Possible upcoming economic and political chaos!

Fasten your safety belts, it going to be a bumpy ride. I am concerned about some surprises, both economically and politically, which may be affecting the stock markets in the next four months. First, while the GDP is forecast to be down only -8% for the year, I believe, there is sector damage in the banking industry that may cause a Lehman Brothers type 2008 surprise to our 2020 supposedly strong banking system. (See below) Secondly, there is increasing professional opinion that President Trump ‘will not concede’ the election and there is a possible scenario whereby on December 14, (if Republican State legislators in swing states approve Trump electors, even though Biden believes he won the state) and if there is no resolution by the House and Senate on January 8th, that by Inauguration Day (January 20), we may have 3 possible Presidents and a public that could react violently. (More later)

Economic chaos

Something is wrong with the bank stocks. The International Monetary fund projects 2020 GDP in the US as down -8% with +4.5% year after year growth in 2021. For Europe, the figures are -10.2 and +6%. With such a small decline in the economy forecast for this year and a big recovery forecast for next year, consequently worldwide stock markets are selling close to pre-pandemic highs. However, I propose this question; if everything looks so well, then why are the banking stocks not following the bullish pattern?  J P Morgan’s high in January 2020 was 142 now 92 and for the same time periods: Wells Fargo Bank 53 now 23, BPN Paribas 54 now 31, HSBG (Hong Kong/Shanghai) 7 now 3, Credit Suisse 14 now 9 and Barclays 10 now 4.6. Something is not adding up. I propose that there is a systemic weakness in the banking system because of the continuing economic effects of the virus, of which investors seem not to be aware.

No Economic Recovery without Control of the Virus. As I said in the ISL #736 there will be “No Economic Recovery without Control of the Virus. The corona virus appears to be out of control. THE VIRUS IS NOT TEMPORARY AND WILL HAVE A LONG TAIL.” The virus continues, in my opinion, to be out of control. Any potential vaccine is a long way off and will not be available to the general public until mid-2021. The problem may still remain, as by then; there may be a variant (covid-21) that the vaccine won’t cover and that there are some 40% of Americans that say they won’t take the shots. Put this together with the reluctance of many Americans to wear a mask or social distance and in dangerous places like Florida, where the Republican governor has lifted all covid-19 restrictions on businesses, including restaurants and bars, the pandemic will probably continue to grow. Therefore, I believe the pandemic effects will be worse and worse, not better and better, which is not the common consensus.

What if there is no fast economic recovery? There are now 30 million Americans that are unemployed because of the virus, (restaurants, travel, sports, small retail and theater), with only 5 million possible new jobs. How many restaurants, theaters and small business will reopen? The good news, and probably why the stock market is up, is because most of the big corporations will survive and so will the many well-educated or well-trained employees. However, how about the 6 million small family owned business that may not survive the pandemic? As this pandemic lengthens, what will happen to their employees? What about the business owner’s bank loans?  What about the people in the bottom 40% of the economy that recent surveys indicate don’t even have $400 for emergencies? Also, it has been reported that there are some 20 million people that haven’t been paying their rent or mortgages (there is a moratorium on evictions) and won’t be able to make back payment when the moratorium is discontinued.  Although there is a moratorium on evictions, what about the landlords who have to pay utility and mortgage payments? What about all the empty office buildings that are no longer needed? (Many now work permanently out of their homes.) The big unanswered question is therefore, what is the financial stability of the banks that hold these mortgages and loans that are not being paid? In 2008, Standard and Poor’s ranked all mortgages as AAA, until they were worthless.

Prediction of a slow recovery with consequences. So in a nutshell, I see the economic recover as slower than predicted, with a lot of upcoming personal and business bankruptcies (along with some more big corporations).The consequences of a continued (proposed) economic slowdown will be that once again (as in 2008)  the banks will get into trouble with their loans and mortgages. Are they still too big to fail? This proposed economic chaos does not depend on who becomes the next President. It is dependent on an out of control pandemic, which I believe will continue unabated for longer than most expect.  However, as stated above, I believe the election will bring another factor of chaos into investor’s decision making process.

Possible Election Chaos.

The following comments have been influenced by two recent articles that I have read. The first appears in the New Yorker Magazine in its September 28 issue entitled “The Political Scene. What come next?” by Jeffrey Toobin, with the sub-title of “How Trump forces could challenge the election results and turn the country into a battleground.” The second article is in the Atlantic Magazine November issue, (published on the website early ‘because of its urgency’) titled “The Election that could break America” by Barton Gellman, with the sub-title of “If the vote is close, Donald Trump could easily throw the election into chaos and subvert the result. Who will stop him?” The cover of the magazine has a flashing red warning signal. Both articles go through the mechanics of the Electoral College process, its flaws and its vagueness.

Under no circumstances will President Trump ‘concede’ Both articles agree that there will be no outcome on November 3ed, election night, even if one side takes the lead. The tabulation of mail-in provisional ballots and litigation will keep the outcome unsettled for weeks. Both articles agree that under no circumstances will President Trump ‘concede’ the election to Biden as both believe Trump is incapable of accepting defeat. Trump has told us so. “The only way they can take this election away from us is if this is a rigged election.” Trump said this at the Republican National Convention on August 24. The Atlantic article says, “Unless he wins a bona fide victory in the Electoral College, Trump’s refusal to concede—his mere denial of defeat—will have cascading effects.” This will create a problem, as our Constitution does not secure a peaceful transition of power. When in 2000, Gore ‘conceded’ to Bush after the Supreme Court ruled in Bushes favor, he had no obligation to do so and could have brought the dispute to Congress.  The Atlantic article says, “We have no precedent or procedure to end this election if Biden seems to carry the Electoral College but Trump refuses to concede. We will have to invent one.”

The Election Day problem. The problem begins on Election Day, when Trump allies can begin by suppressing the Biden vote.  The Republicans have recruited some 50,000 volunteers in 15 contested states to monitor polling places and challenge voters they deem suspicious-looking, to purge voter rolls, tighten rules on provisional votes, uphold voter-­identification requirements, ban the use of ballot drop boxes, reduce eligibility to vote by mail, discard mail-in ballots with technical flaws, and outlaw the counting of ballots that are postmarked by Election Day but arrive afterward. Mail-in ballots have plenty of flaws for the Trump lawyers to seize upon. Voting by mail is more complicated than voting in person, and technical errors are common­place at each step. The intent and effect will be, to throw away as many Biden votes as possible.

The importance of December 8th As to what happens next, gets pretty complicated and hard to believe, I am going to paraphrase and quote directly from the articles: The law allows 35 days for the count and its attendant lawsuits to be resolved. On the 36th day, December 8, an important deadline arrives. At this stage, the actual tabulation of the vote becomes less important than the votes cast. That sounds as though it can’t be right, but it is: The combatants, especially Trump, will now shift their attention to the appointment of presidential electors. December 8 is known as the “safe harbor” deadline for appointing the 538 men and women who make up the Electoral College. The electors do not meet until six days later, December 14, but each state must appoint them by the safe-harbor date to guarantee that Congress will accept their credentials. The controlling statute says that if “any controversy or contest” remains after that, then Congress will decide which electors, if any, may cast the state’s ballots for president.

We are accustomed to choosing electors by popular vote, but nothing in the Constitution says it has to be that way. Article II provides that each state shall appoint electors “in such manner as the Legislature thereof may direct.” Since the late 19th century, every state has ceded the decision to its voters. Even so, the Supreme Court affirmed in Bush v. Gore that a state “can take back the power to appoint electors.” How and when a state might do so has not been tested for well over a century. With a justification based on claims of rampant fraud, Trump would ask state legislators to set aside the popular vote and exercise their power to choose a slate of electors directly. A Trump official told the Atlantic “The state legislatures will say, ‘All right, we’ve been given this constitutional power. We don’t think the results of our own state votes are accurate, so here’s our slate of electors that we think properly reflect the results of our state.’ The Democrats of course would object and we could have two men claiming the presidency.

The importance of January 6th The next occasion to settle the matter is another three weeks away. January 6 comes just after the new Congress is sworn in. Control of the Senate will now be crucial to the presidency. Pence, as president of the Senate, would hold in his hands two conflicting electoral certificates from each of several swing states. The Twelfth Amendment says only this about what happens next: “The President of the Senate shall, in the presence of the Senate and the House of Representatives, open all the certificates and the votes shall then be counted.” Note the passive voice. The Atlantic asks “Who does the counting? Which certificates are counted?” The Trump team would take the position that the constitutional language leaves those questions to the vice president (the president of the Senate). This means that Pence has the unilateral power to announce his own reelection, and a second term for Trump. Democrats and legal scholars would denounce the self-dealing and point out that Congress filled the gaps in the Twelfth Amendment with the Electoral Count Act, which provides instructions for how to resolve this kind of dispute.

The importance of January 20th If Democrats win back the Senate and hold the House, then all roads laid out in the Electoral Count Act lead eventually to a Biden presidency. The reverse applies if Republicans hold the Senate and unexpectedly win back the House. But if Congress remains split, there are conditions in which no decisive outcome is possible—no result that has clear a force of law. Each party could cite a plausible reading of the rules in which its candidate has won. On this argument, no one has attained the presidency, and the decision is thrown to the House, with one vote per state. If the current partisan balance holds, 26 out of 50 votes will be for Trump. Then this may happen: as Congress counts the votes and before Pence can move on from Pennsylvania to Rhode Island, which is next on the alphabetical list, House Speaker Nancy Pelosi expels all senators from the floor of her chamber. Then Pence is prevented from completing the count “in the presence of” the House, as the Constitution requires. Pelosi could then enact plans to stall indefinitely. If the count is still incomplete on Inauguration Day, the speaker herself will then become acting president. Then Pelosi could prepare to be sworn in on January 20 unless Pence reverses his ruling and accepts that Biden won. It would be expected that Pence would not budge. He thereafter could reconvene the Senate in another venue, with House Republicans squeezing in and purports to complete the count, making Trump the president-elect. Under theses circumstance, THREE people could now show up on Inauguration Day.

I am most concerned about how the public, armed to the teeth, will react to this chaos. Will our citizens try and settle this election in the streets through violence? The 1807 Insurrection Act was last utilized in 1992 in the Los Angeles riots. Will Trump use the Insurrection Act to take control of contested states and thereby take control of the election process? How will the military and National Guard act and under whose orders? Will they fire on US citizens as they did at Kent State in 1970? I believe that it is possible that our democracy, as we know it, is at stake and I do believe the next four month ‘could’ be very chaotic.   I believe investors should be prepared for of the possibility of chaos. Let’s hope all votes on both sides will be counted accurately

What can you do?

If you are a voter, try and avoid voting my mail. Vote early in person if your State permits it, or think about voting in person on Election Day. If you are at low risk for COVID-19, volunteer to work at the polls. God bless America!

Carl M Birkelbach 9/28/2020

DOW 27,584,  S&P 3,351 and NASDAQ 11,117

Carl Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Carl Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com