By John Tierney 08-12-2020
In: hive-exclusives | Politics US

2021 Grey Swan #3: Biden Gets A Clean Sweep

(2 min read)
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It goes without saying: the trajectory of the Biden presidency depends critically on whether Democrats gain control of the Senate in Georgia’s two runoff elections on 5 January 2021. Republicans hold 50 seats. If Democrats win both elections, they will match that and gain control with Vice President Kamala Harris’s tie-breaking vote.

The first race pits incumbent David Perdue (R) versus Jon Ossoff (D). The second is a special election to fill the seat left by Johnny Isakson (R) who retired. Contenders are Kelly Loeffler (R), who was appointed to the Senate pending the special election, and Raphael Warnock (D). No candidate managed to reach the 50% cutoff required to avoid runoffs.


How We Got to the Runoffs

On the US general election day on 3 November, Perdue (R) came close to winning his race with 49.7% of the vote. Arguably, Shane Hazel, a Libertarian candidate with a 2.3% share, cost Perdue the victory. Hazel’s positions generally are more aligned with Republican values although, as is often the case with Libertarians, some of his positions should also appeal to Democrats.

The special election was far more fragmented, with 14 candidates including multiple from both the Republican and Democrat sides. Loeffler (R) won 26% of the vote, with Doug Collins (R) gaining 20%. Both are closely aligned

with Trump. Adding in two other fringe candidates, Loeffler probably has close to a lock on about 47% of the upcoming vote. On the Democratic side, Raphael Warnock won with 33% of votes and Democratic candidates won 48.4% in total.

The remaining candidates (Republican, Libertarian, Green and independent) accounted for 4.6% of votes and espouse positions more aligned with moderate Republican or Democratic views. They are mostly neither Trumpistas nor progressives. These voters could potentially swing the runoff elections in January.


Expectations Are Tightening

Betting markets have been favouring Republicans Perdue and Loeffler to win their races, but the odds are fluctuating. On 30 November one source gave Perdue (R) a 67% chance of winning and Loeffler (R) 65%. Yet three days later those odds had tightened to 62% and 57%, respectively. Latest odds are drifting wider again. That same source assigned a 75% likelihood on 30 November that Republicans retain control of the Senate, which became 72% a few days later. Polls, for whatever they are worth, initially showed Republican leads but now essentially show both races to be dead heats.


The Democrats’ Path to Victory

Betting markets may have the Republicans winning the Senate, but the good news for Democrats is that it is several weeks before the runoff elections – still time for something to go wrong. Both Perdue (R) and Loeffler (R) have allegedly traded stocks (and profited) based on confidential information received through their committee positions. That may account for their declining odds. This furore could easily snowball out of control.

What doesn’t appear to be helping is President Trump. His Georgia campaigns have been more about his election loss than either Perdue or Loeffler. Moreover, Republicans increasingly worry that Trump’s campaign to discredit and delegitimize the general election outcome could discourage his base from turning out to vote.

Meanwhile, Democrats, led by Stacy Abrams, have developed a grassroots get-out-the-vote network that has done much to turn Georgia from red to purple.

A Democratic sweep is therefore within reach. But it will take some combination of developments that discourage Republicans from voting and a highly energized Democratic voter turnout.


Bond Markets Would Take Notice

Financial markets seem quite comfortable with the prospect of a divided Congress. President Biden’s moderate and bipartisan instincts suggest that gridlock could ease somewhat, allowing some market-friendly legislation addressing fiscal stimulus and infrastructure to advance. If the Senate were to go blue, the uncertainty quotient would certainly rise – at least until it becomes more apparent how the Biden administration governs. But the clearest impact would likely be in bond markets, where US bond yields could surge higher.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.


(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)



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