Who Will Win the US Presidential Election?

If the latest polls are any indication, Joe Biden is on track to win the popular vote in the upcoming US presidential election by a substantial margin, and an Electoral College reversal of that outcome, like in 2016, is unlikely. But the polls have been wrong before, including in 2016.

Michael Spence, David W. Brady


MILAN/STANFORD – In late July, opinion polls clearly indicated that US President Donald Trump had lost ground to Joe Biden, his Democratic challenger in the upcoming presidential election, owing primarily to his administration’s mismanagement of the COVID-19 pandemic. 

Since then, Trump’s fortunes have not improved; if anything, they have deteriorated further. Now, Trump appears set not only to lose the popular vote on November 3, but also to fail to pull off an Electoral College upset, as he did in 2016.

Start with party affiliations. As Table 1 shows, since the 2016 election, the Democratic Party’s ranks have grown by 6%, compared to just under 3% for Republicans. Self-identified independents declined by 8%. Among those who still identify as independents, the share of those leaning either left or right has changed little.


Moreover, as Table 2 shows, perceptions of Trump’s management of the COVID-19 crisis have declined considerably since March, and even since July, especially among moderate Republicans, Democrats, and independents – three groups whose votes are decisive in battleground states. Trump’s overall approval rating has also declined, though not quite as much.


Regression analysis – using a wide array of known variables that are correlated with voting behavior, including party affiliation and ideology – supports the assumption that the COVID-19 crisis is a major driver of this shift. This includes both the pandemic itself and the economic and employment crisis that it has caused.

To be sure, ongoing protests against systemic racism and police brutality – which have often been met with excessive force by police – are also capturing American voters’ attention. But the way in which those protests are interpreted – that is, whether voters believe they are violent and require a strong “law-and-order” response – is overwhelmingly consistent along party lines, and thus unlikely to affect voting decisions significantly.

As Table 3, which uses data from October YouGov polls, shows, only 15% of Democrats believe the protests are violent. Of those, 19% – just 2.85% of all Democrats – may vote for Trump because of the protest issue.

Overwhelmingly, Democrats still have no intention of voting for Trump, regardless of whether they identify as ultra-liberal, moderate, or anything in between. 

On the contrary, as Table 4 shows, even fewer plan to vote for Trump than the very few who were considering doing so in July, and even more plan to vote for Biden.


In 2016, support for Trump’s then-Democratic challenger, Hillary Clinton, was lower across all three categories of Democratic voter, especially among moderate and conservative Democrats (81%), than it is for Biden today. 

Since these data were collected in mid-October, when many people were already casting their ballots, there is little reason to think that the protests or anything else will increase Democratic support for Trump.

Biden is doing better than Clinton not only among Democrats, but among all voters. In 2016, Clinton won the popular vote by 2.1%, but lost in key battleground states, resulting in her defeat in the Electoral College. As Table 5 shows, the vast majority of those who voted for Clinton in 2016 intend to vote for Biden this year.

But Biden’s advantage is much larger. While most of Trump’s 2016 supporters also plan to vote for him again, he has lost more voters than the Democrats have. Add to that the fact that Clinton voters were already the larger group, and Biden’s lead among these two groups of voters reaches the 8% range. Third-party voters from 2016 are also more likely to prefer Biden over Trump this year.

Biden’s advantage extends to the battleground states. Though the difference is somewhat smaller, the Democrats have retained more voters from 2016 than Trump has, and more third-party voters plan to vote for Biden than for Trump.

A demographic breakdown of the voting public, as shown in Table 7, further reinforces the impression that Biden will come out ahead. Among every category of voter – young and old, female and male, non-white and white, more and less educated – Biden is doing better than Clinton was in 2016.


Of course, voting intentions matter little, if people cannot actually manage to vote. And this election is occurring amid a pandemic, which limits traditional voting methods. But, as Table 8 shows, far more voters – especially Democrats and independents, but also Republicans – are embracing early voting and voting by mail.

This could have implications for the election results – or, at least, how they are received. Issues arising from vote-by-mail systems, or even a protracted ballot-counting process, could fuel state-level challenges to the results. 

Because Biden is likely to receive more mailed-in votes, he is more vulnerable to such challenges, which, if successful, could significantly alter the picture painted by the polling data. The United States may face a period of volatility as it awaits results.

Nonetheless, if the polls are a reasonably accurate indication, Biden is on track to win the popular vote by a substantial margin, and an Electoral College reversal of that outcome is unlikely. 

Trump’s hardcore base is simply not large enough to hand him victory, and he lacks the support of moderates and independents. Biden could suffer due to fragmentation within the Democratic Party – say, if progressive voters decide not to support him – but the polls show no evidence of this. The desire to vote Trump out seems to be too great.

Of course, the polls have been wrong before, including in 2016. The intentions of key groups of voters on either side may not be accurately reflected in the results. In fact, when YouGov asked voters whether their neighbors would be surprised by their voting intentions, about 10% of urban and rural voters said “yes,” indicating that there may be “hidden” voters for both candidates.

In short, Biden looks like he is headed to the White House. 

But the race isn’t over until it is over.


Michael Spence, a Nobel laureate in economics, is Professor of Economics Emeritus and a former dean of the Graduate School of Business at Stanford University. He is Senior Fellow at the Hoover Institution, serves on the Academic Committee at Luohan Academy, and co-chairs the Advisory Board of the Asia Global Institute. He was chairman of the independent Commission on Growth and Development, an international body that from 2006-10 analyzed opportunities for global economic growth, and is the author of The Next Convergence: The Future of Economic Growth in a Multispeed World.  

David W. Brady is Professor of Political Science and Leadership Values at Stanford University and Senior Fellow at the Hoover Institution.

The non-trivial risk of repeating Florida 2000 election showdown

Controversial US Supreme Court ruling that stopped a ballot recount looks troublingly relevant

Edward Luce 

Demonstrators in Florida demanding a recount of votes for George W Bush and Al Gore in the 2000 US presidential election © AFP via Getty Images


Democrats dubbed it the American presidential “selection”. Back in 2000, the US Supreme Court stated that its 5-4 decision to halt Florida’s recount that handed the 2000 election to George W Bush — was meant to be a one-off. Twenty years later it looks like a troublingly relevant precedent.

The risk that robed lifetime appointees will resolve next week’s election is neither trivial nor probable. It lies somewhere in-between.

Common sense dictates that in a contested election between Donald Trump and Joe Biden, the Supreme Court’s instinct would be for self-preservation. In a tight electoral college count where Mr Biden had won the popular vote, another court “selection” could break its legitimacy. 

The risk to the court’s independence of settling in favour of Mr Trump would be high. 

The White House is up for grabs every four years while Supreme Court appointments are for life.

Amy Coney Barrett, who was confirmed this week, could occupy the bench for decades, which means conservatives can probably count on a judicial majority for many presidential terms. Why gamble with such rich winnings? 

That is why most constitutional scholars believe the court will do its best to avoid intervening in the 2020 election. But survival is not the only instinct.

One clashing impulse would be to prevent a constitutional breakdown. It is possible Mr Biden will win Florida on Tuesday night and end all speculation. Failing that, the chances of a rash of court battles over vote counts is high. The Supreme Court has ruled on cases involving four states in the past month alone. 

In cases on South Carolina and Wisconsin, it ruled to make voting harder. Although it upheld Pennsylvania’s three-day extension for postal ballots, the court left itself wiggle room to return to the issue next month. The justices also let stand North Carolina’s extension for mailed in ballots to nine days.


The stated logic behind some of these rulings have not been reassuring. Brett Kavanaugh, who was confirmed in late 2018 as the second of Mr Trump’s three appointments, cited the previously off-limits Bush vs Gore ruling in support of a ruling to stop a deadline extension for Wisconsin’s mail-in ballots.

In the South Carolina ruling, which mandated that postal ballots had to have a countersignature, he likewise argued that decisions by state legislatures “ordinarily should not be subject to second-guessing” by federal judges. Most swing-state legislatures, including Florida, Wisconsin, Michigan and Pennsylvania, are Republican. 

Should any one of these override their state’s popular vote and pledge their electors to Mr Trump, Mr Kavanaugh has made his sympathies known. The same applies to at least three of his colleagues. Ms Barrett could make a majority.

Three of the nine justices — Chief Justice John Roberts, Mr Kavanaugh and Ms Barrett — worked on George W Bush’s Florida legal team. Time does not lessen the 2000 Supreme Court ruling’s capacity to startle. To justify its decision, the court cited the equal protection clause of the 14th amendment that was adopted after the US civil war to put African Americans on the same legal footing as whites. Antonin Scalia, one of the majority judges, later described that rationale as a “piece of shit”.

The late Mr Scalia is the patron saint of the originalist doctrine to which much of the court now subscribes. In theory, originalism is about sticking to the letter and intent of constitutional text — or “calling balls and strikes” as Mr Roberts described it. In practice, originalist interpretations are often redolent of French deconstructionism.

In recent years, the court has issued several rulings that have made voter suppression increasingly easy. It gutted the 1965 Voting Rights Act in 2013 on the grounds that protecting minority rights was no longer necessary. As the late Ruth Bader Ginsburg said in her dissenting opinion, it was “like throwing away your umbrella in a rainstorm because you are not getting wet”.

Asked repeatedly during her confirmation hearings about how she would deal with any appearance of impropriety that would result from her ruling on election cases, Ms Barrett would only commit “to fully and faithfully applying the law of recusal”. 

Given that she was hurriedly confirmed a week before the election and sworn in by Mr Trump within hours, it is not clear what that means. Under a conservative reading of the language originalist judges use in their opinions, many things are possible in the coming weeks.

The king’s money: Thailand divided over the $40bn question

The role and wealth of the Germany-based king is under unprecedented scrutiny amid national protests

John Reed in Bangkok 

       © Thai TV Pool/AFP via Getty


For such a big change it was a very small announcement. An unscheduled communiqué published on its website on Saturday June 16 2018 revealed that Thailand’s Crown Property Bureau had transferred its entire portfolio — royal assets worth tens of billions of dollars held for more than 80 years on behalf of the monarchy and the nation — into the hands of the new King Maha Vajiralongkorn.

“All Crown Property assets are to be transferred and revert to the ownership of His Majesty so that they may be administered and managed at His Majesty’s discretion,” the CPB said, clarifying the details of a crown property law passed the previous year. It added that the assets would “now be held in the name of His Majesty” and be subject to tax.

It was an extraordinary move. Thailand’s royal wealth portfolio is estimated to be worth more than $40bn. In addition to swaths of prime real estate in downtown Bangkok, the CPB owns large stakes in the kingdom’s biggest industrial company, Siam Cement Group, and one of its largest lenders, Siam Commercial Bank. The transfer of ownership from the CPB to the personal control of the king confirmed him as one of the world’s richest monarchs. 

Strict restrictions on what can and can’t be said about Thailand’s royal family — most notably a lèse majesté law that carries a maximum 15-year jail term for saying or writing anything that might be construed as an insult — meant that the transfer of ownership was barely reported. Nobody, including the Financial Times, questioned why it was necessary or raised concerns about the concentration of financial power in Thailand’s current head of state. 


Bangkok: Thailand’s Crown Property Bureau announced in June 2018 that 'all Crown Property assets are to be transferred and revert to the ownership of His Majesty' © Anutr Tosirikul/Alamy


But two years later, amid a wave of nationwide protests, Thais are breaking their silence over the 68-year-old king’s wealth and the generous public budgets enjoyed by royal institutions. Student protesters are asking why public funds are being handed to a king who spends more time in Germany than he does in Thailand — an issue most Thai media avoid mentioning. 

A 10-point manifesto demanding reforms to the monarchy calls for a cut in the royal budget “in keeping with the country’s economic situation” — a nod to the coronavirus pandemic — as well as an end to royal charity projects, which receive taxpayer funds, and the separation of the king’s personal wealth from crown assets.

“It’s the biggest issue of all in Thailand,” says Parit “Penguin” Chiwarak, one of the most radical of the student protesters in pressing for royal reforms. “The royal institution can interfere in politics because they have enough money.

“If we don’t say it now, when are we going to say it?”

Emboldened critics

It is hard to overstate the impact of these criticisms in a country where the royal family was until recently viewed as untouchable. But precedents are being broken by an outspoken and, to many Thais, radical group of young leaders who are questioning the foundations of Thailand’s political order. In a provocative move in September they laid a plaque near the royal palace stating Thailand “belongs to the people, not the king as they deceived us”. 

Anon Nampa, a senior protest leader, calls the royal budget “excessive” and says it has been “unnecessarily increased”. The focus on the king’s wealth comes as Thai authorities, who have managed to restrict coronavirus at just over 3,600 reported cases, are now confronting the economic fallout, which has left millions unemployed and hurt an economy heavily reliant on tourism and exports. 

Parit 'Penguin' Chiwarak, a student protester, says: 'The royal institution can interfere in politics because they have enough money. If we don’t say it now, when are we going to say it?' © Lauren DeCicca/Getty

Thanathorn Juangroongruangkit, who led Future Forward before the party was dissolved, says royal wealth is 'taxpayers’ money, it has to be transparent.' © Mladen Antonov/AFP via Getty


At a rally on September 20, Mr Parit called for a boycott of Siam Commercial Bank, which he called “a money pot of feudalism”. “You are replenishing money for the German,” he said, using the name some anti-government Thais use for the king. “Close your SCB account, get all your money out, and burn your bank book.” 

Thailand’s central bank was quick to say the next day that it had noticed no surge in withdrawals from SCB. In a country without reliable opinion polling, it is impossible to gauge the level of support for the students’ call for scrutiny of royal money and finances, but it is safe to say that the monarchy and political status quo enjoy significant backing.

Many Thais, even those who oppose Prayuth Chan-ocha’s military-backed government, think the students have overplayed their hand with the calls to curb the monarchy’s powers, and that they are entering dangerous territory in a country with a history of coups and political bloodshed. 

Anon Nampa, a senior protest leader, calls the royal budget 'excessive' and says it has been 'unnecessarily increased' © Lauren DeCicca/Getty


Support for the protests will be tested on Wednesday, when the students plan their next big demonstration. They have spoken of marching to Government House to press for the resignation of the Prayuth government and “seizing” back the Democracy Monument in central Bangkok.

The students’ frankness has emboldened other Thais. MPs from Move Forward, formerly Future Forward, Thailand’s most outspoken opposition party, have been using their powers in parliament to probe spending on royal institutions. They point out that it has risen sharply since the king took the throne after his father King Bhumibol Adulyadej died in 2016.

Meanwhile, Heiko Maas, Germany’s foreign minister, last week raised the issue of the king’s residence in the country, reflecting growing discomfort in Berlin as protests escalate in Thailand. 

“We have made it clear that politics concerning Thailand should not be conducted from German soil,” Mr Maas said in response to an MP’s question in the Bundestag. 

“If there are guests in our country that conduct their state business from our soil, we would always want to act to counteract that.”

The royal bill

While the Thai king spends most of his time in Germany, he has taken firm steps to consolidate the power and wealth of royal institutions back in Bangkok since ascending to the throne. 

In 2017, the year the law on crown property assets was passed, the king combined the former royal household office with the privy council and a royal personal safety body to create a single Royal Office. Last year he issued a decree transferring two army regiments to the Royal Office, putting them under his direct control. 

Until this year, Thais — even opponents of the Prayuth government — avoided criticising the king’s role in Thailand’s status quo. But as near daily protests broke out across Thailand in August, Move Forward MPs used their seats on the budget committee of Thailand’s lower house to query royal spending. 

The king’s corporate assets include a 33.6 per cent stake in Siam Cement Group, valued at about $4.5bn © Dario Pignatelli/Bloomberg

Protesters have called for a boycott of Siam Commercial Bank, in which the king owns a 23.4 per cent stake worth about $1.7bn © Brent Lewin/Bloomberg


“It’s taxpayers’ money, it has to be transparent,” says Thanathorn Juangroongruangkit, who led Future Forward before authorities dissolved the party in February, but acts as an adviser to the committee. “These things are not transparent.”

According to Thailand’s budget, spending on the Royal Office is set to reach nearly 9bn baht ($290m) this year, more than double the Bt4.2bn budgeted in 2018, its first full year of operation.

Move Forward also questioned royal spending paid by other government departments, including Bt1.2bn from the defence ministry and Bt1.6bn from the Thai police for royal security, and Bt7bn budgeted for royal development projects, charitable endeavours that receive taxpayer money. 

The party also queried the Royal Office’s use of aircraft, and were given by Mr Prayuth’s office an inventory of 38 planes and helicopters reserved for royal use. 

Mr Thanathorn is also critical of the transfer of royal assets to the king, pointing out that he is now a leading corporate shareholder via the CPB’s stakes in SCG and SCB, and yet enjoys elevated legal status. “The king is now a player in the market,” he says. “It’s just wrong. It’s undemocratic.”


The CPB, akin to a sovereign wealth fund, had its origins in the Privy Purse Bureau, a body devoted to the upkeep of royal family members that began to invest in Siam’s economy as it was modernising more than a century ago. In the 1930s, after the uprising that made Thailand — as it was later renamed — a constitutional monarchy, the CPB was established, with a clear division between the king’s personal assets and royal ones. 

As Thailand’s economy was taking off in the 1980s, the fund became a leading investor in the stock exchange and industry. The CPB was chaired by the finance minister until 2018, when the king appointed as its head air chief marshal Satitpong Sukvimol, who now also chairs SCG.

“The demands by protesters to audit the king’s finances are unprecedented,” says Tamara Loos, a professor of history and south-east Asian studies at Cornell University. “But so is the way the king utilises what were formerly state funds.”

Members of the Royal Thai Police stand under a portrait of King Maha Vajiralongkorn near the Grand Palace in Bangkok © Jewel samad/AFP via Getty


Valuing the king’s wealth

Estimating the value of the king’s wealth is largely a matter of guesswork, as no full inventory of the monarchy’s assets is publicly available. The CPB last published an annual report in 2017 that included investment projects such as Langsuan Village (later renamed Sindhorn Village), a luxury real estate and retail development in Bangkok’s central business district, and the fund’s public works and charitable projects. 

The king’s corporate assets are easier to value: he owns a 23.4 per cent stake in Siam Commercial Bank, worth $1.7bn, and 33.6 per cent of Siam Cement Group, valued at $4.5bn. However, the CPB’s biggest asset is real estate, mostly in Bangkok, but also in Thailand’s central plains and other regions.

A 2011 semi-official biography of the late king, King Bhumibol Adulyadej: a Life’s Work, whose authors were given access to CPB officials, estimated that the Bangkok real estate portfolio alone was worth about $33bn at the time, and added that a “high estimate” of the assets under the CPB’s control was about $37bn. At the time the bureau owned 3,230 acres in Bangkok and another 13,200 acres outside the capital, according to the book.

“If such wealth belonged to an individual, he or she would rank in the top six on the Forbes list of the world’s billionaires,” the book said. “But this wealth does not belong to an individual. It belongs to the crown.” 

Since the king took ownership of CPB assets, that has not been the case. Thailand’s property market has been buoyant in the decade since, although the pandemic has caused demand and prices to fall. Thailand’s government pushes back when journalists, including the FT, try to estimate royal wealth or refer to the billions of dollars of assets the king owns.

In 2012, when Forbes, which the previous year had declared Bhumibol as the world’s richest monarch, published a piece on “His Majesty’s balance sheet” and estimated the king’s fortune at more than $30bn, the Thai embassy in Washington criticised the magazine for including CPB assets “held in trust for the nation” into its calculation of his personal wealth.

Thailand’s foreign ministry declined to comment and a government spokesman did not respond to a request for comment. When the FT made reference to the king’s wealth in a recent story, the Thai embassy in London wrote to the newspaper saying: “The claim that His Majesty the King is in charge of billions of dollars of wealth is unfounded.” 

The letter noted the CPB was “managed by a board of directors” who worked towards “maintaining a balance between financial stability of the assets as well as generating social incomes to benefit all stakeholders”.

German media have reported that King Maha Vajiralongkorn is renting a hotel in Garmisch-Partenkirchen in the Bavarian Alps © Philipp Guelland/EPA-EFE


The German dilemma

Interest in King Vajiralongkorn’s residence in Germany — a staple for local media — has intensified recently as officials asked awkward questions not only about the king’s political role, but also the tax implications of his stay. According to local politicians, the monarch was living in a villa at Tutzing near Lake Starnberg, about 40km from Munich, at the time of his father’s death. More recently, German media have reported extensively that the king is renting a hotel in Garmisch-Partenkirchen in the Bavarian Alps.

In April two Green party MPs in Bavaria’s state legislature, Claudia Köhler and Tim Pargent, posed written questions to the state government as to whether the king might have been liable for inheritance tax. 

The Bavarian government, in its replies, cited German privacy protections surrounding tax and “the state interests of foreign affairs”. However, Mr Pargent says he established that the king would have been liable for inheritance tax. Diplomats are immune, but the Thai king is not a diplomat and his residence in Tutzing is not a consulate, according to the MP. 

“The issue is covered by tax secrecy,” Mr Pargent says. “I am not expecting a final answer through official channels. However, through our questions we were at least able to shine a bit of light on the matter.”

In Bangkok, Mr Thanathorn and MPs from his former party have exhausted their inquiries for the current budget round. But, they say they will take up the matter of royal spending again next year. 

One thing that is transparent, the opposition figure says, is the status of royal assets.

“In 2018, they made it clear, without question, who the CPB belongs to.”


Additional reporting by Ryn Jirenuwat in Bangkok 

Gold, The Simple Math

BY JOHN HATHAWAY 



The current pullback in the precious metals sector is a buying opportunity. Since trading at a closing high of $2,064 an ounce on August 6, gold bullion has declined 8.34% as of this writing.1 

Gold mining shares have followed suit, declining 9.26% since the August high.2 

It is possible that gold and related mining shares could continue to chop sideways to lower until the U.S. presidential election results are known and even into yearend as the implications are sorted out. 

Whatever the electoral outcome, the path towards monetary debasement is bipartisan. 

It is crucial for investors to focus on the long-term trend and to avoid the distractions of short-term timing considerations.

The very strong investment fundamentals for gold and gold mining shares are based on what has been a slow irreversible drift towards significant U.S. dollar (USD) devaluation. 

Paper assets, including equities, bonds and currencies, have underperformed the dollar gold-price since 2000, the dawn of radical monetary experimentation by central bankers. 

Until recently, gold's strength has attracted little notice from mainstream investors. 

Widespread disinterest can perhaps be ascribed to the stealthy, long-term character of gold's outperformance. 

In addition, the absolute performance of equities and bonds has been positive over the past two decades, so there has been little incentive to look elsewhere.

Figure 1. Gold vs. Stocks, Bonds and USD
Relative Returns for Period from 12/31/1999-9/30/2020
Source: Bloomberg. Period from 12/31/1999-9/30/2020. Gold is measured by GOLDS Comdty Index; S&P 500 TR is measured by the SPX; US Agg Bond Index is measured by the Bloomberg Barclays US Agg Total Return Value Unhedged USD (LBUSTRUU Index); and the U.S. Dollar is measured by DXY Curncy. Past performance is no guarantee of future results. You cannot invest directly in an index.

Lack of Crowd Recognition Provides Opportunity

The underappreciated advance in the precious metals complex may well continue over the intermediate term. Lack of crowd recognition provides an opportunity to accumulate positions ahead of more heated price competition that we believe is very likely in the months ahead. 

While the investment consensus slumbers, it may be helpful to consider the potential upside for both gold bullion and gold mining equities and resist the urge to trade the metal's secular bull market. 

To paraphrase the late market analyst Richard Russell,3 "It is the nature of every bull market to take along the fewest possible number of investors for the entire ride."

We believe that now is the time to start layering in gold exposure, not when the rest of the world tries to do so.

In simple mathematical terms, the gold market could not clear at current prices if 1% of the $100 trillion4 or so of institutional assets under management were to move into the physical metal. 

Record year-to-date inflows into gold-backed ETFs have exceeded any previous year. 

But in dollar terms, this amounts to a paltry $51.2 billion requiring the acquisition of 936.2 metric tonnes of gold (according to Meridian Macro Research). 

By contrast, a $1 trillion inflow into gold bullion would require 18,000-19,000 tonnes, equal to roughly six years of annual world gold production. 

A shift of this magnitude by asset allocators would require a bullion price of $5,000-$10,000 an ounce.

Figure 2. Gold-Backed ETF Flows Have Reach Record Levels in 2020 (2003-2020)
Source: Bloomberg. Period from 12/31/2003-10/02/2020. Gold is measured by GOLDS Comdty Index. Gold ETF Holdings is measured by the ETFGTOTL Index. You cannot invest directly in an index.

Paper Money Supply Growth Will Outstrip Available Gold

The time frame for a hypothetical $1 trillion inflow could range from a few years to a decade. As the supply of paper money accelerates, a $1 trillion inflow could prove conservative. 

What is inescapable is that the future increase in the supply of U.S. dollars is likely to far outstrip the 1-2% annual growth in gold supply. 

Monetary regime change, not cyclical or episodic (COVID) related factors, explains the steepening slope in the supply of paper currency versus gold.  

On September 16, Federal Reserve ("Fed") Chairman Powell announced a new QE (quantitative easing) program that is twice the size of earlier QE programs in terms of monthly credit expansion. 

Under the current program, the Fed will purchase $80 billion of U.S. Treasuries and $40 billion of mortgage-backed securities per month net. This will lead to a 21% increase in the Fed balance sheet over the next twelve months. 

Powell stated:

"Effectively, we're saying that pace will remain highly accommodative until the economy is far along in its recovery.... We do have the flexibility to adjust that tool and the rate tool and other tools, as well." 

Sustainable V-Shaped Recovery is Highly Unlikely

Implied in Powell's comment is the expectation that the U.S. economy will recover to pre-COVID levels and that further Fed support will be unnecessary. His thinking assumes that business cycle factors plus cures for COVID-19 will restore normality, which will allow the Fed to withdraw support for financial markets. 

We believe that Powell, his Fed colleagues and consensus economic thinking do not comprehend that the highly indebted U.S. and world economy are incapable of a sustainable V-shaped recovery. 

More likely is a continuation of sub-par economic performance that will be viewed as unacceptable by the next and future presidential administrations.

Highly indebted economies are destined to underperform their potential. Productive resources must be diverted to debt service and principal repayments to meet credit obligations. 

Monetary policy is handcuffed because any tightening, including interest rate hikes, will increase the risk of credit defaults and economic instability. Lenders become reluctant to extend credit at sub-economic rates when borrowers are swimming in debt. 

Therefore, future monetary and fiscal interventions are likely to increase in scale and frequency. Extraordinary measures will become routine.

Before the onset of the COVID economic shutdown, U.S. consumer, business and government debt totaled $64 trillion or more than three times the U.S. gross domestic product.5 

That ratio is most assuredly greater today and, with continuing government and corporate debt issuance, will continue to grow. High debt drives a vicious cycle of money creation that cannot be reversed without an extended period of austerity.

Excessive indebtedness practically guarantees that interest rates will remain tethered to the zero bound. As of September, the blended interest rate on U.S. debt was 1.77%, a record low. The fiscal year (FY) 2020 interest expense was $522 billion through September and will approximate $560 billion for the full fiscal year ending October 31. 

A 1% increase would add over $300 billion in interest expense. As noted by FFTT (Forest for the Trees, 9/24/2020) authored by Luke Gromen,6 on a year-to-date basis, interest expense plus entitlement spending equaled 97% of tax receipts. Taking defense spending into account, spending on automatic pilot is $1.4 trillion. 

Assuming interest rates do not increase, we estimate the growth of embedded non-discretionary spending to be 5-10% annualized.

Figure 3. Interest Rates are Zero Bound
Source: Meridian Macro Research LLC. Data as of 10/03/2020. You cannot invest directly in an index.


Toss in additional stimulus and other ongoing government programs, and one can easily picture routine deficits of $2-3 trillion and annual growth in U.S. Treasury debt of 15-20%, well in excess of gross domestic product (GDP) growth. 

As noted by Gromen, with federal spending accounting for 45% of GDP, any attempts to cut outlays "will effectively amount to a cut in GDP." Proposed tax increases would likely trigger a new recession. The U.S. no longer has fiscal choices.

Monetary policy is also trapped. 

The Fed is morphing into an arm of the U.S. Treasury, as former Fed Governor Kevin Warsh observes in a September 7 Wall Street Journal Op-Ed:

"If the economy does well in the coming quarters, I expect the Fed will expand significantly the scale, scope and duration of its asset purchases. If the economy weakens or financial markets fall, the Fed will do even more. This is what political scientists call path dependency. When an institution sticks to a path for so long, it finds its options limited, detours difficult and exits infeasible.

"The Fed is on a one-way path to a larger role in our economy and government. On the current trajectory, the Bank of Japan might be the model for Fed policy: a large buyer of public stocks and an indistinguishable partner with fiscal authorities. The unimaginable can become the inevitable."

Bonds and Equities Have Become Positively Correlated

The emasculation of the Fed means that bonds can no longer protect conservative, balanced portfolios against equity risk. 

Bonds and equities have become highly correlated. 

The inverse equity/debt correlation assumes a normal business cycle in which bonds and equities would travel in opposite directions during recessions and recoveries.

At the zero bound, bonds offer only return-free risk. Upside potential seems entirely dependent on appreciation linked to crossover into negative nominal territory, certainly a possibility but only speculation for the sophisticated investor. Downside risk would be considerable if the U.S. dollar weakened, inflation returned or if the yield curve steepened. 

If bonds have reached a dead end, asset allocators must look elsewhere. 

Gold will fill a large part of the void vacated by bonds to help balance equity risk.

Figure 4. Correlation of Spot Gold to Traditional Financial Assets
Source: Bloomberg. Period from 9/30/2000-9/30/2020. Gold is measured by GOLD Comdty Index; U.S. Equities by the S&P 500 Index; U.S. Cash by the S&P US Treasury Bill 0-3 Month Index; International Equities by the MSCI EAFE Index; U.S. Fixed Income by the Bloomberg Barclays US Aggregate Bond Index; and Real Estate by the Dow Jones US Select REIT Index. You cannot invest directly in an index.


Asset allocators may also soon discover that gold mining equities offer dynamic exposure to a falling U.S. dollar and a rising gold price. 

Despite good performance year-to-date, up 37.86% (as measured through 10/13/2020 by GDX7) versus a 24.66% year-to-date increase in the gold price, flows into mining shares have been lackluster. 

Shares outstanding of GDX are 15% below the peak in 2017 despite nearly doubling in value.

Figure 5. GDX Shares Outstanding are Down 15% from 2017 Levels (2006-2020)
Source: Bloomberg. Period from 5/12/2006-10/12/2020. You cannot invest directly in an index.


Against a very favorable macroeconomic backdrop, gold bullion and gold mining stocks appear to be significantly under represented. 

The Meridian Macro Figure 6. chart shows that gold-backed ETFs and related mining stocks represent only 0.91% of the aggregate market capitalization of world exchanges, a ratio well below the prior peak reached in 2011.

Figure 6. Gold Miner Mkt. Cap Physical Gold ETF Holdings Value as % World Exchange Market Cap vs. Gold ($/oz)Source: Meridian Macro Research LLC. Data as of 10/03/2020. You cannot invest directly in an index.


Gold mining shares represent unprecedented value relative to their history and in comparison to conventional equity alternatives. 

For example, miners trade at EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortization) 8 of 8.52x compared to the equal-weighted S&P 500 of 16.33x, the widest spread in 10 years.

Figure 7. Gold Mining Equities vs. S&P 500 Index: EV/EBITDA (2006-2020)Source: Bloomberg. Data as of 10/12/2020. S&P 500 Index is measured by the SPXEVEBT Index and Gold Mining Equities are measured by the GDMEVEBT Index. You cannot invest directly in an index.


In addition, the ratio of the HUI Index9 to the gold price stands at 0.18, indicating that gold miners are cheap relative to gold bullion. 

This compares to a range of 0.14 to 0.64 during the bull market from 2000-2010, as shown in Figure 8.

Figure 8. The HUI-Gold Ratio Measures Investor Sentiment on Gold
Source: Bloomberg. Data as of 10/12/2020. The orange line measures the ratio of the HUI Index to GOLDS Comdty Index. You cannot invest directly in an index.


The gold mining sector is financially robust thanks to the strong bullion prices and significant debt reductions made possible by healthy cash generation. Dividend hikes have become frequent and there is plenty of room for more to come. 

Our research indicates that twelve mining companies have announced dividend increases in 2020. Payout ratios are still low and conservative. There is considerable room for further increases as companies become more comfortable with a gold price of $1,900. 

Year-over-year earnings comparisons will be favorable due to higher average gold prices in 2020 versus 2019. A favorable outlook for gold bullion prices means rising future earnings. The still shunned sector could gain favor with growth stock investors.

We are frequently asked how gold mining stocks might behave in a broad market setback similar to March 2020 or 2008. Market meltdowns occur when investors sell whatever they can to raise cash. 

No asset class or stock group is immune to panic liquidations, including gold and gold mining stocks. More critical, gold and gold mining stocks were quick to recover from market panics and deliver subsequent outperformance, as shown in Figure 9.

Figure 9. Gold Mining Equities Performance (2008-2020)
Source: Bloomberg. Data as of 9/30/2020. Gold mining equities are measured by the NYSE Arca Gold Miners Index (GDM). You cannot invest directly in an index.


Are Markets Priced for "Destruction"?

On the other hand, the downside risk in mainstream equity portfolios is considerable and, in our opinion, requires more protection than ever. By almost any benchmark, the stock market (measured by the S&P 500 Index10) is equal to or more overvalued than at its 2000 peak.

Source: Bloomberg. Data as of 9/30/2020.



As hedge fund manager Michael Solomon of Marlin Sams Fund, L.P. summed up on October 3:      

"The markets are priced for destruction... Investors ignore the fact that real corporate after-tax profits (US Bureau of Economic Analysis) have been flat since 2010... Since 2008, the markets have crashed/cracked four times (including the bond market's taper tantrum)…The mass delusion is that the Federal Reserve can save the day. We believe that as the Fed gets further in, it will find itself trapped in a position from which it cannot get out. Investors believe things are good, but they are not. The illusion has been supported only by the reckless, extreme, and irresponsible actions of the Fed."

High financial asset valuations are addicted to Fed support. In our opinion, there is little risk that Fed support would or could be withdrawn. Fiscal stimulus is likely to continue as well. As argued in Mr. Solomon's synopsis above, the consensus illusion of well-being is dependent on ever greater money creation.   

In our view, new episodes of money creation, market intervention, or price rigging add to systemic instability. 

Conditions caused by the next financial accident mirroring the GFC (great financial crisis) or black swan event echoing the COVID-19 pandemic could render monetary and fiscal countermeasures ineffectual. 

A substantial devaluation of the U.S. dollar would take place.

Layer in Gold Exposure

Ray Dalio noted in his study, The Changing World Order, "most people don't pay enough attention to their currency risks." He recently reiterated his earlier prediction of a 30% decline in the U.S. dollar within the next few years. 

Most investors assume the dollar will retain constant value. We believe that is wrong. Dalio points out that all paper currencies have been devalued or died. No exceptions.

We believe that now is the time to start layering in gold exposure, not when the rest of the world tries to do so.

A cursory inspection of the U.S. fiscal situation suggests that the U.S. dollar deserves to rank high on the endangered species list. There are many ways that a dollar devaluation could transpire. 

Inflation, pronounced loss of value against other currencies, or a deflationary credit meltdown are all possibilities. In any of these scenarios, the dollar price of gold would rise.

The four-year rise in gold from $1,100 at yearend 2015 to $1,900 in 2020 is an early signal of a failing currency regime. 

We believe that potential exists for the dollar price of gold to rise more than 5-10 fold when that failure becomes plain for all to see. 

It is a matter of simple math. 

Timing remains uncertain but the outcome seems inevitable.



1 The price of gold is measured by spot gold price, which refers to the price of gold for immediate delivery.

2 As measured by Sprott Gold Miners Exchange Traded Fund (NYSE Arca: SGDM), an ETF that seeks investment results that correspond (before fees and expenses) generally to the performance of its underlying index, the Solactive Gold Miners Custom Factors Index (Index Ticker: SOLGMCFT). The Index aims to track the performance of larger-sized gold companies whose stocks are listed on Canadian and major U.S. exchanges.

3 Richard Russell was an American writer on finance. He began publishing a newsletter called the Dow Theory Letters in 1958. The Letters covered his views on the stock market and the precious metal markets. As of 2015, Dow Theory Letters was the longest-running service continuously written by one person in the business.

4 Source: Boston Consulting Group, May 2020.

5 WSJ: The U.S. Economy Was Laden With Debt Before Covid. That's Bad News for a Recovery, by Shane Shifflett. October 1, 2020.

6 Luke Gromen, CFA, is founder of the macroeconomic research firm Forest for the Trees (FFTT). FFTT publishes a bi-monthly, in-depth macroeconomic & thematic newsletter for institutional investors.

7 VanEck Vectors Gold Miners ETF (GDX) tracks the overall performance of companies involved in the gold mining industry.

8 The EV/EBITDA ratio is a popular metric used as a valuation tool to compare the value of a company, debt included, to the company's cash earnings less non-cash expenses.

9 The NYSE Arca Gold BUGS Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. BUGS stands for Basket of Unhedged Gold Stocks.

10 The S&P 500 Index (SPX) is an index of stocks issued by the 500 largest U.S. companies.

Cash Isn’t Trash Compared to Stocks and Bonds

The risks of a sharp selloff in both stocks and bonds is high at the same time, making cash an attractive haven

By Justin Lahart

Fed Chairman Jerome Powell testified at a Senate panel hearing on Sept. 24./ PHOTO: DREW ANGERER/POOL/SHUTTERSTOCK


Stock valuations are incredibly high, but the long-term Treasurys that investors typically use to safeguard their portfolios are shockingly expensive. Under these circumstances, the better hedge might be old-fashioned cash.

Almost any way you look at them, stocks seem quite expensive. The S&P 500 trades at about 22 times its expected earnings over the next year, its richest forward price/earnings ratio since the dot-com bubble. Against its inflation-adjusted earnings over the past decade—the valuation method popularized by economist Robert Shiller—it is similarly expensive. Other yardsticks, such as the overall value of U.S. stocks in comparison to gross domestic product, tell a similar story.


No valuation method is perfect of course, but when so many of them point in the same direction it is a reason for caution. 

Indeed, about the only way to argue that stocks aren’t significantly overvalued is to compare them to long-term Treasurys. 

The 10-year Treasury note yields just 0.72%, putting it near its lowest levels in history. 

Against that, the low earnings yield on stocks (the inverse of the price/earnings yield, 4.5% on a forward basis) doesn’t seem so bad.

Whether stocks really are inexpensive in comparison with long-term Treasurys is an open question, especially because the low-inflation, low-growth environment that Treasury yields are predicated on calls into question the strength of future earnings growth. 

One thing that seems clear, however, is that as an investment, Treasurys don’t have much room left for upside. 

If worries about the economy became severe enough to send the 10-year’s yield down to zero, for example, its market value would rise by only about 7%.

In contrast, there could be plenty of downside. Consider a situation where next year a massive stimulus plan is enacted and a vaccine against the new coronavirus becomes widely available, the combination of which makes the economy really hum, while the Federal Reserve steadfastly keeps short-term rates near zero. 

If that pushed the yield on the 10-year to 2.5%, the 10-year note would lose about 16% of its value. 

Short-term Treasurys don’t carry anything like those downside risks, and their yields aren’t substantially lower than their long-term counterparts—the three-month bill’s is 0.1%. 

A number of high-yield savings accounts have interest rates that approach or exceed the yield on the 10-year note.

When investors turn to cash, it is usually because market losses have made them deeply worried, leading them to miss out on gains made in the subsequent recovery. 

But now, when both stocks and long-term Treasurys seem awfully expensive, a bit of cash might provide them with a margin of safety, and an easier night’s sleep to boot.