Results,reassessmentandlessonsfromhistory

In our mails the one thread which kept coming back is the centrality of the US in the current world order. Multiple times we have written about how this order emerged and what the alternatives can be and what is the implication if it continues in the same vein. Hence when the US goes through the change of guard, analysts everywhere must sit up and take notice. But now once the elections are over and the results are more or less declared (though still open to legal contests) markets would like to reassess the new reality. Markets work on the expectation and the current scenario which is a Biden Presidency with senate remaining with the Republicans was also one of the expected state.

So, let’s look at the implications of the same and which constituencies will come out winners. For that one can try to go through what are the major policy planks which the new US president has promised. A tax on rich, more government spending, a more reasoned approach on trade partners, new immigration policies etc. are some of his promised policies. However, it should be remembered that it is not a Blue wave and all these policies have to be approved by the senate. If we see the market reactions to the event it’s clear that they are perceiving at a risk on case. With the emerging market currencies showing quite a good show. Chinese Yuan has hit a 28-month peak to trade currently at 6.58. Indonesian Rupiah and South African Rand are on a one-way appreciation street for the last few days. The Yen, Euro and Sterling all have made gains against the dollar. Stocks are also in the green zone with Nasdaq futures rallying over 2% in the Monday trade signalling a positive opening for US equities later in the day. Nikkei, Hang Seng and Kospi all are up by 1.5% or more. The US 10-year yield is currently trading at 0.82 from 0.72 on 5^th November.

Now even with some pollsters calling it a one-sided contest (fivethirtyeight.com giving 90% probability to a Biden win) it has turned out to be a really close race. Some states like Wisconsin and Arizona which carry together some 21 electoral votes have been declared on the base of a mere 20k votes each. Just to put this in context the US population is 328 million and the world population is 7.8 Billion. 40k is 0.012% of 328 million (courtesy MS Excel). Now small things can sometimes produce much oversized results which were not predictable in advance.

History is replete with such examples; one very interesting example is given by William Darlymple in his book The Anarchy. He writes that the whole conquest of India by the British was predicated on the result of the battle of Plassey in the year 1757 where Robert Clive defeated the Nawab of Bengal. The most important part in the victory was played by rains on the fateful day which completely drenched Nawab’s artillery, whereas Clive’s arsenal was saved by the virtue of being covered by sheets of “tarpaulin”. Nawab’s army had a size advantage of over 20 times over Clive. Though Biden’s presidency is not in the same league, readers would appreciate the inherent complexity, unpredictability and element of luck.

The Indian Rupee is trading at 73.82 currently, appreciating in line with other risk currencies. The Indian 10-year benchmark trades at 5.87 currently.