Can we change the subject? I know what we can talk about!
Iowa! Everyone outside of the Beltway was focused this week on the coronavirus. Historical facts, comparisons with SARS, opinions abounding. Either it becomes a pandemic or it does not. Meanwhile, next week is Iowa! If Sanders wins there and in New Hampshire, he could carry that momentum into Nevada three weeks later. He already has two advantages in the Silver State: it has a high number of Latino voters (a group with whom he has strong support) and it’s a caucus state (playing to his unwavering base). Furthermore, Super Tuesday on March 3 is loaded with states with heavy Latino populations. Until now, the 2020 election has been somewhat of a sideshow to the colorful political headlines of the past few months—trade war, Brexit, impeachment. While those issues fade, the primaries are upon us. And Sanders could rack up enough decisive victories to establish him as the betting markets’ presumptive nominee come early March. Those same betting markets suggest Trump’s odds of winning rise if Sanders is the nominee. Of course, it’s only February.
Like Trump was an outsider, so is Sanders. He’s not even a Democrat, nor is he well-liked among establishment Dems. “Nobody likes him,’’ Hillary said in a documentary about her 2016 run that just premiered at the Sundance Film Festival. Yet, as the 2016 primaries showed, Bernie connects with many of the same Rust Belt voters who went for Trump. He actually won Michigan, Wisconsin and Indiana with overwhelming margins in a vast majority of counties where Trump thumped Hillary. He carried similar counties in Pennsylvania, too. Of course, Trump arguably has strengthened his ties to those voters, and there are a lot of potential roadblocks in the way of a potential Sanders coronation. Biden’s still the front-runner in national polls. Even if Sanders overtakes him, he could arrive at the Democratic National Convention with the most delegates but not enough to win the nomination. This is when party-loyal Super Delegates—the most established of the establishment Dems—would step and determine his fate. If that’s the case, might Buttigieg, if he’s still in, endorse Biden in exchange for a future administration position, maybe VP? Renaissance Macro views Biden-Buttigieg as a prize-winning ticket—two candidates with large bases that don’t overlap. How a fading Warren exits is important. If she encourages her supporters to back Sanders before the March 3 Super Tuesday contests, Sanders could become a much more formidable opponent to Biden. And then, Bloomberg! I’m going to need to get a lot more popcorn.
Earnings to date have been better than expected, with revisions much healthier than the manufacturing ISM, which Cornerstone Macro believes is overstating weakness. With the Fed in a dovish hold (reinforced by Chair Powell’s post-meeting comments, with futures actually pricing in at least one cut this year), global short rates at cycle lows and commodity/production input costs on the wane, the economy should get better. Goldman Sachs’ proprietary global indicator just posted its strongest reading since May on broad-based improvement across the U.S., Europe, China and most emerging economies. Geopolitical and other unforecastable events such as the coronavirus are the biggest threats—indeed, weakness on the virus news initially hit technology stocks the hardest on fears their Chinese plants may be locked down. Then again, bullish sentiment was extreme after tech jumped 22% in just three months. As long as the Fed remains easy and yields low, the TINA (There Is No Alternative) “put” should remain in effect, with cash-laden investors buying on pullbacks. Fundstrat’s not ruling out a correction of 5% or more on virus fallout, Boeing weakness and falling yields that have the curve inverting again. To me, this feels like normal and healthy consolidation after an impressive surge, with more upside likely longer term. Either it becomes a pandemic or it does not. For now, I’d rather talk about Iowa.
- The consumer is fine While some expressed nervousness about moderating consumer spending in this week’s initial Q4 GDP report, Fed statement and December personal spending print, the data suggest it’s misplaced. U.S. consumer financial obligations are near multi-decade lows, and confidence as measured by the Conference Board is near a 2-decade high. Notably, the bottom income category in January posted its highest level of confidence since December 2000.
- These aren’t chinks in housing’s armor Both new and pending home sales unexpectedly slipped in December, but the year-over-year (y/y) trend stayed strong and the outlook appears to be picking up, with prices strengthening and mortgage purchase applications at an 11-year high.
- GDP growth is stubbornly good Despite tariffs, Brexit, impeachment, geopolitics, manufacturing slump, etc., real GDP rose at a 2.1% rate in Q4, according to the initial estimate, putting growth for all of 2019 at 2.3%, matching the annual average over the past 10 years.
- Capex continues to struggle Excluding a big jump in defense, December durable goods orders fell a fifth straight month. Core business orders—nondefense capital goods ex-aircraft, a proxy for capital expenditures (capex)—declined the most since last April, with nondefense capital goods down the most since August 2016 on a y/y basis.
- A pension crisis is brewing U.S. pension funds are underfunded by about $3.8 trillion, and the Pension Benefit Guaranty Corp. doesn’t have enough capital to even make whole the 200 largest pension funds.
- A deficit crisis is here The Congressional Budget Office projects federal deficits will consistently top $1 trillion annually and rise to more than 7% of GDP by decade’s end. On the plus side, the cost of that debt should remain historically low, as it also sees a lower-for-longer Fed maintaining rates at 1.5-1.75% until the end of 2021, with gradual hikes to 2.25-2.50% by year-end 2023.
In my travels, I’ve only had one question about impeachment Trump’s 42% average approval rating is not far off from Obama’s and Reagan’s at comparable points, and his 89% approval rating from Republicans shows he is solidifying support.
Such a big responsibility for such a small state Even though the Iowa Democratic caucuses award only 1% of the total delegates, the winner has gone on to win the nomination in the last four contests (Gore, Kerry, Obama, Clinton). No one since Bill Clinton has lost the first two contests (Iowa and New Hampshire) and then won the nomination.
Bloomberg doesn’t want your love, just your vote Even though he won’t be on any primary ballots until Super Tuesday, Michael Bloomberg has spent more than $251 million so far on his atypical run for the Democratic nomination, more than Hillary spent on ads throughout the entire 2016 campaign. One $11 million buy was for a 60-second Super Bowl ad.