I Don't Care What The Betting Markets Say About November-- Except For The Biggest Betting Market Of All, Wall Street

Trump is the quintessential après moi, le déluge president. The last thing he'd ever think about is how anything will do in a post-Trump world.That helps explain why the Wall Street Journal's Kate Davidson wrote a piece yesterday, U.S. Debt Is Set To Exceed Size Of The Economy Next Year, A First Since World War II. Much of the giant pre-pandemic run up was illegitimate spending-- tax cuts for the rich and immense waste-- and then came COVID. Like Japan and economic basket cases Italy and Greece, what that means is that just federal debt has reached or exceeded 100% of U.S. gross domestic product.

...The U.S. passed the 100% debt-to-GDP mark, measured on a quarterly basis, in the April to June quarter, when government spending surged to combat the new coronavirus and tax revenue plunged. But this would be the first time in more than 70 years for it to do so for the federal government’s full fiscal year.

The last time the U.S. debt level exceeded economic output was in 1946, when it stood at 106% after years of financing military operations to help end World War II.

Policy makers have compared the fight against the coronavirus to a military war effort, and approved roughly $2.7 trillion in spending since March for testing and vaccine research, aid for hospitals and economic relief for businesses, households and state and local governments. Federal revenue fell 10% from April through July, compared with a year earlier, as fears of the virus and widespread business shutdowns brought economic activity to a standstill, and firms laid off millions of workers.

The combination of those factors sent the federal deficit soaring and caused government debt as a share of economic output to jump.

By the end of June, total debt had swelled to $20.5 trillion from $17.7 trillion at the end of March, a 16% increase over just three months, according to Treasury Department data. Meanwhile, the economy shrank 9.5% in the second quarter, bringing debt as a share of GDP to 105.5%, compared with 82% in the first quarter.

“It was a massive rise in borrowing and quite shocking, but incredibly effective,” said former CBO chief economist Wendy Edelberg, who in June became director of the Hamilton Project, a think tank affiliated with the Brookings Institution. “On the flip side, this is exactly why we, as a country, want to have room to increase borrowing during times of emergency.”

Although the economy contracted sharply in the second quarter, the decline would have been much worse if not for the historic fiscal support, economists say. The spending propped up incomes through stimulus checks for households, enhanced jobless benefits and emergency small-business loans.

CBO projects those measures will add little to the deficit over the next 10 years, because they are entirely offset by low inflation and very low interest rates. Wednesday’s estimate said the deficit would grow by $13 trillion over the next decade, compared to March’s $13.1 trillion projection.

The mounting U.S. debt load is at the center of a debate in Congress over how much additional relief the government can afford to provide to households and businesses hit by the pandemic.

Cutting the size of the nation’s debt hasn’t in recent years been a priority of lawmakers in either political party-- a factor that facilitated bipartisan support for earlier pandemic stimulus packages. The latest effort is testing the limits on lawmakers’ willingness to spend, however. Democrats have pushed for a broad-based, $3.5 trillion relief package, while the White House and Senate GOP have sought to cap the bill at $1 trillion. Some Republicans have argued against any additional relief measures at all.

Net interest costs on the debt have declined 12% during the first 10 months of the fiscal year compared with the same period a year earlier, despite rising red ink.

“There’s no economic difference between a ratio of 99% and a ratio of 101%,” Ms. Edelberg said. A more useful measure of the country’s fiscal health is its debt-to-GDP trajectory, she added.

After World War II, federal debt levels remained relatively stable for years and a booming 1950s economy helped cut the debt-to-GDP ratio in half, to 54%, by the end of the decade. That isn’t expected to happen this time.

Deficits and debt were already projected to rise over the coming decades as an aging population pushes up the costs of Social Security and Medicare. In the years before the virus, Congress also approved a handful of measures that widened the budget gap, including two bipartisan budget deals that lifted government spending above previously enacted caps and a Republican tax cut that has constrained revenues.

While debt has risen in most advanced economies, the U.S. is the only country whose debt-to-GDP ratio is expected to continue rising after 2021, according to the International Monetary Fund’s Fiscal Monitor Report. It is also expected to record the biggest jump in debt-to-GDP this year among advanced economies, including Germany, France, Italy and the U.K.

“In the short term you have to spend what it takes to minimize the recession and keep the economy afloat,” said Brian Riedl, a senior fellow at the conservative Manhattan Institute for Policy Research. “But the soaring debt to GDP ratio is totally unsustainable, even if interest rates remain low.”

Interest costs are expected to eat up a larger share of the federal budget, topping out at $1 trillion a year by the end of the next decade, Mr. Riedl estimates.

The larger the debt grows, the more sensitive it becomes to even small shifts in interest rates, and the more likely it is to crowd out private investment, he added.

Meanwhile the current bull market in equities has a Biden victory baked in, according the CNN Business. "It turns out," wrote reporter Paul La Monica, "a basket of stocks that could fare well in a Biden presidency have been outperforming the overall market-- as well as a portfolio of stocks that might benefit from a second Trump term." He points to "a group of infrastructure, renewable energy, pro-globalization, health care and cannabis stocks [that] are up more than 10% since early June.

This so-called Biden or blue list includes companies like Granite Construction, Tesla, First Solar, chip giant Broadcom and the iShares MSCI Germany ETF, which owns several top German stocks.

The bet is that these companies might thrive if Biden wins and pushes for the United States to rebuild highways and bridges, wean America off oil and restore fractured trade relations with China, Japan, Europe and other global economic leaders.

Investors also seem to think that affordable health care and more relaxed laws regarding marijuana use could be in the cards if Biden is the next president. Along those lines, insurer Centene, hospital owner HCA and Canadian cannabis firm Canopy Growth are in the "blue" portfolio.

Meanwhile, a group of oil and fossil fuel producers, big defense contractors and bank stocks tracked by Strategas that might do better under a second Trump term is down 9% in the past three months.

Driller Transocean, coal miner Peabody, military suppliers Lockheed Martin and Northrop Grumman, and Wall Street powerhouses Bank of America and Morgan Stanley are part of this "red" basket.

...[E]xperts also think Wall Street is signaling that it expects Biden to win, and that this could be a good thing for the continued economic recovery.

For one, there's historical precedent for Biden to stick with current Federal Reserve chair Jerome Powell, who has been praised for tackling the Covid-19 economic crisis by slashing interest rates to zero and launching several new lending programs.

Biden's former boss, Barack Obama, stuck with George W. Bush's appointed Fed chair Ben Bernanke so that Bernanke could continue to manage the Fed's response to the 2008 global financial crisis. In other words, Obama chose continuity over partisanship.

Trump could very well keep Powell for a second term. But the president has often lashed out at Powell on Twitter and in news conferences for not acting quickly enough to cut rates. He even bashed Powell for not slashing rates below zero, a risky move taken by Europe and Japan.

That makes a reappointment of Powell under Trump less of a slam dunk.

"There may be more risk of Powell being replaced under Trump than Biden. Trump was criticizing Powell even when the economy and market were both doing well," said Nela Richardson, an investment strategist with Edward Jones in an interview with CNN Business.

"That's just one reason why the outcome of this election is not as cut and dry. Biden represents the precedent of Obama keeping Bernanke," Richardson added.

Another market expert noted that the usual knee-jerk market reaction to White House politics (i.e. a Democrat is bad because they would raise taxes while a Republican will cut them) may not hold water in 2020.

"We lean against the conventional thinking that Biden = tax hikes = bad for the market," said Katie Nixon, chief investment officer of Northern Trust Wealth Management, in a recent report.

"There is more at play, and the calculus behind the totality of proposals is complicated, with the impact of tax increases potentially offset by a repairing of trade relationships around the world," Nixon added.

And besides, rich people love an Austerity hawk-- and that's Biden more than Trump! Meanwhile, the Trump Recession is starting to hurt middle class voters-- it's already been killing working class voters-- and I have been noticing that in polls, Biden has pulled even withTrump on who will do a better job on the economy. (Biden is already beating him in every other metric the pollsters normally measure.) And the continuous corruption is taking its toll as well, albeit just around the edges.