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      in US Politics

      Share the Profits! Why US business must return to rewarding workers properly | Robert Reich

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      Share the profits! Why US businesses must return to rewarding workers properlyRobert ReichThe economy is booming and corporate profits are huge, but American wages still stagnate. History provides the answer According to this week’s release from the commerce department, the US economy has been growing at its fastest pace in almost 40 years. Corporate profits are their highest in 70 years. And the stock market, although gyrating wildly of late, is still scoring record gains.Where egos dare: Manchin and Sinema show how Senate spotlight corrupts | Robert ReichRead moreSo why do most Americans remain gloomy about the economy? Mainly because their real (inflation-adjusted) wages continue to go nowhere.Steeply-rising profits, economic growth and stock market highs – coupled with near-stagnant wages – has been the story of the American economy for decades. Most economic gains have gone to the top.So why not share the profits?Profit-sharing was tried with great success in the early decades of the 20th century but is now all but forgotten. In 1916, Sears, Roebuck & Co, then one of America’s largest corporations with more than 30,000 employees, announced it would begin to share profits with its employees, giving workers shares of stock and thereby making them part-owners.The idea caught on. Other companies that joined the profit-sharing bandwagon included Procter & Gamble, Pillsbury, Kodak and US Steel.The Bureau of Labor Statistics suggested profit-sharing as a means of reducing “frequent and often violent disputes” between employers and workers. Profit-sharing gave workers an incentive to be more productive, since the success of the company meant higher profits would be shared. It also reduced the need for layoffs during recessions because payroll costs dropped as profits did.By the 1950s, Sears workers had accumulated enough stock that they owned a quarter of the company. And by 1968, the typical Sears salesperson could retire with a nest egg worth well over $1m, in today’s dollars.The downside was that when profits went down, workers’ paychecks would shrink. And if a company went bankrupt, workers would lose all their investments in it. The best profit-sharing plans took the form of cash bonuses that employees could invest however they wish, on top of predictable wages.But profit-sharing with regular employees all but disappeared in large US corporations. Ever since the early 1980s when corporate “raiders” (now private-equity managers) began demanding high returns, corporations stopped granting employees shares of stock, presumably because they didn’t want to dilute share prices. Sears phased out its profit-sharing plan in the 1970s.Yet, just as profit-sharing with regular employees disappeared, profit-sharing with top executives took off, as big Wall Street banks, hedge funds, private equity funds and high-tech companies began doling out huge wads of stock and stock options to their MVPs.The result? Share prices and chief executive pay (composed increasingly of shares of stock and options to buy stock) have gone into the stratosphere, while the wages of the typical worker have barely risen.Researchers have found that before the 1980s, almost all the increases in share prices on the US stock market could be accounted for by overall economic growth. But since then, a large portion of the increases have come out of what used to go into wages.Jeff Bezos, who now owns around 10% of Amazon’s shares, is worth $170.4bn. Other top Amazon executives hold hundreds of millions of dollars of shares. But most of Amazon’s employees, such as warehouse workers, haven’t shared in the bounty.Amazon used to give out stock to hundreds of thousands of its employees. But in 2018 it stopped the practice and instead raised its minimum hourly wage to $15. The wage raise got headlines and was good PR – Amazon is still touting it – but the decision to end stock awards was more significant. It hurt employees far more than the increased minimum helped them.Corporate sedition is more damaging to America than the Capitol attack | Robert ReichRead moreIf Amazon’s 1.2 million employees together owned the same proportion of Amazon’s stock as Sears workers did in the 1950s – a quarter of the company – each Amazon worker would now own shares worth an average of more than $350,000.America’s trend toward higher profits, higher share prices, mounting executive pay but near stagnant wages is unsustainable, economically and politically.Profit-sharing is one answer. But how can it be encouraged? Reduce corporate taxes on companies that share profits with all their workers, and increase taxes on those that do not.Sharing profits with all workers is a logical and necessary step to making the system work for the many, not the few.
      Robert Reich, a former US secretary of labor, is professor of public policy at the University of California at Berkeley and the author of Saving Capitalism: For the Many, Not the Few and The Common Good. His new book, The System: Who Rigged It, How We Fix It, is out now. He is a Guardian US columnist. His newsletter is at robertreich.substack.com
      TopicsUS economyOpinionEconomicsStock marketsUS domestic policyUS taxationUS politicsAmazoncommentReuse this content More

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      in US Politics

      AstraZeneca’s boss is a boardroom superstar but a potential £2m cherry is pushing the point

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      A majority is a majority, but a rebellion of 40% against an executive pay policy is too large to be pinned solely on those brain-dead fund managers who outsource their thinking to proxy voting agencies.At AstraZeneca some serious institutions, with Aviva Investors and Standard Life Aberdeen to the fore, clearly thought the company was pushing things too far by adding a potential £2m cherry on top of their chief executive, Pascal Soriot’s, already substantial pay package. The rebels had a point.Yes, Soriot is a boardroom superstar thanks to AstraZeneca’s success in supercharging the development and production of the Oxford University vaccine for no profit. Communication with regulators went awry at times, and Soriot himself obviously wasn’t getting his hands dirty in the labs. But the boss, even when operating from Australia, is doing an excellent job of standing up to irritating and ungrateful EU commissioners, which is also part of the pandemic operation. And, amid it all, the company didn’t miss a beat on its day job and had time to spend $39bn buying the rare disease specialist Alexion, which looks a promising deal.Yet exceptional effort in an exceptional year is roughly what one expects from a chief executive on Soriot’s pay package. In the last three years, his incentives have performed wonderfully and he has earned £13m, £15m and £15m, so is firmly established in the £1m-a-month category, which very few chief executives of FTSE 100 companies can say. Even for an international hero, it feels a decent whack.The company’s claim was that “the world drastically changed in the last 12 months, and so did AstraZeneca”, and thus adjustments should be made outside the normal three-yearly cycle for tweaking pay.That argument would have felt stronger if AstraZeneca was not already at the adventurous end by UK standards. Last year, Soriot earned 197 times the median pay among his workforce. And, critically, the new arrangement will take his variable pay – annual bonus plus long-term incentives – to 900% of his £1.33m salary. A few years ago 500% was regarded as high by FTSE 100 standards.That precedent-setting detail helps to explain why the rebellion was so strong. Those fund managers who care about controlling boardroom pay inflation saw the risk of knock-on effects elsewhere. Loyalty to Soriot probably swayed a few doubters and helped AstraZeneca prevail, but the company did not need to pick a fight at this time – it gave Soriot a chunky rise a year ago.Some real pay shockers (think Cineworld) have slipped through in recent months. If the wider message in the AstraZeneca vote is that fund managers are not all asleep, that would be no bad thing.Seatbelts on for more stock market turbulenceLast Friday investors preferred to see a silver lining in a weak set of US unemployment numbers – only 266,000 jobs created in the month of April, against forecasts of 1m. If a lack of new jobs implied no inflationary wage pressures in the US economy, at least the stock market could take a few days off from worrying about rises in interest rates, ran the theory.Inflationary pressures, though, come in many forms, and here is a piece of data that spooked the stock market on Tuesday: China’s producer prices index rose at an annual rate of 6.8% in April, up from 4.4% in March.That is the highest level for three years and a sign, probably, that the boom in prices of raw copper, iron ore and other raw materials is finally feeding through to goods. The FTSE 100 index fell 175 points, or 2.5%, following other stock markets down.The benign view says a flurry of higher prices is almost to be expected as the global economy reopens. In that case, central banks’ mistake would be to move too early and choke off recovery. Yet it is clearly also possible that we could be at the start of a big move on prices, with the next leg delivered by the Biden’s administration’s huge infrastructure programme. If so, the mistake would be to delay rate rises.Do not expect quick or clear answers. Inflation data can give mixed messages for months. Do, though, anticipate more bumpy days for stock markets. Investors’ default assumption is to assume the US Federal Reserve will play nicely and look through the short-term signals. Life could quickly get ugly if there is any deviation from that assumed path. More

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      in US Politics

      GameStop hearing: Robinhood founder defends halt to trading

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      Robinhood’s chief executive defended the app’s decision to halt trading in GameStop shares at a congressional hearing on Thursday, calling allegations that the company acted to help hedge funds that were hemorrhaging money “absolutely false”. The comments triggered accusations the company is creating a “smokescreen” to deflect blame.Vlad Tenev and other players in the GameStop saga appeared before the House financial services committee in the first public hearing in a wide-ranging investigation into trading in GameStop, AMC and other companies whose share values soared as small investors piled into the stocks.“The buying surge that occurred during the last week of January in stocks like GameStop was unprecedented, and it highlighted a number of issues that are worthy of deep analysis and discussion,” Tenev said.Tenev once again apologized for the trading ban. “Despite the unprecedented market conditions in January, at the end of the day, what happened is unacceptable to us,” Tenev said.The sometimes fractious hearing was largely divided along party lines, with Democrats calling for more oversight and Republicans arguing against more regulation.“Don’t you see something has gone terribly wrong here?” said Democrat congressman David Scott. He called social media-led stock market bubbles “a threat to the future of our financial system”.Republican Bill Huizenga called the hearing “political theater”, a comment that drew admonition from the committee chair, Maxine Waters.GameStop’s shares surged 1,600% in January as small investors worldwide – many coalescing on the Reddit forum WallStreetBets – piled into the troubled retailer’s shares betting against Wall Street hedge funds that had bet the share price would collapse – a practice known as short-selling. At one point, short-sellers had borrowed far more of GameStop’s shares (140%) to sell short than were available on the market.According to Tenev, Robinhood and other brokers had no choice but to suspend trading in GameStop and other hot investments during this period of “historic volatility”.Robinhood is required to place a deposit using its own funds at a clearinghouse to cover risks until trades are settled between a buyer and seller. On 28 January, the company was informed by its clearing house, NSCC, that it had a deposit deficit of approximately $3bn – up from $124m just days before.With trading in hot stocks suspended, Robinhood moved to raise $3.4bn from investors and trading was resumed.But the suspension triggered a firestorm of criticism among small investors and in Washington, with Republicans and Democrats attacking Robinhood and accusing it of backing the losing hedge funds over small investors.Christopher Iacovella, the chief executive of the brokerage-industry group American Securities Association, dismissed Tenev’s explanation and said the system had worked as it should to defend the US’s financial system.“As the GME [GameStop] short squeeze unfolded, the clearinghouse recognized that an inadequately capitalized broker-dealer could pose a risk to our markets and it took the action necessary to protect the system,” Iacovella said in a letter to the House committee. “Attempts to blame the clearinghouse or the timing of the settlement cycle for what happened during the short squeeze are a smokescreen.”Thursday’s hearing, titled Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, is the first of a series and addressed a number of issues including the “gamification” of investing, the role of social media and potential conflicts of interest.The representatives questioned the role of Citadel, an investment firm that executes Robinhood clients’ trades and also invested in Melvin Capital Management after the hedge fund’s bets against GameStop collapsed.Both Citadel’s founder, Ken Griffin, and Melvin’s founder, Gabe Plotkin, testified at the hearing. In his testimony, Plotkin denied that Citadel “bailed out” Melvin. “It was an opportunity for Citadel to ‘buy low’ and earn returns for its investors if and when our fund’s value went up,” he said.Plotkin said January’s frenzied trading in GameStop was “untethered to fundamentals” and quoted racist messages aimed at him and others, including antisemitic statements such as “it’s very clear we need a second Holocaust, the Jews can’t keep getting away with this.”“The unfortunate part of this episode is that ordinary investors who were convinced by a misleading frenzy to buy GameStop at $100, $200, or even $483 have now lost significant amounts,” said Plotkin.GameStop’s share price has now collapsed from a high of $483 on 28 January to just over $44. But one of the small investors who helped drive the stock to dizzy heights is still a believer.In his testimony Keith Gill, a trader variously known online as Roaring Kitty and DeepFuckingValue, said his investments had made him a millionaire.“GameStop’s stock price may have gotten a bit ahead of itself last month, but I’m as bullish as I’ve ever been on a potential turnaround. In short, I like the stock,” he said. More

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      in US Politics

      GameStop: US lawmakers to quiz key players from Robinhood, Reddit and finance

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      Frenzied trading in the shares of GameStop and other companies will be the subject of what is expected to be a fiery hearing in Congress on Thursday, when US politicians get their first chance to quiz executives from the trading app Robinhood, Reddit and other players in the saga.The House financial services committee will hold a hearing at noon in a first step to untangling the furore surrounding trading in GameStop, AMC cinemas and other companies whose share values soared to astronomical levels as small investors piled into the stocks.The hearing, titled Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, is expected to be fractious.Shares in GameStop, a troubled video games chain store, soared 1,600% in January, as an army of small investors, many using the trading app Robinhood, appeared to have bet that Wall Street hedge funds had overplayed their hand when betting the stock price would collapse – a practice known as short-selling.Spurred on by meme-toting members of the Reddit forum WallStreetBets, investors kept buying the shares, driving up the price and triggering huge losses for some hedge funds.Robinhood briefly suspended trading in GameStop and other hot stocks at the end of January and sparked allegations that the hedge funds and others may have pushed Robinhood and other trading platforms to stop the rout.The news managed to – briefly – unite Washington’s deeply divided political elite. Both the rightwing senator Ted Cruz and the progressive representative Alexandria Ocasio-Cortez attacked Robinhood’s decision to halt trading in GameStop by small investors.Ocasio-Cortez sits on the bipartisan financial services committee.Among those testifying are:Robinhood’s CEO, Vlad Tenev.
      Reddit’s CEO, Steve Huffman.
      Gabe Plotkin, founder of the Melvin Capital Management hedge fund, which was forced into a rescue after retail traders crushed its bets against GameStop.
      Ken Griffin, billionaire CEO of Citadel, an investment firm that executes Robinhood clients’ trades and also helped to bail out Melvin.
      Keith Gill, a trader variously known online as Roaring Kitty and DeepFuckingValue and a longtime GameStop booster.
      The hearing marks the first time the major players in the GameStop controversy have all been forced to publicly reckon with the anger the episode provoked among small investors and across the political spectrum.Gregg Gelzinis, associate director for economic policy at the Center for American Progress, said: “The GameStop drama raised quite a few public policy questions but first it’s important for members of Congress to understand how events played out.”Gelzinis said there were still questions about the timeline of events. More broadly, he said, GameStop had highlighted many crucial issues for regulators, including the role and regulation of hedge funds, whether or how Wall Street is using social media to drive investment strategy, the “gamification” of investing by trading apps and the economic incentives at play for the trading platforms.“What would have happened if Robinhood had failed? What would have been the knock-on effects for financial markets?” he asked. “These are huge investor protection questions.“I saw someone on Twitter describe it as a Rorschach test for financial regulators,” he added.The hearing will not be the last inquiry that the executives at the center of the controversy will face. Federal prosecutors have begun an investigation, according to the Wall Street Journal, and the Securities and Exchange Commission, the US’s top financial watchdog, is reportedly combing through social media posts for signs of potential fraud.In the meantime, evidence has emerged that small investors were not the largest buyers of GameStop and other hot companies. According to an analysis by JP Morgan, institutional investors may have been behind much of the dramatic rise in the share price.“Although retail buying was portrayed as the main driver of the extreme price rally experienced by some stocks, the actual picture may be much more nuanced,” Peng Cheng, a JP Morgan analyst, told clients in a note.Gelzinis said Thursday’s hearing was likely to raise as many new questions as it answered but was a necessary first step to understanding the seismic changes in investing that GameStop highlighted.“This is only the start of the story,” he said. “It’s clear this is not just a clearcut small investor versus Wall Street story. It’s a fairly messy picture but hopefully by the end we can paint a clearer picture and draw up some public policy conclusions from it.” More

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      in Elections

      Revealed: David Perdue bought bank stocks after meeting financial officials

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      David Perdue, the Georgia Republican facing a Senate runoff election on Tuesday, has twice bought a significant number of shares in a US bank shortly after meeting with financial policy makers, raising more questions about his prolific stock trading while in office.In one case, in May 2015, Perdue bought between $15,000 and $50,000 worth of shares in Regions Financial Corporation two days after a 10-minute phone call with then treasury secretary Jack Lew.Perdue bought additional shares in the bank two years later, on 18 May 2017, two days after a half-hour meeting with then Federal Reserve chair Janet Yellen.It is not clear in either case if Perdue discussed relevant financial regulation or other market-sensitive issues with Lew or Yellen or whether the discussions influenced his decision to buy the stock.At the time of the call with Lew, members of the Senate banking committee, on which Perdue sits, were engaged in close talks over a potential trade deal.But the purchase of more Regions stock in the wake of Perdue’s meeting with Yellen – who will be nominated to serve as treasury secretary by Joe Biden once the president-elect takes office – is possibly significant, because it came about two months before Yellen publicly discussed her support for raising the $50bn asset threshold for systemically important institutions, a change that meant Regions bank could see an easing of important financial regulations.As Yellen’s views on the topic publicly evolved in her role as chair of the Fed, so did Perdue’s buildup of stock in Regions. Perdue separately sought to advance deregulatory legislation that would be favorable for banks like Regions, which Regions and more than a dozen other banks publicly endorsed.Public records show that Perdue sold his full stake in Regions on 11 October 2019 and on 23 October 2019, suggesting that Perdue may have made a 21% return on his earlier investment. He then bought more shares of the stock in November 2019 and January 2020.John Burke, Perdue’s communications director, has said that Perdue does not handle day-to-day decisions about his portfolio, which Perdue claimed is managed by outside financial advisers.It is not uncommon for policy makers like Yellen to have meetings with senators. On the day of her meeting with Perdue in 2017, Yellen also met with Lord Mervyn King, the former governor of the Bank of England, had lunch with Treasury secretary Steve Mnuchin, and then met with another senator, Ohio Democrat Sherrod Brown.Former government insiders say policy makers try to be cautious in such meetings, and try to avoid sharing information that could move markets. At the same time, it can be difficult to avoid the sharing of potentially valuable information if senators and policy makers are discussing any issue in depth, and a senator might be able to gauge an evolving policy position that could be market-sensitive.The new revelations come as Perdue’s frequent stock trading while in office has come under increased scrutiny in the press ahead of his runoff Senate election on Tuesday. If Democrats win two runoff elections, it will transfer control of the Senate from Republicans to Democrats.Previous media reports have focused on how Perdue has faced federal scrutiny for his frequent stock trading while in office, and whether his position as a senator with access to market-sensitive information, especially during the pandemic, may have influenced some trades. The New York Times, citing multiple anonymous sources, said Perdue’s sale of $1m in stock in a financial company called Cardlytics, where he served on the board, drew the attention of investigators at the Department of Justice last spring, who were undertaking “a broad review of the senator’s prolific trading around the outset of the coronavirus pandemic for possible evidence of insider trading”.The investigators ultimately concluded that a personal message that had been sent to Perdue from the company’s chief executive, alluding to “upcoming changes”, was not “nonpublic information”, and declined to pursue charges. Perdue sold his stock two days after he received the personal message from the CEO. About six weeks later, the chief executive resigned and the company revealed that results were below expectations, causing the stock to tumble.The New York Times separately reported that, as a member of the Senate’s cybersecurity committee, Perdue and others sought out the protection of the National Guard against data breaches. The newspaper said that beginning in 2016, Perdue bought and sold shares in a cybersecurity firm called FireEye on 61 occasions. Nearly half of those trades, the New York Times reported, occurred while Perdue sat on the cybersecurity committee, which could have given him access to sensitive information.Perdue’s senate campaign did not respond to the Guardian’s request for comment. He has formerly denied having any conflict of interest.But Perdue’s challenger in this week’s senator runoff, Democrat Jon Ossoff, has repeatedly raised the issue, and accused Perdue of using his office to enrich himself.Perdue’s spokesman has called the criticism “baseless” and he has emphasized being “totally exonerated” by federal investigators. More

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      in Elections

      ‘The risks are now off the table’: Wall Street looks forward to Biden presidency

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      Wall Street is supposed to hate uncertainty but as the fight over the presidential contest continues, investors couldn’t be happier.
      If, as appears likely, Joe Biden wins, he will become the first president since George HW Bush to enter office without control of both the House and Senate – an outcome that indicates at least two years of legislative gridlock.
      It’s a scenario Wall Street appears to love. One that may give Republicans in the Senate little incentive to enact a new, larger coronavirus stimulus package that Democrats have hoped for and the power to block tax increases, big spending programs and tougher regulations.
      Stocks jumped again on Thursday, the first time since 1982 that the Dow and S&P 500 rose at least 1% on four straight sessions, giving the stock indices their biggest weekly gains since April, with the Dow up 7.1% week, the S&P 500 and Nasdaq up 7.4% and 9% in the week to date.
      Oliver Jones, senior markets economist at Capital Economics, told the Guardian: “There’s definitely some relief that things like tougher tax policy, tougher corporate reforms look to be off the table without Democrats having more control over Congress.
      “Essentially, it’s going to look more like a continuation of the status quo, which is the outcome favoured by most firms,” Jones added.
      Brad McMillan, chief investment officer at Commonwealth Financial Network, attributed some of the gains to the election’s smooth running and, notwithstanding legal challenges, the likelihood of an imminent outcome.
      Looking forward, McMillan told the Guardian, markets were encouraged by prospects that a Biden administration’s more progressive, high spending proposals are less likely to get through a politically split legislature.
      “Biden’s economic plan included substantial new corporate taxes and capital gains taxes, all of which would have been very disruptive to the market,” McMillan said. “The risks from a blue wave and a Green New Deal are now off the table.”
      Wharton professor of finance Jeremy Siegel also welcomed the result, even as the final outcome of the presidential election remained unresolved. “Truthfully that combination is excellent for the economy and it’s excellent for the markets,” Siegel told CNBC on Wednesday
      Market enthusiasm for a split government has historical roots going back decades. In 2018, after voters handed control of the lower chamber to Democrats in the midterm elections, markets soared.
      “The better-performing periods are periods where the houses were split in terms of leadership,” financial adviser Mellody Hobson noted at the time.
      Since Tuesday, markets have also been buoyed by the prospect of government infrastructure spending that could also pump billions of taxpayer dollars into an overhaul of the nation’s energy and transportation systems.
      For big tech, which is facing antitrust investigations under the Trump administration, the political scenario could also be rosy. Ahead of the election, FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks, in particular, showed jitters after months of impressive pandemic gains.
      “The Street appears to have gotten the ‘Goldilocks election outcome’ for tech stocks with no ‘blue wave’ expected (Senate staying red) and a likely Biden White House now on the horizon,” said Dan Ives of Wedbush Securities in an investors note on Thursday.
      “With the Republicans likely to control the Senate, the chances of major legislative changes to antitrust law now is off the table in the eyes of investors which posed the biggest risks to tech stalwarts with a ripple impact across the sector,” Ives added.
      Ives said the likely election outcome was a “green light to buy tech stocks” and predicted that big tech stocks could rally another 10% to 15% into year-end. “We continue to be bullish on owning the secular growth stories for 2021,” he wrote. More

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      in US Politics

      Markets plunge in uncertainty about a second term and a second wave

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      Stock market investors are braced for a bumpy ride this week as the likelihood of further dramatic increases in Covid-19 cases across the world collide with the final days of the US presidential election campaign.
      Last week, shares in the US and Europe slumped at their fastest rate since March and analysts said there would be worse to come, after France and Germany imposed strict lockdowns and US states came under pressure to tackle the rising number of deaths.
      “New lockdowns across Europe are being harshly repriced by markets,” said Barclays equity strategist Emmanuel Cau.
      “There is a huge nervousness about a second wave,” added Gabriel Sterne, head of global macro research at consultancy Oxford Economics. “With some government finances beginning to be stretched, the threat of further lockdowns is causing a large degree of anxiety.”
      Heightened levels of concern about the path of the virus began to affect markets three weeks ago. From New York to Paris, London and Tokyo, investors sold heavily from 13 October onwards as each day brought news of higher infection rates and growing numbers of deaths.
      Stricter measures to limit households mingling began to take effect and government ministers of all political stripes began to talk about broader lockdowns being the only answer to the spread of the virus.
      FTSE 100
      The Paris CAC index lost more than 400 points, or 8%, from 13 October to the end of last week while London’s top 100 listed companies slumped 7.5% over the same period. Last week, the Stoxx 600 index of European companies slumped to its lowest level in five months, falling 3.1% in a day.
      In the US, a downturn in stock values that began in September with a panic over the virus turned into a rout after it became clear Congress would not give Donald Trump the stimulus package he craved.
      Without a second trillion-dollar tranche of cash to support closed businesses and millions of unemployed workers, the president’s boast that the recovery was “looking fantastic” lacked substance. The S&P 500 lost more than 8% in the 16 days that followed 13 October.
      It wasn’t the first time this year that fears of a Covid-19 second wave had spooked markets, but the rallies that turned the previous panics into mere blips on a chart appear to be absent this time. Investors have stopped listening to hopeful stories about a vaccine and begun looking at the ripple effect that flows from the widespread adoption of masks and physical distancing.
      As Dhaval Joshi, chief European strategist at BCA Research, says, consumers who cannot use their nose or mouth in close proximity to others are hardly consumers at all.
      He estimates that while lockdowns put a temporary block on economic activity, the face mask and distancing rules will cut as much as 10% off GDP for as long as they are imposed.Stocks in the three hardest-hit sectors – hospitality, retail, and transport – have taken a beating since March.
      Stoxx 600
      However, investors who have switched to the tech industry have shrugged off concerns about the virus. The major tech companies – Apple, Amazon, Alphabet (the owner of Google), Microsoft and Facebook – were behind the 50% increase in the S&P 500 since Trump took the presidency and have generally benefited from the switch to a more digital economy since the lockdowns in March. If US stocks are to recover their momentum, tech will have to perform.
      In the UK, where the FTSE 100 is dominated by banking, insurance and oil and gas companies, share prices have barely recovered after dipping to 5,000 points in March. Across Europe, successful industrial giants such as Mercedes-Benz, Volkswagen and Siemens have been hit as a six-month recovery in their share prices took a negative turn.
      Donald Trump’s attack lines in the closing weeks of the US presidential campaign have also highlighted the potential downside for investors of a victory for Democratic candidate Joe Biden on 3 November. Desperate to land some punches on his rival, the president has tweeted more than once: “A vote for Joe Biden is a vote for the biggest TAX HIKE in history.”
      So far the claim, which even rightwing US thinktanks say overstates the magnitude of his tax proposals, has failed to shift the polls and they continue to suggest a Biden victory. But distrust of the polls and Trump’s veiled threats to challenge the validity of a narrow Biden victory have only added to stock-market jitters.
      S&P500
      One constant source of light for investors has been the actions of central banks. After a brief flirtation by the US Federal Reserve with increasing interest rates during the first years of the Trump administration, all central banks have cut borrowing costs to zero, and some, including the European Central Bank (ECB) and the Bank of Japan, to below zero.
      Central banks have also pumped trillions into the financial system to maintain the flow of easy credit to businesses large and small, adding to the sense that whatever Covid-19 may throw at them, companies’ borrowing costs will be negligible.
      This week the Bank of England’s monetary policy committee is expected to add another £100bn to the £745bn of “quantitative easing” – purchasing sovereign and corporate debt from financial institutions – it has already injected into the economy. The US Fed’s board will also meet this week and the signs are that the recent slump in stock values will persuade its policymakers to increase its current $7.2tn (£5.6tn) of QE.
      Last week the president of the ECB, Christine Lagarde, signalled a further stimulus for the eurozone in December, while the Bank of Japan has said that its determination to print as much money as it takes to keep interest rates below zero is “unlimited”.
      Such support from the central banks will be essential as the virus continues to ravage the populations of Europe and the US. Whether it will be enough to turn the stock market back on to a more positive path is another matter. More

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      in US Politics

      Investors should prepare for worst over US presidential election

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      Opinion polls in the US have long pointed to the strong possibility of a Democratic party sweep in the election on 3 November, with Joe Biden winning the presidency and Democrats gaining control of the US Senate and holding on to the House of Representatives, putting an end to divided government.
      But if the election turns out to be mostly a referendum on Donald Trump, Democrats might win just the White House while failing to retake the Senate. And one cannot rule out the possibility of Donald Trump navigating a narrow path to an electoral college victory, and of Republicans holding on to the Senate, thus reproducing the status quo.
      More ominous is the prospect of a long-contested result, with both sides refusing to concede as they wage ugly legal and political battles in the courts, through the media, and on the streets. In the contested 2000 election, it took until 12 December for the matter to be decided: the supreme court ruled in favour of George W Bush, and his Democratic opponent, Al Gore, gracefully conceded. Rattled by the political uncertainty, the stock market during this period fell by more than 7%. This time, the uncertainty could last for much longer – perhaps even months – implying serious risks for the markets.
      This nightmare scenario must be taken seriously, even if it currently seems unlikely. While Biden has consistently led in the polls, so, too, had Hillary Clinton on the eve of the 2016 election. It remains to be seen if there will be a slight surge in “shy” swing-state Trump voters who are unwilling to reveal their true preferences to pollsters.
      Moreover, as in 2016, massive disinformation campaigns (foreign and domestic) are under way. US authorities have warned that Russia, China, Iran and other hostile foreign powers are actively trying to influence the election and cast doubt on the legitimacy of the balloting process. Trolls and bots are flooding social media with conspiracy theories, fake news, deep fakes and misinformation. Trump and some of his fellow Republicans have embraced lunatic conspiracy theories such as QAnon and signalled their tacit support of white supremacist groups. In many Republican-controlled states, governors and other public officials are openly deploying dirty tricks to suppress the votes of Democratic-leaning cohorts.
      On top of all this, Trump has repeatedly claimed – falsely – that mail-in ballots cannot be trusted, because he anticipates that Democrats will comprise a disproportionate share of those not voting in person (as a pandemic-era precaution). He also has refused to say that he will relinquish power if he loses and has instead given a wink and a nod to right-wing militias (“stand back and stand by”) that have already been sowing chaos in the streets and plotting acts of domestic terrorism. If Trump loses and resorts to claiming that the election was rigged, violence and civil strife could be highly likely.
      Indeed, if the initial reported results on election night do not immediately indicate a sweep for the Democrats, Trump would almost certainly declare victory in battleground states before all mail-in ballots have been counted. Republican operatives already have plans to suspend the counting in key states by challenging such ballots’ validity. They will be waging these legal battles in Republican-controlled state capitals, local and federal courts stacked with Trump-appointed judges, a supreme court with a 6-3 conservative majority and a House of Representatives where, in the event of an electoral college draw, Republicans hold the majority of state delegations.
      At the same time, all of the white armed militias currently “standing by” could take to the streets to foment violence and chaos. The goal would be to provoke leftist counterviolence, giving Trump a pretext to invoke the Insurrection Act and deploy federal law enforcement or the US military to restore “law and order” (as he has previously threatened to do). With this endgame apparently in mind, the Trump administration has already designated several major Democratic-led cities as “anarchist hubs” that may need to be put down. In other words, Trump and his cronies have made clear that they will use any means necessary to steal the election; and, given the wide range of tools at the executive branch’s disposal, they could succeed if early election results are close, rather than showing a clear Biden sweep.
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      To be sure, if early results on election night show Biden with a strong lead even in traditionally Republican states such as North Carolina, Florida or Texas, Trump would find it much harder to contest the result for more than a few days, and he would concede sooner. The problem is that anything short of a clear Biden landslide will leave an opening for Trump (and the foreign governments supporting him) to muddy the waters with chaos and disinformation as they manoeuvre to shift the final decision to more sympathetic venues such as the courts.
      This degree of political instability could trigger a major risk-off episode in financial markets at a time when the economy is already slowing and the near-term prospects for additional policy stimulus remain grim. If an election dispute drags on – perhaps into early next year – stock prices could fall by as much as 10%, government bond yields would decline (though they are already quite low), and the global flight to safety would push gold prices higher. Usually in this type of scenario the US dollar would strengthen; but, because this particular episode would have been triggered by US-based political chaos, capital might actually flee from the dollar, leaving it weaker.
      One thing is certain: a highly contested election would cause further damage to the US’s global image as an exemplar of democracy and the rule of law, eroding its soft power. Particularly over the past four years, the country has increasingly come to be regarded as a political mess. While hoping that the chaotic outcomes outlined above do not come to pass – polls still show a strong lead for Biden – investors should be preparing for the worst, not only on election day but in the weeks and months thereafter.
      • Nouriel Roubini is professor of economics at New York University’s Stern School of Business. He has worked for the International Monetary Fund, the US Federal Reserve and the World Bank.
      © Project Syndicate More