Whether your politics are progressive, conservative, or somewhere in between, letting your political views drive your investment decisions could be detrimental to your bottom line. Kim Parlee speaks with Marko Papic, Chief Strategist at Clocktower Group, and author of, “Geopolitical Alpha”.
- My next guest says the era of geopolitical ignorance is over. The days when investors could be successful without much understanding of politics will be a footnote in the annals of history and that getting the market right is just as much about politics and geopolitics as it is about valuations, interest rates, and earnings. Joining me from Los Angeles is Marko Papic. He is partner and Chief Strategist at Clocktower Group and also author of a new book called Geopolitical Alpha.
Marko, it's great to talk to you. It's been a while, we're thrilled that you're back with us. I want to start here from a quote from your book. And you talk about your framework in terms of looking at politics and how it's a really important part of what you do. And you say, and I quote, "you have to meditate on your biases and bathe yourself in indifference." How do you do that, especially in this environment?
- Yeah, you get a really big tub and you fill it with indifference. No, I mean, I think that's very, very important because suddenly, politics and geopolitics are part of our fiduciary duty as investors. And so you can't get emotional about it, because ultimately, you're trying to sort of forecast the policy that will influence valuations, that will influence moves into multiples. And that means that you have to really think about separating yourself as the investor from yourself as the human.
And that's very, very difficult for a lot of people. And I would argue that that's the number one reason that people miss what's going on on the political front. So whether it's trying to forecast the first 12 or 18 months of Trump administration or how the current election could influence asset prices, I think people get emotional and then they make mistakes.
- It's interesting, because I think people get emotional, which 100%, I agree with that. But also, to your point, the market is not very good of pricing geopolitical risks-- and I guess the market is made up of people, that's why it happens. So how do you do that? I mean, you know how do you deal with those mismatches and what do you see in that?
- I think that's where the title Geopolitical Alpha comes from. I think the market is simply a bookie setting a line of a game, like a football game. It's saying the Patriots will beat the Bills by 7 points. That's all the market has done.
And then you have to ask yourself whether the material constraints that surround policymakers will allow that to happen. And quite often, what you see is that what price the market set to a particular political event is driven, as you pointed out, by emotional investors. And then something else happens. And we have to prepare ourselves by conducting political analysis.
And that's really what the book is ultimately about. It's about empowering investors to be able to do political analysis themselves and not become overly reliant on consultants or on research providers who not necessarily have all the answers, particularly people who talk to wise men in smoke-filled corridors of power. That's, I think, the least useful for investors going forward.
- So what do you see? What are you seeing right now?
- What I'm seeing right now is that this election is not really about Biden versus Trump. This election is about a pro-growth outcome versus an anti-growth outcome. And when I say growth, I really mean about fiscal thrust over the next 12 to 18 months. And so the reason the market is reacting the way it has been over the last couple of days, where the doldrums of September have been replaced by this enthusiasm of October, which very few people, I think, expected, is because the market's actually quite comfortable with the so-called blue wave. Because it reassures investors the fiscal thrust over the next 12 to 18 months will be significant.
Similarly, a Trump victory-- I think President Trump has proven that when it comes to fiscal matters, he can work with Speaker Pelosi. I think that they will ultimately come up with a stimulus package if he were to win. The one outcome which I think the market is really looking through right now, for good reason-- it's not the most likely one-- is a gridlock scenario.
A gridlock scenario would pit a Biden administration with a Republican Senate, which would actually mean that fiscal thrust would probably be significantly smaller over the next 12 months. And then could actually even turn negative if the GOP senators ultimately try to push Biden on stimulus, just like they did with Obama from 2010 to 2016. So I think that's really what's the most important right now on a tactical basis.
- That sounds overwhelmingly bullish, quite frankly, except for that last scenario that you just spelt out. And I guess we have to kind of know the odds and the probability on that. But I just want to ask you, though, too, because a lot of people-- we've seen a huge bounce back since the pandemic started, to your point-- unexpected enthusiasm in October. But we are seeing this-- we talk about a K-shaped recovery, where we're seeing the markets do well and those with means doing well and others not. Does that catch up to us at some point?
- Absolutely. I mean, first of all, I think the K-shaped recovery as a little bit overstated. Yes, the stock market has definitely bounced faster, but it depends what you look at in the economy. I mean, the unemployment rate did fall quite fast from the century highs of like, 14% to 8%. You did see consumer spending on durables, basically recovering three months, which took six years in the last cycle.
And so I would say that the economic recovery is actually quite fast when you compare it to previous recessions. And that's the power of fiscal policy. And that's why I think the big question mark over the next 12 to 18 months is whether the fiscal policy will continue to be bullish.
Your point is, well, it's overwhelmingly bullish. I agree with you. I just think the market probably thinks that the gridlock scenario is at 15%. I would say it's a 30%. So I think that's a substantive and non-negligible odds that Biden doesn't carry the Senate.
- Let me ask you again before we even get an outcome to the election. I mean, there's going to be a period of time where we could get a contested outcome. What does that do? Could that have more impact than just weeks or months when it's contested?
- No, I don't think so. I think if there is a contested election, which I think is unlikely-- and we can talk about why-- but if that happens, I think the risks are going to be in December. But basically, first week of January, contested election will be resolved. And so I think that there is a way in which investors can overstate that as a risk for the long term.
- OK, but why? So go ahead explain to me why you see that as less of a risk.
- Well, first of all, the polls don't show that it's going to happen. And it's interesting, because I feel that a lot of people have been scarred by 2016, and there's this sense that polls don't matter. They do. National polls really, really matter. Why? Because they're high quality polls, first and foremost, unlike state polls.
Second of all, they matter because it's very difficult to win an electoral college vote when you lose the national election by over 3% of the vote. It's never happened. Actually, Donald Trump is the first person to manage to win the electoral college vote by losing over 2% of the general election vote. And he did so by squeaking behind those Midwest states by 80,000 votes.
So he needs to thread the needle again. Could happen, but then the gap between himself and Biden has to come down from 10% to at least, at the bare minimum, to 5% on the day of the election. You're asking a lot in just 20 days until the election.
- Marko, we're going to leave it there, but great to talk to you we're going to have you back soon to talk more about this. Thanks so much.
- Absolutely. Thank you, Kim. It's a pleasure to be back.