Dear Investors & Friends,
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat”… Theodore Roosevelt.
While western economies are still being held hostage by the Coronavirus and continuous government measures, keeping or re-introducing restrictions and partial lock-downs, more and more emerging markets are taking a different path back to an economic revival and some sort of normalcy. It seems that the Covid-19 fear factor is still prevailing in many industrialized democracies, while more and more people in developing nations seem to have understood that the consequences of global lock-downs can have an even more devastating impact on health and prosperity than the virus itself, especially for the poorest of the poor. The data analyzed throughout the year also shows that places with strict lockdowns have not been able to prevented cases from surging and the continuous spikes in cases are very similar to those in places that never locked-down at all. Countries like Sweden that went a completely different route than most other European countries so far have not experienced more devastating consequences than e.g. Spain or Italy, which had gone into complete lock-downs. As a matter of fact, the latter have experience quite dramatic spikes in cases in recent days while the situation in Sweden has remained rather stable. The same can be said comparing the seven U.S. states that never issued any stay-at-home orders like e.g. the Dakotas, Utah, or Arkansas versus those that did such as e.g. Michigan, Wisconsin, or California. At this point, we believe it is safe to say that the consequences of economic lock-downs turn out to be more severe than the outfall of the virus itself when it comes to health, prosperity, and the overall quality of life for a country’s population. And while government restrictions in the West remain one of the biggest obstacles for a global economic recovery, some emerging markets in Asia and Latin America seem to be ahead of the curve with a surprisingly strong resumption in economic activity. The latest third quarter GDP numbers out of China show an economic growth of 4.9% and ironically, China seems to have become the big profiteer from this crisis, fostering its path to global economic dominance.
Besides the global pandemic, the other significant event likely to influence the stock market this fall is the upcoming election in the United States. Not only for the Presidency but also as far as the balance of power in Congress is concerned. Since we are looking at the current political constellation through our “Swiss lens”, we may see some developments in a different light from what the American people get to see, based on the daily news cycle in the local media. Looking at the polls on a national level as well as in swing states specifically, a Biden-Harris victory seems to be the most likely outcome, especially since Donald Trump probably has been the most controversial and polarizing President in American history. At the same time though, I have to admit that from my own personal experience and having traveled from coast to coast over the last couple of weeks, I noticed a level of enthusiasm for the Trump-Pence ticket that not necessarily backs-up the numbers in the official polls. From my conversations with fellow travelers on airplanes or speaking to cab drivers and bartenders from Florida to California, I came to notice that an overwhelming number of people seem to be supporting President Trump over the former Vice-President. Surprisingly, even right at my doorsteps, in traditionally blue Palm Beach County, Trump yard signs and billboards seem to outnumber the competition by at least five to one.
From a pure investor’s point of view, the economic policies of the Trump administration over the past three years have proven to be extremely beneficial to domestic economic growth and have catapulted stock markets across the board to record high levels. Hence, it is very likely that a re-election of Donald Trump would solidify itself in further stock market confidence and economic growth. In general, markets tend to prefer “the devil they know over the devil they don’t” and consistency results in predictability; uncertainty has always been the stock market’s worst enemy. Even though it is probably fair to say that President Trump’s personality is rather volatile, his policies have turned out to be surprisingly steady and reliable. Under a second term of Donald Trump, the country is likely to recover from the economic hardship caused by the Coronavirus within due course, driven by further tax breaks, deregulation, and American energy independence.
To the contrary, the probably biggest challenge Vice President Biden is facing among moderate and swing-state voters are his ties to the Democratic Party’s radical left. Even though Joe Biden has positioned himself as a moderate and common-sensed politician, willing to reach across the aisle, the fact that his campaign platform has embraced Senator Bernie Sanders’ economic policies to a large extent, including the “Green New Deal”, could come back to haunt him. At this point, it is difficult to guess how powerful the socialist wing of the Democratic Party has become. Joe Biden’s campaign platform though suggests that it has gained substantial influence. Whether a Biden presidency would actually follow-through on the advertised tax and energy policies or only laid those out in an attempt to appease an internal opposition before the election, will remain to be seen. Another reason for concern is Biden’s health and the prospect of Senator Kamala Harris becoming the President of the United States within the foreseeable future. Her voting record in the United States Senate leans heavily towards the Socialist left and could take the country into a significantly different direction from what a Biden presidency potentially would. If enacted, major elements of the Democratic policy plan on key economic issues such as doubling the capital gains tax rate, repealing the Trump tax cuts, substantially increasing the corporate tax rate, and banning fossil fuels, in our view would have a devastating effect on American economic growth, lead to higher unemployment, a declining standard of living, a higher poverty rate and more foreign investments being re-routed to other countries. Additionally, a Biden-Harris administration would be adding an additional $5.4 trillion in government spending over the next ten years, as analyzed by the University of Pennsylvania’s Wharton School and based on Biden’s campaign manifest, while the tax hikes are expected to “only” collect additional revenues of approximately $2.5 trillion within the same period of time, leaving a substantial funding gap. Hence, it unfortunately seems likely that the suggested “Bidenomics” would not only raise the cost of capital, reduce the incentive to work and invest, decrease productivity and output across the country, but also send the national debt into an even faster turning deficit spiral, further decreasing the U.S. dollar’s purchasing power and increasing the cost of living in America. As far as the future and further devaluation of the U.S. dollar are concerned though, one has to acknowledge that there will be trillions more in spending in order to bail-out the economy after Covid-19, no matter whether we will see a second term for the Trump administration or a win for the Biden-Harris ticket in November. It is probably not an exaggeration when the pundits declare this year’s election to be one of the most important elections in our lifetime. We probably all have had our hat thrown in the ring, whether knowingly or unknowingly and it could well be that this time, the American voter is the “Man in the Arena”, defining this country’s destiny for decades to come.
Given the environment as it presents itself, we continuously recommend diversifying and protecting assets through offshore accounts in non-U.S. dollar denominated investments, preserving purchasing power against a declining U.S. dollar, preferably by holding equity and alternative investments in Swiss francs, Nordic- and Asian currencies, including Australian dollars, as well as precious metals. In general, we recommend staying underweight in equities for the time being and carefully consider bond investments, even though we do not expect global interest rate levels to rise over the next 18 months. Furthermore, we advise to set stop-buy orders on exchange traded funds that short the consumer discretionary, energy, transportation as well as the financial sector as a short-term hedge in case of a Biden-Harris victory on November 3rd. This mainly due to aforementioned policy concerns which are likely to negatively impact the economic recovery. This would be meant as a precaution until the dust after the election will have settled. Please contact us in order to define a hedging strategy which should be based on the specific equity exposure of each portfolio and differs per investment strategy and risk profile.
Oliver E. Hohermuth, Principal & Chief Investment Officer