Crypto News: What will decide the US election? Probably not the economy

It's not the economy, stupid; economic changes between now and November aren't likely to shift the US election;
If China is building gold reserves to help topple the dollar, it has a long, long way to go;
Chocolate and coffee go together, and they make money;
AND yet more courtroom drama, featuring stars from Matthew McConaughey to Marlene Dietrich

Bill Clinton's presidential campaign in 1992 produced a gold mine of quotations to help the stressed out financial columnist. His campaign manager James Carville famously said that he would like to be reincarnated as the bond market, as that would let him intimidate people. And there was the message drilled in to all campaign workers, which felled George H.W. Bush's bid for reelection: "It's the economy, stupid."

That election really was about the economy. But it's surprising how many aren't. In 2009, the academic Leo Kahane published It's the Economy and Then Some, which found an effect, and quantified it. Using regressions of three factors crucial to economic well-being — changes in unemployment, growth in disposable income, and gasoline prices — Kahane demonstrated how much the economy would in itself add or subtract from the incumbent's vote total. But while the effect is real, it's not that strong.

Andrew Harris of Fathom Consulting has updated Kahane's numbers and offers this chart of elections from 1952 onward. The numbers show that the current relative economic health (even if many don't think it feels that way) should, all else equal, add 1.8 percentage points to Biden's expected vote tally. In an agonizingly close election, that's not to be sneezed at. But if you want help predicting this year's election, this isn't it. Two of the seven elections with economic fundamentals worse than they are now still saw the incumbent party returned to power, while challengers won in five of the 11 in which the economy was stronger:

The results are interesting nonetheless. In 2016, Hillary Clinton had a better economy to boast about than any other recent presidential candidate from the incumbent party (but then we knew that was a strange election); no president achieved reelection with a weaker economy than Barack Obama in 2012; and Bill Clinton's reelection in 1996 was achieved with fundamentals almost identical to those today. He certainly did a good job of persuading people that they were a bit better than that.

The readthrough for this year is that the economy is unlikely to be decisive. Other factors are driving voters. Polls in the swing states suggest that former President Donald Trump is ahead at this point, and a change in economic fortunes is unlikely to alter that. A big implosion could make life much easier for Trump, however. Look only at the RealClearPolitics tracking polls for 2008. John McCain staged a great fightback and went into the lead in the first week of September. That weekend, Lehman Brothers went bankrupt:

Short of another Lehman-scale event, the economy is not going to decide the election. The outcome will instead rest on issues like abortion and immigration, on which investors have no great expertise.

There's fun to be had with statistics on the gold market. One of my favorites, which I picked up from a museum, is that if all the gold that had ever been mined in human history were melted down, it would fit into a cube with sides of 20 meters. This valuable object would comfortably fit into a modern oil tanker. However, as gold is exceptionally dense, that tanker would sink.

That illustrates the essential point that scarcity props up the gold price. It also limits what might be possible. And that helps gauge just why gold has broken out to an all-time high in recent weeks, despite rising real bond yields that would usually weigh on its price. Generally, a high real gold price has over time presaged poor returns ahead. So why has it rallied, and is there any reason to believe it's more sustainable this time?

China has been the most obvious driver of the gold rally, as it has sharply increased its holdings (according to official figures which many suspect to be understated) while scaling back its accumulation of foreign exchange reserves.

Gold's price has been rising on the back of China's attempt to liberate itself from the dollar by building up reserves of gold. One way to hasten de-dollarization, or dethrone the dollar as the sole global reserve currency, would be for China to back the yuan with gold, in much the same way that the postwar Bretton Woods agreement centered on a dollar that was convertible into gold.

Claude Erb and Duke University's Campbell Harvey argue in Is There Still a Golden Dilemma? that that isn't going to happen — although if it did it would drive quite a bull market. Their hypothesis is that China would have to amass gold reserves per capita at least the equal of the US before its currency could enjoy the same credibility. This chart sets out the math of what it would need to do achieve that. Assuming US gold reserves stay constant, China would need to increase its current 7.3 million ounces of gold to 1.1 billion ounces:

To achieve parity, in the words of Erb and Harvey, "would be a significant undertaking since the entire amount of gold mined in 2022 was 116.6 million ounces according to the World Gold Council." To get to 1.1 billion ounces, it would have to buy every ounce of gold mined for almost the next nine years. That might not sink a super tanker, but it would be very expensive. If China wanted to rely on the gold it mines itself to make up the difference, that would take 85 years (although that could be shortened if they increased annual production).

There are two conclusions from this. The first is that de-dollarization is going to have to involve more than Chinese gold purchases. While the direction of travel is obvious, Erb and Harvey's work does suggest that the dollar is still some way from being dethroned. The second is that it looks like there's a new source of steady demand for gold. As Erb and Harvey illustrate in this chart, the advent of gold exchange-traded funds almost 20 years ago helped move the gold price to a new, higher level:

What's also interesting is that gold is still rallying, even as ETF holdings begin to decline — which is circumstantial evidence that another source of demand is emerging. While China regards extra gold holdings as a means to the end of de-dollarizing, it will take a long time. The question is whether it can be relied on as a continuing source of demand. That, according to Erb and Harvey, means that today's "golden dilemma" is the same as the one sparked by ETFs: "Has an influx of gold buying ushered in a new age of permanently and perpetually rising real gold prices or has it simply set up real gold prices for a significant fall?"

Look away, coffee lovers. The price of the bean in futures markets is surging, and it's only a matter of time before it is reflected on supermarket shelves and coffee shops. There is no respite for the chocolate sweet toothers, either. Cocoa, chocolate's main ingredient, is currently trading at unprecedented high levels. Cocoa farmers in Ghana and Cote d'Ivoire — which supply about two-thirds of the world's total supply — are suffering from low crop output caused by extreme weather amidst other debilitating factors, and this drives up the price.

Coffee farmers are facing similar misfortunes. Commodity traders spooked by the surge in cocoa prices fear trouble for farmers will drive coffee's price higher. Hedgepoint Global Markets' Carlos Costa warned of possible "contamination" of the coffee trade by speculative buyers fearing the crop will suffer cocoa's fate. Whether these concerns are justified depends on underlying supply dynamics.

Cocoa is a hard-to-replace ingredient found predominantly in one geographical area, while coffee buyers can choose between two bean varieties — arabica and robusta — which can be sourced from multiple producing countries. Among the two, the lower-quality robusta — which is mostly produced in Vietnam, where farmers are facing bad weather — remains popular, while coffee manufacturers typically turn to arabica when they run into supply troubles. Farmer challenges for robusta in Vietnam briefly drove a surge in arabica's prices, although the crop pared those gains.

While robusta and cocoa have both fallen from their record heights, they maintain their strong relationship, as shown in this chart:

As for the potential effect on US consumers, the official coffee price inflation figures kept by the Bureau of Labor Statistics show that a spike in prices ended two years ago, and prices are now deflating. That's unlikely to continue if raw coffee prices remain this high:

Trouble for Vietnam growers is not robusta's only problem. As Bloomberg Opinion's Javier Blas notes, demand from China is also driving up competition for the scarce beans. Blas argued that Beijing's sudden strong taste for coffee would usher in an era where prices will probably be higher for longer than in the past — although perhaps not at the level of the recent 45-year high.

A favorable weather forecast in Vietnam is expected to lift the gloom for farmers, and has eased the pressure on prices. Still, the International Coffee Organization, which promotes farmers' welfare, is determined to prevent coffee going down the same route as cocoa. Vanúsia Nogueira, executive director, argued that cocoa's large concentration in just two countries led to its current problems, adding that the organization is working to prevent the same thing from happening to coffee.

Cocoa's retreat from an all-time high is good news for chocolatiers. But the sharp change shot the commodity's volatility into the stratosphere. Ordinarily, a price fall should be a source of relief for chocolate makers. However, such an upswing in volatility does little to calm their fears. For now, chocoholics are isolated from the absurd price movement as producers insist they are fully covered on cocoa for 2024. Still, manufacturers such as Hershey Co., Mondelez International Inc. and Nestle SA, are all in the market to secure beans for next year, and the fundamentals possibly do not yet reflect that:

The elevated volatility in cocoa prices shows that the storm is far from over. Robusta's fortunes hinge on favorable weather forecasts — which can never be guaranteed. Standpoint Asset Management's Eric Crittenden is sticking to his long positions on cocoa and coffee, believing that the decent run still has some steam:

"Commodities were mixed, but recent strength in agricultural and metals markets might indicate another round of inflation surprises to the upside. Another month like April would likely have us transitioning into a more defensive/stagflationary posture."

So far, the chaos engulfing the two commodities has yet to be reflected in shelf prices. With every sip of coffee or hot chocolate and every bite of the confectionery, consumers will hope prices stay away from any brewing troubles.

-- Richard Abbey

There was more courtroom drama from Stormy Daniels on Thursday, along with a lot of nominations for great courtroom scenes in my inbox. So, you might try Anatomy of a Murder, starring James Stewart; the French movie Anatomy of a Fall; Charles Laughton and Marlene Dietrich in Witness for the Prosecution; Judgment at Nuremberg; Jodie Foster in The Accused; Breaker Morant; Matthew McConaughey making his reputation in A Time to Kill; A Matter of Life and Death; Al Pacino in And Justice for All; The Measure of a Man from Star Trek: The Next Generation; Kevin Costner in Oliver Stone's JFK; and Marlon Brando in A Dry White Season (apologies for failing to find a clip of the actual court scene, in which Brando was spellbinding). And have a great weekend everyone.