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Biden Presidency: Trump’s constituents ‘will not let it go’, expect tumultuous period ahead: Guggenheim Global CIO

Yahoo Finance’s Brian Sozzi, Myles Udland, and Julie Hyman speak with Scott Minerd, Guggenheim Partners Global CIO, about the potential of a contested election and how the markets are reacting.

Video Transcript

JULIE HYMAN: Now let's break down what all of this means for the market. Scott Minerd is joining us now. He's Chief Investment Officer at Guggenheim Investments. And he's also the Chairman at Guggenheim Partners. Scott, it is great to see you. I want to start with the election.

You know, we got to get to the jobs report and the Fed and all the rest in a moment. But it looks like we do have a potentially contested election here, right? The Trump campaign has said it is going to sue in various states. What is the economic feed through and threat from a contested election? Are you concerned about what it could mean?

SCOTT MINERD: I am in the near term, Julie. I don't think we can overemphasize the risk of, really, this thing turning into virtual anarchy. I heard comments like last night that Bannon was calling for political assassinations. We see the president contesting everything, drawing into question the very foundations of the electoral process. And a lot of his constituents, if Biden is declared today, are not going to let it go.

And so I think we could have a very tumultuous period ahead of us. But I think that you-- again, the smart move here has been to look through all of this and look, where do we think we'll be in six months? We have a lot of uncertainty over the next 30 to 60 days as COVID resurges, that we have more shutdowns.

You know, I'm of the opinion that economic growth in the fourth quarter could even contract modestly. But the market discounts beyond these points and any dip here would be a buying opportunity.

JULIE HYMAN: I want to ask you to expand on that fourth quarter comment that you just made that we could see growth in the fourth quarter potentially contract. What would be behind that if we do see a contraction?

SCOTT MINERD: Well, I think two things primarily. One is a lack of anything in the Department of Stimulus, which, candidly, that window is closing very quickly on us, because I doubt if the president is contesting the election that Congress is going to get very much time to focus on a stimulus package this year.

The other thing is the rise in COVID cases. What's really disturbing here about the increase in COVID cases is on average, we're increasing the daily number of COVID cases by 25,000. Two weeks ago or less than two weeks ago, our peak was at 75,000. Last week our peak was just above 100,000. And based upon the pace we're moving at, this week it will probably be 125,000.

And if the trend continues, you know, by the time we get to Thanksgiving, we could be close to 200,000 cases a day, which would be roughly four times the peak that we reached last spring when everything went into lockdown.

BRIAN SOZZI: Scott, when you're talking to clients, and when you have talked to them this week, have they become incrementally more bullish on a Joe Biden presidency than perhaps they were over the summer?

SCOTT MINERD: You know, it's really interesting. I think most of my clients are a bit befuddled. They're looking at everything and they're saying, gee, you know, why are stocks at these kinds of levels? You know, we are still well behind where we were in January for economic output. You know, why are interest rates staying this low? Shouldn't we be expecting them to rise?

And so I think they're a little bit lost in the woods, as most investors are. And that's why I try to get people focused on the idea that at the end of the day, you're either a speculator or an investor.

And I know what a speculator is. I was a trader on Wall Street for 15 years. And I was worried about what my P&L said tonight. But if you're an investor, you're trying to look out and say, hey, what are my returns going to look like over the next six months, year, three years, that sort of horizon?

And so I think trying to get them to understand that in the big picture, with a huge commitment to stimulus eventually coming, huge commitment out of the Federal Reserve, who basically issued a very tortured statement yesterday, to re-commit in a way they never have before that they're there to bail out the economy. I just don't see the policymakers letting this thing slide into another crisis.

MYLES UDLAND: Scott, here at Yahoo Finance, we tend to mostly talk about publicly traded stocks. So we're looking at stock prices all the time. Something you flagged in your note is something that flies under the radar amazingly, which is the amount of outstanding debt around the globe that has a negative yield.

And this obviously affects portfolio construction for clients who are trying to hit 5%, 7%, 9% hurdles. What are you telling folks who are looking at fixed income that is not giving them any kind of return? Maybe it's a hedge in this environment. But it's certainly a challenging time for a lot of institutional type managers.

SCOTT MINERD: Well, it definitely is, Myles. I mean, investors who are income oriented, retired people, insurance companies, pension funds, are getting this yield compression. And here's an interesting statistic. Approximately 10% of all the debt in the world today has a negative yield attached to it. Over 90% of the debt outstanding has a yield below 2%.

So only 10% of all the bonds available in the world yield more than 2%. And I'll be quite frank with you. When you look at people like investors, like insurance companies, or you look at investors like pension funds, at the end of the day, they're not solvent with those kinds of yields.

And so that's why we're looking at the valuations, for instance, in the life insurance space, where major companies are trading at 40% of book value, because people are really questioning their long term viability.

JULIE HYMAN: And Scott, you still think there's a risk we could go negative here in the United States as well. How much worse does that make the issue that you're talking about?

SCOTT MINERD: Well, Julie, it just compounds the problem. I mean, you know, it's interesting. As the Fed went around for the last two years and did the their Fed Listens meetings, where they met with leaders from all sorts of industries in their home, in each banks' district, the clients who I have who are insurance companies, who are pension funds, made the case to them that their policies were basically destroying their business.

And the Federal Reserve's typical response is we don't have a mandate to preserve your business. We have a mandate for full employment and price stability. And so they see this as completely outside of the domain of their responsibility.

And I think there is a cognitive dissonance among people, which it just can't get any worse, meaning yields couldn't possibly go negative. But my experiences is in business is that when 90% of the people are telling you to move one direction, the likelihood is you're going to move the other.

JULIE HYMAN: And so how likely-- so it sounds like you do think it's likely then that we'll get those negative rates. And if the Fed doesn't think that's an economic threat, is it an economic threat because of the damage it could cause to the businesses that you're talking about?

SCOTT MINERD: Well, Julie, I do think that negative rates are likely in the cards. Our models suggest negative 0.5% by 2022. Obviously, this is going to raise questions about the stability of the financial system.

But you know the Federal Reserve and policymakers have basically been willing to socialize a lot of risks, like we've socialized corporate credit risk with the corporate bond purchase program at the Federal Reserve. So I think as time goes on, it'll just force the policymakers into socializing more of these problems and making it the burden of the US government.

JULIE HYMAN: Scott, we'll leave it on that note, although it's a bit of a grim one. It is great to talk to you, Scott. And I hope that we'll get you back soon. Scott Minerd is Chief Investment Officer at Guggenheim Investments and Chairman of Guggenheim Partners. I do appreciate your time here this morning. I know it's early there on the West Coast.