Blue wave a 'perfect storm' for markets

This week on Talking Finance: 

• Professor Simon Jackman, Chief Executive Officer of the United States Studies Centre, discusses the fallout from the Capitol Hill insurrection and its significance;
• Chris Weston, Head of Research at Pepperstone Group, looks at how markets are responding to the blue wave scenario in the US;
• Diana Mousina, Senior Economist, Multi-Asset Group at AMP Capital, dissects the latest retail figures; and
• Steve Sammartino, Author, Futurist, and Eureka Report’s Technology Commentator, runs through the power of big tech.

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AG: Hello and welcome to Talking Finance, I’m Alex Gluyas and on this week’s show we’re joined by Professor Simon Jackman, who is the CEO of the United States Studies Centre, for a discussion on the remarkable week it has been in US politics and the fallout from the Capitol Hill insurrection. For a look at markets, we’ve got Chris Weston, who’s the Head of Research at Pepperstone Group, and he looks at how markets are responding to the blue wave scenario in the US and the prospect of more stimulus being pushed through.

We also chat to Diana Mousina, Senior Economist at AMP Capital, and she unpacks the latest retail figures and what they mean for Australia’s recovery. Then Author, Futurist and Eureka Report’s Tech Commentator, Steve Sammartino, looks at the banning rampage Twitter is going on and what that says about the power of big tech today.

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AG: And now for a look at what’s happening in the US, we’ve got Professor Simon Jackman, the CEO of the United States Studies Centre. Simon, it’s been a pretty unforgettable few weeks in US politics. As someone who has studied US politics extensively, what did you make of the Capitol insurgence in terms of its historical significance?

SJ: The historical significance is absolutely massive. It’s the first time since the war of 1812 that the physical security of the US Capitol has been violated and this time, by US citizens under the instigation of the American President. It’s just remarkable to think that it came to that and indeed, I think it is slowly dawning on the American people, and in particular Republican members of congress as well, just how serious this was. And frankly, that it wasn’t worse in terms of the number of fatalities, the duration of the incident… I think that growing sense of outrage and shame, frankly, is what underlies some of the way support is draining away from President Trump among Republicans right now.

AG: The reaction has also been significant, there’s been numerous social media platforms that have banned Trump, his banks halting doing business with him, and calls for that second impeachment. Do you think this is the end for Trump’s political career or will he go down fighting considering there's still quite some voters out there that support him?

SJ: I think he’s going to go down fighting, the question is, what does that look like over the eight days he has left in office, number one, and the speech he gave just literally hours ago in El Paso, Texas, I believe it was, down on the border with Mexico in Texas indicates he’s not going quietly. There’s no resiling, there’s very little reconciliation, zero responsibility being accepted for the events of last week. The interesting question is, what is his standing among the Republican rank and file? That is the wellspring, that’s the mainstay of his political power in the United States, and where does that go literally over the next hours, days, for one thing?

But I think more fundamentally, of more importance for the United States, is over the next couple of years what sort of a force is Donald Trump as a former, frankly, failed American President? Nonetheless, what does his hold over Republican rank and file voters who vote in primary elections for who will run as Republican candidates, that’s the connection from Trump’s hold over the rank and file to the Republican Party. I think, for the time being, that remains intact, although it is literally moving in real-time. But that’s the one I’m keeping an eye on, not so much the next week or so, as compelling as that’s going to be, but where is Donald Trump as a political force six months, 12 months from now?

AG: We saw Republican congresswoman, Liz Cheney come out and say that she’s supporting the impeachment of Trump. How significant is that and could this be the start of other Republicans following suit?

SJ: It is a steady drip hour by hour, almost. Liz Cheney is the number three Republican in the House of Representatives. She was no fan of Donald Trump and broke with Trump quite a while ago over the course of calendar year 2020 through the coronavirus handling, through all that. Cheney was very clear that we knew where she was with respect to Trump. But nonetheless, her coming out and saying she would support impeachment, removal of the President, that’s incredibly significant. Is she giving some cover now to other like-minded Republicans to come out? Certainly, the other one to watch of course is Mitch McConnell in the Senate, who has said if the reporting is to be believed, essentially he’s not going to get in the way of impeachment. He’s not going to insist that his Republican senators toe the line on this. There is no line to toe, I think he’s giving them a free vote on this one and that’s enormously significant and we’ll just see, does that sort of withering of support, that wavering of support among Republicans start to really coalesce and take off over the next – and again, this is literally hour by hour politics at work here, because we’re down to the last week of the Trump Presidency. If they’re going to move against him, essentially they’ve kind of got to do it now.

AG: How likely do you think then that criminal charges will end up being made against Trump after he leaves office in terms of inciting this insurgence?

SJ: On that, I don’t know. We’re in such unchartered territory, we’ve never been down this road before. I honestly don’t think anybody knows the answer to that and a lot depends on what happens over the next couple of days. If Trump is removed from office I think that will take some of the air out of that balloon, but I think some of it is an investigation as well. What does an investigation reveal about contacts between, what was the President saying in private, what can be substantiated that really firmly connect the dots between acts and things he said and asked people to do and the events up on Capitol Hill?

Right now, I think what’s on the public record, it’d be a tough criminal case to make. His moral culpability I think is quite clear, but I think right now a criminal case on a sedition charge or incitement/insurrection charge, or whatever you want to call it, in a court of law would be a tough one to sustain. His criminal liability – perhaps, I think, the thing he is more concerned about are the charges that the Trump organisation and perhaps he and his family face up in New York State around the behaviour of the Trump organisation and the way it was moving money around, that is perhaps his more pressing criminal liability that he may be staring at before we get to any charges stemming from the events of last week.

AG: We’ve also got Biden’s inauguration next week, so how are you seeing this transition of power playing out and what do you think Biden’s main priorities will be in his first few months in office?

SJ: I think, number one, we all want a safe and secure inauguration day and I think again, that is something that is very much a work in progress, as I think the depth and the resolve and the level of coordination among the insurrectionists as being fully understood by law enforcement and security professionals, that’s just observation number one. But on Biden’s priorities, I think he himself last week made that very clear, it’s coronavirus, it’s COVID, it’s COVID… They have to get the distribution of the vaccines rolled out effectively at scale and quickly.

Nothing can really happen in terms of an economic recovery and a recovery of the United States in terms of its morale, I think, until you can reassure the American people that America is a safe place with respect to the coronavirus, but perhaps also it’s a safe place with respect to there is a government in place that is not facing the threat of uprising that State Capitol’s themselves are safe places too. I think right now America is under enormous stress and worry about what may transpire at the next six days and then the first hundred days of the Biden – how quickly can they get coronavirus under control.

AG: Great to chat, Simon, thanks very much for your time.

SJ: My pleasure, thank you.

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AG: And now for a look at markets, here’s Chris Weston, Head of Research at Pepperstone. Chris, it’s been a pretty mixed start to the year, but how are you reading equity markets’ start to 2021?

CW: Well, they’ve been pretty good. Certainly, here in Australia energy’s doing very nicely, I mean we’re up 1.4 per cent for the year, but energy’s up 8 per cent, materials up 4.5 per cent, financials up 3.9 per cent, so it’s been certainly a good start, there’s green on the screen. Japan’s a market that we’ve been looking at very closely, the Nikkei’s up 2.6 per cent, Hang Seng up 3.8 per cent. It’s been a positive start to what could be another volatile, perhaps less volatile, year. But of course, people are still positioned for this idea of what’s happening in reflation and higher inflation and position themselves accordingly within the sectors as I talked about there, energy, materials, financials all do well in a rising inflationary environment.

I think, ultimately, in the last couple of days we’ve seen a bit of a push-back from the Federal Reserve as well, obviously the price maker of central banks sort of poopooing the idea that we’re going to see a near-term taper of their bond buying program, which has given us some relief as well. So, yeah, we’ve got a few vulnerabilities in the short-term, but we started off 2021 in a positive fashion.

AG: There’s finally been that confirmation of the ‘blue wave’ situation in the US and the ability for Biden to push through more stimulus after gaining control of both chambers. How are you seeing that flow through to markets?

CW: I think initially the market story is a very positive situation. I think certain people were quite concerned about the influence that some of the more progressives, the hard left, would have, your AOC (Cortez), Elizabeth Warrens and Bernie Sanders of this world, for example, and the influence that they may have on the corporate landscape. But given the mix of the senate, the ability to pass through some of the much more progressive agendas is going to be very limited indeed. I think people have said, well, that’s fine, the makeup that we have now is so slim that we’re going to see more fiscal stimulus being rolled out, monetary policy is going to complement that quite nicely.

But because of the degree and the inability for them to pass a lot of the progressive and more extreme measures, then this is actually a positive scenario to play through. In fact, in terms of fiscal, it’s become somewhat more of a consensus view now that over the next two to three months we’re going to see a $1 trillion fiscal plan being pushed through, see nominal treasuries push a little bit higher, inflation expectations have sort of got along with that as well, and I think that’s really underpinning stocks.

As long as the Federal Reserve are keeping the gravy train going and welcoming opportunistic inflation and not talking about any kind of signs of tapering off their liquidity measures through QE, then I think the idea of having a blue wave and the genetic makeup of the senate and the slim ability to pass progressive measures is probably a perfect storm for markets there.

AG: We also saw the Russell 2000 hit fresh record highs overnight, do you think that’s solely based on what we just discussed, that greater fiscal stimulus being priced into that?

CW: Yeah, absolutely. We know with the Russell that the majority of companies are inward looking, they make their money from within America and if there’s going to be a significant fiscal stimulus, we’re talking $1 trillion dollars being rolled out over the next two to three months, potentially far more – whether we get another $2 trillion for infrastructure and other factors is still a major point of debate, but there’s certainly going to be more being placed on there. Interest rates are not going up any time too and in fact, if you’re an MMT supporter, then you’re going to be believing that they’re probably going to use more in terms of taxation as opposed to interest rates going forward.

But the Russell ultimately is an inward looking market, so if they’re doing measures which are going to have a much greater dominance in spurring growth within the US economy, then the inward looking stocks, which is what the Russell constitutes are going to do, is going to outperform. Whereas, if you look at the NASDAQ, a large component will make their money globally and that’s certainly true of the S&P as well, where over 50 per cent of the revenues are derived externally. I think the natural ramifications of buying an inward looking market leads us to taking an overweight view on the Russell, but it’s also part of the reflation trade. There’s a lot of value-orientated stocks that are seen within the Russell.

If we get a situation where bond yields are moving higher, both at a nominal basis, potentially on a real basis, but certainly on a nominal basis with treasury yields moving higher towards the backend of the curve, and you’re seeing a situation where materials, energy, financials do quite well, the dollar continues to sell-off to an extent, inflation expectations moving higher, then the equity market which is going to outperform in the US is going to be the Russell then.

AG: You wrote a piece at the start of the week about the current importance of the US Dollar, saying if investors get their US Dollar call right, it’ll help in other markets. How are you reading that, do you think a rebound in the US Dollar is on the horizon yet?

CW: At the risk of sounding like a fence-sitter, I’m very neutral on the US Dollar. We had been sitting, like everyone else, in the bear camp for some time and we understand the importance that the US Dollar has as part of the global reflation trade. This idea that we’re going to see higher inflation coming through, we still believe that’s going to be very much the case. But what we also recognise now is that every man, woman, cat and dog are very much long reflation, so they’re short the backend of the curve, they’re long materials, energy, financials, Russell… And right at the heart of that trade is a weakening dollar, and specifically the US Dollar against the Chinese Yuan. I think that’s been really, really, really influential in what we’ve been seeing in copper, in iron ore futures and all these other factors which have really helped to have this feedback loop into higher inflation expectations as well.

The Dollar is absolutely critical behind that and the variable that’s influenced the US Dollar has been inflation adjusted treasury yields, or what we call real yields, or treasury inflation protected securities. Inflation adjusted treasury yields, if they start moving higher, then I think we’ll probably get to a point where people really assess their US Dollar exposure, which everyone’s very much short at the moment. The Dollar is very influential in this trade which has become a consensus trade for 2021, that we’re going to see better times ahead and people are positioned as such. If we get to a point where the Dollar start rallying, then because of the one-sided nature of this holding, then I think you’re going to see some fairly violent moves.

But at the moment, I’m sitting in the neutral camp, so I think that the risks are skewed symmetrically in terms of up and down for the Dollar. I think when we get to a point where real yields start looking a little bit more like they might head higher, then I’ll probably take amore constructive or positive view on the US Dollar. Right now, I’m sitting in that neutral camp, so I think the risks for the US Dollar are symmetrical and therefore I’m looking at the signs which give me more conviction that it could make a downtrend or it could start to go higher in the moment. I think if you get your Dollar call right, then you’re going to get this very consensus trade on the money as well.

AG: We also saw a 20 per cent drop in the Bitcoin price within three days, are you viewing that as a correction that needed to happen?

CW: I think whether you’re trading Bitcoin – obviously, there’s a million different ways you can trade Bitcoin these days, depending on your risk tolerance and if you’re willing to take leverage or non-leverage or whatever. The fact of the matter is that the 10-day realised volatility in Bitcoin, yesterday sat at 125 per cent – that’s an annualised number. When you’re dabbling in a market that has that sort of level of realised volatility, you just need to be aware of the potential moves. After such an exponential move, to have a 20 per cent decline is something that we have to live with.

This really affects me as a trader – I want to understand, when I’m seeing volatility high, I want to adjust my position size and I want to run a much smaller position size. Volatility’s very low, then I can increase my position size and my position size is dictated to by the volatility in the market. Bitcoin’s volatility was so high that it just expected that at some stage we were going to get a 15-20 per cent move, it could be up or it could be down, volatility’s directionally agnostic. But these are the sort of situations that we have to live with as someone who’s investing or trading Bitcoin, is that it can have these sort of moves.

The other thing is, that one of the points in the early cycle of October-November was that there was a lot of whales who were disclosing their position, you’re talking about Stan Druckenmiller, Paul Tudor Jones, some of the big funds… Everyone was talking about this big position that the institutional crowd were amassing and of course, everyone was very keen to disclose their positions when they’re getting in, it makes a lot of sense. If you’ve got a multi-million dollar position in Bitcoin of course you want the world to know about it, because if you’ve got a reputation, everyone else will follow and you’ll push the price up, you’re talking your book up a little bit.

But if you are reducing your position because it’s moved above $40,000, then you’re not going to tell anyone because you might still have a holding and you don’t want the position to be smashed as everyone follows your trade. I think when it comes to that, just because of the lack of transparency in Bitcoin relative to the stock market, where if you’ve got a big position you have to disclose it to shareholders, I think what you’ve probably seen in that move is that some of the big cats have probably reduced some of their exposures after a big move there and we just don’t know about it. I think that’s one of the things we have to live with as well.

I sit in the camp personally with cryptos, Ethereum and Bitcoin, that I like the story, the adoption story, the macro story, whatever it’s going to be. I like it, I think it’s going to play more of a role in our lives going forward, but just be warned when you see realised volatility at those kind of levels, that is something that has to be consideration for your position size and for a lot of people who don’t have that risk tolerance, it’s something that you just wouldn’t be touching.

AG: Great to chat, Chris. Thanks for your time.

CW: My pleasure, thanks for having me on.

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AG: And now for a look at the economy, here’s Diana Mousina, Senior Economist at AMP Capital. We had the retail figures for November come out this week which found that retail sales rose by 7.1 per cent nationally, what did you make of it in terms of is this further evidence of a strong recovery?

DM: I think there’s a few things going on. The main issue is that you had the reopening in Victoria which obviously boosted retail sales for November quite significantly for the Victorian economy and that’s worth about 25 per cent of the national economy. That was one of the biggest reasons for such a strong increase in that month. But overall, the factors that drive retail spending, things like consumer incomes, consumer sentiment, all of these things are actually looking pretty good despite the fact that we’re still in the midst of managing the pandemic because the government has provided so much support to households. So, while that very strong rate of growth is unsustainable to be maintained over a number of months, I do think that retail spending will actually do pretty well over the near-term.

AG: That rise was led by Victoria which saw a 22.4 per cent increase, albeit from a low base. But, given the longer lockdowns faced by Victorians and the damage that was done to the economy as a result, how important is it for the Australian economy that Victoria’s seeing this strong rebound?

DM: I think it’s a sign that people want to be out there spending if they can. We saw the exact same thing when the lockdowns were lifted across the nation back in June/July, there was some pandemic shopping that was related to higher grocery spend and those types of things over March. But once people were allowed out and were more comfortable to increase mobility because they were less concerned about the virus or contracting the virus from going out, you saw areas like eating out lifting quite significantly. Mobility is really the key here in terms of how it drives retail activity.

I mean, over the last few weeks we obviously would have seen some weakness in retail spending across New South Wales and across other states as well because of restricted travel from New South Wales and now some other clusters popping up across Victoria and Queensland. The next one to two months may be difficult for retail spending overall, but if consumer incomes continue to hold up, which I think they will over the first half of this year, then I think that the retail sector can still do pretty well.

AG: We’ve got the end of JobKeeper coming up in March, as the government starts to ease off that initial stimulus introduced during COVID last year. How do you think that will impact household spending and subsequently, some of those retail stocks that have performed really well last year?

DM: We’ve already had one tapering down of JobKeeper which started at the beginning of October and it didn’t seem to impact households that much because I suppose you had enough other stimulus going on in place to kind of offset any weakness. JobKeeper is really about trying to support business incomes, which then support employment. If you’re in a situation where the economy is able to operate say, at 80 per cent capacity or even above that, to where it was before COVID and have 80 per cent of people still being able to visit business premises or that sort of thing, then you probably don’t need as much support as JobKeeper was providing. For now, I think that the end of JobKeeper is not going to be such a drastic fiscal cliff that a lot of people have been talking about, have been concerned about. The problem is if we go back into another nation-wide lockdown or the lockdowns become more stringent across the states, for example, in New South Wales we just had some areas of Sydney being locked down but it’s not like the whole of Sydney was locked down.

If you get pockets of these restrictions, generally businesses should be okay because it should only happen for a few weeks at most, the problem arises if we go back into a national lockdown, which is just absolutely impossible to predict. We haven’t been able to predict any of the lockdowns that have occurred across Victoria or New South Wales or now even Queensland. We are really just relying on Australia to maintain good control of COVID.

AG: You’ve mentioned we have been dealing with some COVID clusters over the past few weeks/month, but it doesn’t seem to have impacted consumer confidence drastically. Do you think we’re at the stage now where consumers are confident that COVID will remain under control until a vaccine is rolled out?

DM: Yeah, I think probably some of this positive vaccine news is making people more optimistic. The new year, Christmas period also maybe would have offset some of those concerns about COVID. Normally, what I’ve seen over the data over the past year is that when mobility takes a hit, just people’s movements around, normally consumer sentiment tends to perform more negatively. If we see some more mobility restrictions come in place or people reduce their mobility because they’re concerned about the virus, then I think consumer sentiment will still take a hit, but maybe some of these vaccine hopes will start to override that.

Although, the vaccine rollout is going to be incredibly slow, especially in Australia I think where we’re not in as much of a rush to vaccinate the population compared to countries like the US and the UK which obviously have a much different situation in terms of COVID case numbers. It’s going to take a long time for the vaccine to actually reach a large share of the population here.

AG: Good to chat, thanks for your time, Diana.

DM: Thank you so much.

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AG: And now for a look at tech news, here’s Author, Futurist and Eureka Report’s Tech Commentator, Steve Sammartino. Steve, it seems Twitter’s been on a bit of a rampage with banning accounts as well as Trump’s, and other social media platforms are following suit. Is this just further confirmation of the power that big tech does have today?

SS: Absolutely. If anything, it shows that their power is at an inordinate level now and they almost have become kingmakers and breakers. The thing that we need to be really clear on is that banning Trump and all his affiliate accounts, both Twitter, Facebook, all the way down to Spotify and Pinterest – don’t know what Trump’s doing there – is a reflection of the fact that he’s no longer going to be in power, rather than his behaviour violating the terms of service. We should be really concerned that after four years of violation of those terms, it was only since he lost power that they’ve removed him from the platforms. That, for me, is the most concerning element there because it goes to show that the terms and conditions of use are really irrelevant and what’s relevant is who’s in power and who they’re going to share their platforms with.

AG: We’ve also seen Apple and Amazon suspend Parler, which is a social media network used by many Trump supporters, because they weren’t doing enough to prevent the spread of posts inciting violence. Do you think this is a positive move by these tech companies or another example of them stamping their authority?

SS: I actually think it’s another example of big techs stamping their authority. Look, I actually am a believer that we do need to regulate things. I don’t think that violating free speech is good, but I think that what we need is the government to be making these decisions around the world, not big tech. The fact that these decisions are made by two of the top five companies in the world, with huge market capitalisations in the trends is really an issue, because they’ve become more powerful than nation states. While what was happening on Parler is not really the internet we want or believe in, there’s a real schism here in where the power lies and where decisions should be made.

It seems as though the regulations that we have at this point within the tech realm and within digital communications are severely outdated and most of the laws that we use on the internet now on what’s allowable content and what’s not allowable go way back to the mid-90s and the internet has changed significantly since then.

AG: What do you think the flow-on effects are going to be of these acts that we mentioned in terms of that battle between government and big tech and that growing call for increased regulation in the sector?

SS: Within the sector, we’ve got two main issues I think that are happening. One, is anti-trust, which these companies – and I think they are clear monopolies, the fact that you have an app store, whether it’s Google Play or whether it’s the iPhone app store, you’ve got two companies basically controlling what goes on your phone. I mean, you don’t even own your phone, you basically have a licence to use it because the software on there is licenced. You can’t even put your own apps on the phone. For me, that’s just inordinate monopoly power, so you’ve got the anti-trust issues happening and I think these companies can and should be broken up, they’re far too powerful, which will stifle innovation and stifle potential investment. But I think the bigger issue goes way back to the Communications Decency Act out of the Us and there’s a particular section there called Section 230, which states that internet companies don’t have to be responsible for what ends up on their platforms. That’s why we end up with continual issues of arguments about what’s socially acceptable and what’s acceptable on those platforms, and we have the tech companies deciding what they want on there and that’s just not right.

In the same way, we have roads that are regulated by the government, we have healthcare that’s regulated by the government, we have media that’s regulated, but this law says that tech companies aren’t responsible for the media on their platforms which is crazy because every algorithm is an editorial decision and I think they should be responsible for what’s on their platform. I think one of the really big solutions would be a KYC, know your customer, and what that would mean is that every person who’s on some form of social media needs a licence or a passport so we know who they are and we have that information available to see, in the same way that you had a phone number and we knew where you lived, or the same way that you have a drivers licence.

AG: How is this then going to impact investors? I mean, we’ve already seen Facebook and Twitter’s share prices dive quite considerably in recent days. Do you think these major social media platforms will continue to drop in value as this anti-trust movement really heats up?

SS: Yeah, it’s interesting. I think that the regulation would have a bigger impact on their profitability than anti-trust would. They actually almost offset each other. Anti-trust, splitting up the companies, I think they’d be more profitable as a sum of the parts or a better investment as a sum of the parts. But, if regulation comes in, absolutely it will thwart their profitability massively. The reason that Facebook and Twitter and Google and all these guys are so profitable, is because they’re unregulated. They’re basically unregulated monopolies. If they get regulated, their profitability will be smashed. Even one of the moves which is, data is labour, getting all of their data for free and not having to pay us interest or pay the data creators anything for use of the services will have a huge impact on their profitability.

They’re only so profitable because they’re a little bit like chemical or oil companies before there was an EPA, that’s what they are in real terms. So I’d be very nervous about their profitability as regulation comes in.

AG: Great, thanks for your time, Steve.

SS: Absolute pleasure.

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AG: And happy birthday to Paul Kelly, who is 66 today. Here’s a bit of, ‘From Little Things Big Things Grow’.

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AG: That’s all from me, have a great week.

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