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Breakingviews - Cox: Reverting to mean is weak economic message

ZURICH (Reuters Breakingviews) - Reversion to mean is a well-worn concept in finance. Very low valuations may last for a while, but they are rarely a new normal. Rather, over time they tend to rise towards their historical average or long-run mean. So low price-earnings multiples are a buying opportunity.

Former U.S. Vice President Joe Biden accepts the 2020 Democratic presidential nomination during a speech delivered for the largely virtual 2020 Democratic National Convention from the Chase Center in Wilmington, Delaware, U.S., August 20, 2020.

Financial markets and U.S. politics are different beasts. But it’s hard not to see some traces of the mean reversion theory at work in the presidential election of 2020. It was on display over the past four evenings of the Democratic Party’s quadrennial convention.

The virtual gathering itself was anything but conventional. As a result of the coronavirus, the event was socially distanced and at-times oddly remote. And Joe Biden, who is challenging President Donald Trump, did not speak of reversions to the mean.

Indeed, the word “market” never entered his Thursday evening acceptance speech. But the bleak economy served as a backdrop for nearly every address of note, from those by his former boss Barack Obama and his wife Michelle to the skewering of Trump’s business and management chops delivered by a fellow New York billionaire, Mike Bloomberg.

However, the Biden campaign’s slogan, “Build Back Better”, implies returning to some previous, more normal, and better state of existence. It is reminiscent of the Trump team’s winning motto in 2016, “Make America Great Again”. Both septuagenarian candidates are embracing the past as both prologue and future.

But for Republicans, wistful remembrance of the way things were is a tried and true strategy. For Democrats, the party of progressivism, it is a new entry into the market of political strategies.

Indeed, the party’s previous presidential winners have often been relatively newbies, rising rapidly from local renown to national status. Obama hadn’t even served a full term in the Senate. Jimmy Carter and Bill Clinton were southern state governors. John F. Kennedy had just one Senate stretch. The average age of all Democratic presidents since Franklin Delano Roosevelt occupied the White House in 1933 is just over 50 – a full generation behind 77-year-old Biden.

Republicans have traditionally been the party of the older, more conservative segment of the American electorate. The average age of Republican presidents upon taking the highest office since Dwight Eisenhower is 62. And until former reality television star and real-estate developer Trump upset the party’s record, most of its candidates were battle-tested politicians with broader recognition.

In that respect, the convention format – online, something like a canned Oscars ceremony where live-ish speeches are interspersed with slick videos and musical performances by John Legend and The Chicks – was not the only thing that broke the mold.

The messages delivered by the party’s leading lights and emerging stars were unlike anything Democrats have broadly espoused before. Combined with appearances from turncoat never-Trump Republicans like John Kasich, the ex-governor of Ohio, the promise was more of restoration than renewal – effectively, reversion to the mean.

Take Obama’s keynote on Wednesday. He did something unprecedented in modern times when he criticised his successor, calling Trump’s inability to grow into the job a failure that has led to 170,000 coronavirus-related deaths and millions of job losses. Part of the solution was, again, reversion: “Joe and Kamala will restore our standing in the world”, he pledged.

Similarly, Bloomberg explicitly twisted Trump’s 2016 MAGA slogan to fit the Democratic candidate’s experience in reviving a moribund U.S. economy: “While Biden helped save 1 million auto industry jobs, Trump has lost 250,000 manufacturing jobs. So, when Trump says he wants to make America great again, he’s making a pretty good case for Joe Biden.”

Biden responded in kind: “It will be the work of the next president to restore the promise of America to everyone,” he said in a surprisingly vigorous speech closing the festivities.

The candidate’s economic program reflects this untraditional backwards shift. As my colleague Gina Chon pointed out last month, Biden proposed spending $700 billion over four years on American made products and research and development. The plan was so “America First” it was praised by Steve Bannon, the former Trump adviser arrested on Thursday by federal authorities on fraud charges.

Biden’s fiscal plan specifically promises a reversion to the mean on taxes, to the levies that existed before the Tax Cuts and Jobs Act of 2017. He pledged strengthening education, healthcare, child - and elderly care systems, as well as a $2 trillion infrastructure program. How to pay for these investments? In large part by reversing “the president’s $1.3 trillion tax giveaway”.

The Democrats are not only looking backwards to the old normal. In discussing Covid-19, Obama did harken back to the past, praising Biden’s role in managing the spread of H1N1 and preventing an Ebola outbreak. But Biden looked forward, promising a national strategy on day one, including a “national mandate to wear a mask - not as a burden, but as a patriotic duty to protect one another”.

Equally forward-looking was Biden’s discussion of racial injustice. Although he called on the accomplishments of the late civil-rights leader John Lewis for inspiration, there was no hint of mean reversion in his admonition to wipe the “stain of racism” from the American national character.

Whether this more restorative, even conservative, approach by Democrats will propel Biden into the Oval Office is hard to say. In a recent Gallup survey, President Trump failed to garner a majority from Americans rating his handling of seven key issues, including the economy. Meantime, polls show Biden capturing the popular vote and leading in key battleground states. For a party nurtured by hope and change - and youthful candidates - reverting to the mean is a bet on the depths of Trump fatigue.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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