Report Contents

Alan Brazil SOM Macro

November 25, 2020

State Of the Markets

The US After Trump And COVID

BY Alan Brazil

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( 7 mins)

Step 1: Identify Macro Themes

What Will The US Look Like After The 2020 US Elections And The Second Wave of COVID?

The US After Trump And COVID 1 The US After Trump And COVID 2

Step 2: Fundamental Economic Framework

Surge In Cases Not Just An Artifact of A Surge In Testing–Hospitalizations Are Rising

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As With The Last Time, Economies Will Suffer From Lockdown Unless There Is A Vaccine

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US Economy Could Be Headed For Another Lockdown Given The Surge In Cases

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On The Surface The Biden Agenda Looks Relatively Benign Even If The Dems Control The Senate

Biden Polices

Tax Policies

Increase corporate tax rate to 28% from 21%
Allow Trump bonus depreciation to phase down
Increase marginal tax rates to pre-Trump levels (39.6%) for incomes over $400,000 Phase out itemized deductions for incomes over $400,000
Apply the 12.4% social security tax on income over $400,000
Tax capital gains and dividends at the same rate for incomes over $1 million
Allow other Trump tax changes to expire in 2026

Regulatory and Spending Polices

3+ trillion stimulus package focused on helping state and local governments

Green New Deal

Restore limits for oil and gas operations
No new federal oil and gas leasing
100% of new car sales including trucks will be zero emissions Carbon pollution from power sector by 2035
Net zero emission by 2050
Rejoin Paris agreement
Reduce carbon footprint of building by 50% by 2035
2.5 trillion of climate focused infrastructure spending next two years

Health Care

Extend and improve Obama Care 2+ trillion of spending

Tax Changes Pushes Revenue Back To Normal After Trump

The US After Trump And COVID 9

Rising Deficits Under Biden Could Put Pressure On The Dollar And Crowd Out Capital Growth

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At Its Heart, However, The Biden Plan Is A Massive Income Redistribution Plan From The 1%

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Biden Tax Policy Would Push Top Tax Rates To Historical Highs And Reduce National Savings

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Step 3: Identify Potential Repricing Catalysts

Biden Plan Reduce Future US GDP From Higher Tax Rates And Climate Policy

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Any Outcome In Georgia Election Is A Likely A Positive Tailwind For the Economy GDP And Risk Assets

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The Election Tailwind Combined With An Effective Vaccine Could Unleash The US Economy In 2021

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Near Term Expect More QE And Short-Term Rates Being Held Lower-For-Longer

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More QE And Rates Lower-For-Longer Could Mean Another USD Weakening Cycle

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The Rise of The Yen: Abenomics QE Could Be Over And That Could Mean Weaker USD

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Weakening USD Could Drive Up Commodity Prices And Push Up Commodity EM GDP

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Step 4: Identify Asymmetric Trades

Trade 1: Buy US Cyclical Equites Or An Equally Weighted Equity Index

Trade Thesis

  • Tailwinds from 2020 election and an effective vaccine could return the US economy to it’s pre-COVID growth trajectory

  • Accelerating economic growth would drive up US equities particularly in those sectors exposed to cyclical growth

– Person-to-person contact related equities have the most beta to this scenario, e.g. airlines

Risk is vaccine is delayed or the election outcome becomes uncertain

The US After Trump And COVID 30
The US After Trump And COVID 31

 

Trade 2: Buy Home Builders, Housing Related And “For-Rent” Equities

Trade Thesis

  • Housing prices will continue to rise driving higher home asset values and rent rates from building and existing portfolios

  • Prices and rental rates will continue to rise even in a stress economy reflecting the rising demographic driven demand and ten years of underbuilding

  • Value of land banks of home builders will rise with higher housing prices, while “For Rent” companies underlying home assets will rise along with rental income

    Risk is economy does not recover

The US After Trump And COVID 32

The US After Trump And COVID 33

 

Trade 3: Buy GSEs, Mortgage Insurers, And Mortgage Bankers/Selected REITs

Trade Thesis

  • Dodd-Frank reform unleashes another home ownership surge

  • Reform could be driven by many factors

    • –  Support low income housing and minority access to homeownership

    • –  Response to the barriers for first time ownership of a sizable cohort of the US

      population

    • –  Reduce the pressure from rising housing prices on affordability from too little building

  • Housing starts rise to historical levels as mortgage financing relaxes

– Starts need to accelerate to offset the historical underbuilding

• Think the 2003-6 housing boom

Risk is nothing gets done to loosen lending standards

The US After Trump And COVID 34

The US After Trump And COVID 35

 

Trade 4: Go Long A Basket of Commodity EM FX Vs USD

Trade Thesis

Short the USD vs an basket of commodity EM FX

  • EM commodity country FX should appreciate vs the USD

  • US QE will weaken the USD vs commodity EM FX

    • –  QE will drive capital flows to EM

    • –  Weaker USD will drive up commodity pries helping commodity EM

      Countries

  • Commodity country EMs have the capacity for fiscal stimulus that

    should support their economies and reduce risk

  • EM countries have used even stricter containment strategies vs the

    US to bend the COVID curve

    Risk is a general risk-off environment and a flight to the USD

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