Washington & Wall Street -- The Capital Note


(Carlo Allegri/Reuters)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: election drama, Mick Mulvaney’s new venture, and another Japanese prime minister resigns.

From Washington to Wall Street (I)

It is a cliché that markets do not like uncertainty, and it is a statement of the obvious that this November’s election may produce, well, let’s just stick with the term “uncertainty.” The president has been saying what he has been saying about the election process, and, of course, Hillary Clinton recently chipped in with this (via CNN):

“Joe Biden should not concede under any circumstances because I think this is going to drag out, and eventually I do believe he will win if we don’t give an inch and if we are as focused and relentless as the other side is…”

What Clinton envisions is an election night that could well extend into an election week or even — gulp! — an election month, because of an expected surge in mail-in balloting due to concerns about the coronavirus.

FiveThirtyEight has a state-by-state guide to absentee voting here. One of the things that caught my eye was the different rules that apply, not least when it comes to the date by which ballots must be received. In most cases the deadline for receipt is November 3, but not always. In Alaska, for example, absentee ballots must be postmarked (or dropped off in person) by November 3 and received by November 13. In California Ballots must be postmarked (or dropped off in person) by November 3 and received by November 20. Minnesota ballots must be postmarked (or dropped off in person) by November 3 and received by November 10. And those three states are not the only exception to the receipt by November 3 rule.

If July’s New York primary is any guide, the outlook for a smooth process is not encouraging. About a fifth of all mail-in ballots were disqualified.

The Economist (my emphasis added):

For the likelihood of voting by mail, we rely on a Pew Research Centre poll of voters between July 27th and August 2nd. According to this survey, 39% of voters are planning to cast postal votes this year. A 2018 canvass of state data from the United States Election Assistance Commission, which helps states with administrative issues related to voting, revealed that the average rejection rate for postal votes was about 4% in states with the least vote-by-mail infrastructure and experience, and 1% in the best-prepared—though rates in extreme cases can exceed 15%…

Although such a scenario is unlikely, even small glitches with postal voting cause a sizeable increase in the probability of a recount in one of the decisive states. Failure of election workers to attach postmarks to ballots, voters assigning signatures that do not match the state’s rolls (typically because elderly voters have trouble with the pen, or young voters have no record against which to match), and failure to deposit a ballot before the deadline are all common errors that can lead postal votes to be rejected—and they only become more common when more people vote by mail. According to our modelling, the chance that a marginal state ends up in recount territory (typically when the margin between the candidates is less than half a percentage point) is around 5%, before factoring in trouble with vote-by-mail. It nearly doubles to 9% when these postal simulations are taken into account.

Now throw in the civil unrest that has been going on for months now and it becomes all too easy to paint a bleak picture of what November might look like if the election is at all close.

Under the circumstances, it was not a surprise to read this in Bloomberg (my emphasis added):

One measure of hedging in the stock market is higher than at any point in the past three presidential elections. In the interest-rates market, implied volatility is well above levels reached in 2016 or 2012. And three-month implied volatility in the dollar-yen pair — a classic haven trade — has risen above the two-month tenor by the most in two decades, signaling demand for protection from turbulence near Election Day….

One area that highlights how much traders are bracing for election drama is swaptions, or options on interest rate swaps, which typically mirror the overall direction of Treasury yields. Wells Fargo analysts found that Election Day is priced for four times the volatility of a “typical” trading day in this market, based on the difference between at-the-money volatility on two-month and three-month swaptions on 10-year interest rate swap contracts. That compares to roughly two times at a similar point in the 2016 election cycle and about 1.7 times during the 2012 campaign, they wrote in a note.

Obviously people are beginning to have flashbacks to Florida and Bush v Gore.

In 2016, MarketWatch took a look at what happened when a lot hung on hanging chads:

The Dow fell more than 5% over the first two weeks following Election Day; this came as a legal battle escalated in Florida…In late November… Florida’s election board declared Bush the victor. And though Gore immediately contested that ruling, the stock market did begin to rally. Even so, on Dec. 12, when the legal battles were finally ended by the Supreme Court’s decision, the Dow was 3.1% lower than where it stood on Election Day.

2020 is not 2000. Those six weeks in late 2000 might look like an era of tranquility compared with what may lie ahead.

— A.S.

From Washington to Wall Street (II)

Mick Mulvaney, Trump’s former acting chief of staff, is following the path of scores of former politicians from Washington to Wall Street. Mulvaney announced this weekend that he is raising money for a hedge fund called Exegis Capital. He and his partner Andrew Wessel plan to capitalize on the former congressman’s knowledge of financial regulation.

“Politics is going to be a very turbulent thing for the near future, and I think it creates opportunities for those who understand how Washington works to provide an advantage over everybody else,” Mulvaney said on an S&P Global Intelligence podcast. Exegesis will invest in financial firms with exposure to regulatory risk.

To some, Mulvaney’s decision reeks of cronyism: using public service as a launching pad for a lucrative career in the private sector. But many of the same people who denounce this kind of rent seeking tend to support increased financial regulation. Whatever one thinks of Mulvaney’s integrity, his ability to make money on political experience says more about politics than it does about him.

One complication: Mulvaney also serves as special envoy to Northern Ireland. “It’s not clear how Mulvaney will divide his time between the hedge fund and promoting peace in Northern Ireland,” points out Politico.

Quite a long commute.

— D.T.

Around the Web

Coronavirus and the Labor Market:

The trend in job postings — a real-time measure of labor market activity — is 20.2% lower than in 2019, as of August 28. This is a slight improvement after two consecutive weeks of decline in the postings index, which followed three months of gradual improvement. Three weeks ago, the trend was 18.1% below last year.

‘Severe lumber shortage’ is adding $14,000 to the cost of a new home

Buffet goes to Tokyo:

The chairman and CEO of Berkshire Hathaway announced Sunday — his 90th birthday — that his company has acquired a slightly more than 5% stake in each of the five leading Japanese trading companies. The companies are Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp.

Random Walk

For the second time in his career, Japanese prime minister Shinzo Abe has resigned, citing health reasons. The first time, in 2007, after serving little over a year, Abe stepped down following an election in which his Liberal Democratic Party suffered major losses. His successor, Yasuo Fukuda, resigned suddenly the following year due to partisan gridlock. Next was Taro Aso, who lasted 357 days. Aso exited the old-fashioned way: His Liberal Democrats lost in a historic landslide just one week before he completed his first year in office.

You’re probably wondering what happened next. Well, Yukio Hatoyama completed nine months in office before…you guess it: resigning. Hatoyama had promised to close the U.S. military base on Okinawa, but reneged in the face of increasing North Korean belligerence. Naturally, he stepped down.

Another member of Hatoyama’s Democratic Party of Japan, Haoto Kan, took his place. And then the next year he resigned.

In fact, Abe’s eight-year tenure — now coming to a close —  is the longest by a Japanese PM in 50 years. We wish him well.

— D.T.

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