We should move towards greater debt transparency and enhanced creditor coordination. I am encouraged by G20 discussions on a Common framework for Sovereign Debt Resolution as well as on our call for improving the architecture for sovereign debt resolution, including private sector participation.”

So far, IMF policy towards countries in trouble has mainly been to grant ever larger loans under strict conditions and to regard “debt haircuts” as a “last resort”. But now there are signs that worldwide lockdowns and global warming have resulted in an “even greater willingness to spend” on the part of the Fund. In this regard, the IMF has pointed to a doubling of its lending capacity.

 

The IMF will lend more aggressively and encourages governments to do the same

The Fund expects and encourages governments to increase their indebtedness significantly in order to cope with the Covid-related economic crisis. Increased government borrowing is needed not only to stimulate growth (including through government loans) but also to finance “green” economic policies. Given the stress the IMF is putting on the need for a coordinated policy response, we think there is a strong likelihood that this will happen.

 

Central banks fund a bigger share of national debts

This is where central banks come in. In order to ensure the financing of national debts over the medium term, and to avoid that higher interest rates cause a decline in private investment, central banks must help finance a “concerted orgy” of spending.

 

The US election result will change this “big picture” very little

The election result will have less of an impact on US fiscal and monetary policy than many assume. Republicans and Democrats both stand behind an ultra-expansionary fiscal policy. They differ only in terms of the extent and speed of the attendant Federal balance sheet deterioration. Both parties will do their utmost to ensure the “managed rally” in stocks, bonds and real estate is kept alive. And both connive at undermining the ability of markets to function, and not just in the financial markets. (Indeed, the market’s ability to respond to scarcity indicators, or to promote an efficient allocation of capital, has been impaired for a long time.) Both parties bring the risk that increasingly managed foreign trade flows and an aggressively redistributive state help to create an all-regulating “superstate”, one which appropriates ever more powers for itself. That way lies a corrosion of free competition and freedom of speech.

 

Survey results are deceptive and election surprises not unlikely

Pollsters were wrong about Brexit and the 2016 US Presidential election. Most of the media, those in the “arts world”, in universities and among “state-sponsoring elites” prefer the Democrats, as do employees of polling organizations.

 

Republicans are more likely to turn up and vote

We believe just under 60% of all eligible voters will actually exercise their right to vote. While 245 million of the 330 million US resident population are likely eligible, we expect only around 140 million will actually vote. Supporter mobilization is therefore crucial and Republicans have an advantage here. We think most surveys do not take this factor adequately into account.

 

Covid-19 favors the Democrats

Most Republicans are opposed to compulsory health insurance and against a state-subsidized health system. In times of the corona pandemic, this is viewed negatively by many voters. Meanwhile, this year’s focus on race issues may also favor the Democrats. Around 65% of Hispanics tend to vote Democrat and in recent years this voter group has seen some increase in numbers.

 

Trump’s fundamentalist stance is well received by religious groups

Religion-motivated voters, for whom support for Israel and the protection of unborn life is important, will likely stay loyal to Mr. Trump despite his “character issues”.

 

Composition of the Senate will be decisive

The composition of the Senate will be decisive for what happens in Washington. Investors should therefore probably focus a little less on the Presidential election and a little more on the future composition of the Senate.

 

Next big rescue package to come soon after the vote

Both Mr Trump and Mr Biden are very focused on the demand side of the economy and want to implement additional, coordinated fiscal and monetary stimulus. In government, as opposed to campaigning, rhetorically large differences tend to get reduced. If the election on November 3rd produces a clear result we expect new major aid packages soon thereafter. In this case, the dollar will continue its decline and gold and silver should continue to rise.

 

But an unclear result would be “poison” for the markets and the economy

If the election result is unclear, there is a risk of unrest, even of civil war-like conditions on a localized basis, as well as a continuation of the current stock market correction, a renewed appreciation of the dollar and even (probably temporary) price falls in the precious metal markets. Investors should not discount this scenario as the probability of it happening is “high”. In such circumstances, a fresh US fiscal rescue package could not be adopted quickly and the US economy could see a quick relapse into recession.

 

Markets struggling with high Covid case numbers

The sharp increase in the number of Covid cases is putting the markets under considerable pressure. France and Germany have introduced new lockdowns. There are also new restrictions elsewhere. In the US, too, new social curbs are likely within a few weeks. The Covid second wave heightens the risk of recession both in the US and worldwide, even if the US election result turns out “good”. Good, here, means clear and indisputable. New lockdowns mean state finances deteriorate even faster which will bring central banks into even sharper focus. They have to prevent interest rates from rising by aggressively buying up a massively increased supply of government bonds. Investors should consider increasing their investments in gold mining stocks and their currency allocation to gold.

 


Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44


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