The GERM Report

Risk level: Red

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)

THE BOOSTER SHOT

-Brent up 10% on vaccine hopes, but will it last?

-The market direction will be set by mood this week.

It’s time to put aside bipartisan rancor, divisive attitudes and instead listen to one another, US President-elect Joe Biden said Saturday evening. By any reasonable standard, Biden and Sen. Kamala Harris, the first Black, Asian and woman to be nominated for vice president, won the election. The end to a contentious, and sometimes violent, election should cool the market nerves. But we still have no concession from President Trump and many of his party loyalists have acknowledged the outcome. That leaves us to wonder about a smooth transition, as well as the possibility of a barn-burning end to the Trump presidency.

A sizeable draw on US crude oil inventories helped set the tone last week, though concerns about the pandemic and an increase in activity in the US shale sector pushed oil prices lower at week’s end. For the week, however, the bulls had it, with Brent gaining 5.3% on the week, in line with our Red alert, to finish trading Friday at $39.70 per barrel. Finishing the week at $37.14, meanwhile, it looks like WTI is testing a floor.

“It’s time to put away the harsh rhetoric, lower the temperature,” Biden said. “See each other again, listen to each other again.”

But we should recall there are two types of conversationalists; those who listen, learn and speak their turn and those who don’t. President Trump, along with the vast majority of the Republican Party, seem to be in the latter. This transition will be a difficult one, with the president vowing to not go down without a fight. Trump himself has been largely silent, with even his notorious Twitter account mostly inactive. Only a handful of centrist Republicans like Alaska Sen. Lisa Murkowski have congratulated Biden and Harris on their victory. Most others remained silent, tacitly disavowing the president-elect’s pleas for unity.

The United States is a federal democracy, though that political ideology has evolved considerably over the course of the nation’s long history. Polarization is baked into the US political system by design, but it has its flaws and we can take a look at international relations theory to find some answers. Neo-realist Kenneth Waltz noted that parties engaged in cooperative behavior must search for a common denominator. That’s part of what makes the US system what it is. That search comes through deliberation and, often times, disagreements, but the intent is to find a general consensus. But Waltz continues that negotiating parties usually find the lowest common denominator and end up in the worst of all possible worlds.

On national politics, federalism, the sharing of power, has its vulnerabilities. A July article in The Journal of Federalism notes those divisions can become toxic to the point of vengeful federalism, or as the authors propose, punitive federalism.

“Punitive federalism is characterized by the federal government’s use of threats and punishment to suppress state and local actions that run contrary to its policy preferences,” its authors note.

Punitive is a defining aspect of the Trump presidency and we expect that to continue into mid-January, when Biden is sworn in as president. Trump may already be taking a cue from Richard Nixon by firing many of his top appointees. For Nixon, it was the Saturday Night Massacre. For Trump, the Axios news service calls it a “post-election execution list.” Already signing an executive order that tacitly demands loyalty from federal employees, we can only imagine what a very-angry President Trump will do to purge his inner circle in defeat. Silence, however, is tacit endorsement of such punitive behavior.

Initially, we would expect optimism to greet the outcome in trading on Monday, but a jilted president will almost certainly seek revenge. That means the prospects of a major stimulus package are slim at best. Economists from Paul Krugman to Federal Reserve Chair Jerome Powell said a major stimulus is necessary to prevent the economy from deteriorating further. Can we expect President Trump to seek revenge over state leaders such as Michigan Gov. Gretchen Whitmer, where state-level infections of COVID-19 are on an exponential rise? Will he punish his foreign adversaries? We’ve already seen Israel Prime Minister Benjamin Netanyahu congratulate Biden on victory, so he could punish his friends too.

And what about the transition? Noted columnist and Trump opponent Norm Ornstein calls it the “transition from hell.”

“We’re in for a parade of horrors during Trump’s remaining time in power,” he wrote for USA Today. “Change is coming, but along the way, fasten seatbelts for severe turbulence.”

From mining in Alaska, to firing Anthony Fauci, the top infection disease expert in the United States, Trump will spend the next few weeks in office doing whatever the hell he wants to and it won’t be pretty. Transitions are never easy, but this one could be particularly toxic. US lawmakers tried to enact legislation to make the process as smooth as possible, starting first with limiting just how long it would take. In the 1930s, the process lasted four months and the period between President Hubert Hoover and President Franklin Roosevelt was tumultuous in political and economic terms. At the waning months of the Hoover presidency in 1932, unemployment was near 24% and GNP was down 31%. Sound familiar? The pivot to FDR was no less ugly. The business empires of Du Pont and JP Morgan even went to so far as to plan a military coup to remove FDR. Shocking to read that today, but it’s a point in history to consider.

And when Biden eventually becomes the next president, he will not have an easy go of passing some of the sweeping legislation some in the market had feared. Without the so-called Blue Wave, we would suspect angry Republicans to thwart an agenda that seeks to limit drilling on federal lands. And if you don’t believe that the United States is behind the curve on environmental issues already, we’ll point you to the French position on US LNG, supposedly a cleaner fuel to begin with, as Exhibit A. Nor will the $2 trillion in stimulus hoped for by Democrats materialize. And we still have a conservative majority in the nation’s highest court. Trump may be going away, but he’s left an endurable mark, for better or worse.

Crude oil prices were up by more than 10% early Monday on hopes for a vaccine for the novel coronavirus. The market is about mood, though, and we would expect the good feelings might not last the week. We’re still in the grips of a pandemic that has no end in sight and, with winter descending on the Northern Hemisphere, it will get worse before it gets better. We have some European market voices to hear from on Monday, though that will be overshadowed by US political and vaccine news. The same goes for the governors at the US Federal Reserve. A slowdown in Chinese inflation would be unsettling and we’re curious to see sentiment from the European economy midweek. There’s the usual data on US oil and product inventories, and we’d expect to see gasoline demand continue its slow march lower. Even without the pandemic, seasonal factors would support our sentiment on demand. And it’s a trifecta week too, with the IEA, EIA and OPEC all releasing their monthly assessments. There are some federal holidays midweek that could interrupt the trend, but don’t sit on your hands too long as there’s a big dump on GDP data later in the week. Yes, we know it’s a rear-view look, but it sets the mood. And let’s not forget that the trading week ends on Friday the 13^th. We’re going Red again, expecting crude oil prices to move by around plus or minus 4% on the week.