HARRIS VP PICK SMALL MARKET NEGATIVE, BUT IT COULD HAVE BEEN WORSE

There's been particularly strong interest in my views on Biden picking Harris as his VP candidate, so I'm publishing here the entire text of my August 11 Pangaea Policy note to financial markets on the choice.

Biden picking Harris as his running mate is both a small market negative and a small political negative for Biden. 

• The best that can be said of the Harris pick is that Biden adhered to the political version of the Hippocratic Oath: “first, do no harm”. Most other picks would have been more left-progressive than Harris and created greater immediate disquiet with both markets and the centrist voters Biden needs to win.  
• But Harris will be seen and sold as progressive, all the same. She’s a Democrat from deep blue California, where centrism is a sure political loser. The Biden-Harris ticket will be loudly touted as “progressive” to keep the Sanders/Warren acolytes on side, which is an important part of the Biden strategy. 
• The perception that progressive Harris could soon succeed to the presidency will be an additional weight on markets as the elections near, since the presidential election is very likely a close one and Senate and House majorities also hang in the balance. 

The likelier an all-Democratic Washington looks (today we think about 20% but there will be volatility), the likelier the Biden-Harris ticket is to cast a larger negative market shadow. 

Why is the Harris pick market negative?

• Biden signals with Harris that he intends to run and govern not as the centrist he’s mostly been in his long career, but as “progressive lite”, continuing the “Biden-Sanders unity” skew with a retrograde emphasis on statist, highly regulated, and much higher taxed policy results.  Combine that with Biden’s frontrunner status, and markets are likelier to get nervous about progressivism in Washington like they did in late winter when Sanders looked like the nominee. 
• Markets thought in 2016 continuing these sorts of policies wouldn’t be so bad because they’d accommodated to it through eight years of the Obama presidency, and market groupthink had it that Clinton was more of a centrist than she pretended. But if Biden-Harris wins - or even looks like it in October - it will begin an unwelcome market negative shock and longer-term reversal from the last four years, all the more so because the keys to vigorous post-virus economic recovery are dynamism and animal spirits, not an ill-timed return to the sub-3% growth “new normal” of the Obama years.
• The Harris pick won’t make an appreciable difference in markets today, almost 100 days from the elections, but the progressive signal it sends will weigh on markets more and more if the election looms with Biden still perceived as winning. And that only increases if controversy continues around Biden’s health and Harris looks likelier to become president sooner.  More on that below. 
• What doesn’t change in 2021 is China policy, whether or not POTUS Biden or VPOTUS Harris want to soften it.  China policy is the most bipartisan policy in Trump’s Washington, supported and aided by Senate Democratic leader Schumer and other leading Democrats as much as Republicans. Congress is very unlikely to permit a volte-face or significant change to it. 

Why is Harris a small political negative for Biden? 

• Progressive Harris might become president soon after Biden wins, a scenario that might drive voters away from the ticket. Biden’s VP pick likely is the most consequential in generations for only one reason: Harris is seen as likelier to become president than any VP nominee since Harry Truman in 1944 (and the public had no idea of the nature or severity of FDR’s impairments during the election). Biden casts himself as the centrist ballast on the progressive ship - but if Biden is no longer president, progressive Harris will be perceived by markets and voters as unconstrained to move the country left.  Fairly or not, Biden’s health is a significant campaign issue, and Trump’s efforts are very likely to make it even more of one.  In June, almost 4 in 10 voters thought Biden had dementia, and this week, almost 6 in 10 think Biden is unlikely to finish his term in office. Biden could dispel this: Biden's acceptance speech, his debates with Trump, one-on-one showcase press interviews, and other in-person campaign appearances can flip or inoculate against this perception and even make it irrelevant by Election Day. But if that perception about Biden doesn’t change decisively, Harris will be the embodiment of a progressive future that markets and voters might well shy away from.  
• Any VP pick diminishes Biden’s candidacy, and doesn’t add to it, because Biden defines his candidacy with it. Now, his campaign publicly identifies as skewing in the progressive direction and makes it much more difficult to continue as ‘centrist Joe from Scranton’.  Harris’ chief advantage is that she is acceptable to progressives but isn’t seen as captured by the Sanders/Warren wing, and doesn’t (yet) ring the ’scary leftie’ bell the way other potential candidates would have. “Best available” is never something that generates excitement among voters, or even relevant party interest groups. But...
• Other potential candidates were more obscure, likely more divisive, or both.  The sole credible centrist, Klobuchar, took herself out of the running, although her candidacy was doomed months ago. Warren is politically savvy enough not to want it, knowing she has power and influence over a Biden-Harris administration in the Senate as the progressive litmus test on nominees, legislative enforcer, and significant progressive fundraiser. (This is the exact same argument Harris’ political patron, former California Speaker Willie Brown, made publicly last week - Harris is better off in the Senate.)
• Harris doesn’t fix the Biden enthusiasm gap. The Harris pick neither makes the ticket nor sinks it, unlike other potential choices. It’s a traditional pick in the sense that Harris is a political chameleon without any real national profile. No part of the party is thrilled but she checks all the boxes and no one will complain overtly. Everyone will stay on side but no interest group will be fired up. To see the point, contrast Harris with a Michelle Obama pick (which wasn’t going to happen): Biden picks Mrs Obama, and the election is pretty well over. Enthusiasm and turnout go through the roof: Mrs Obama is both a political celebrity and a political Rorschach test, with everyone seeing in her what they wish to see. Harris is neither, although her lack of sharp national profile is an advantage at the outset. 
• The Harris pick is not a step or nod to the political center, something this ticket needs after its strong move to the left in the last three years. The Biden bet is that Biden himself, as well as veteran surrogates including Obama, can generate enough centrist appeal to win. This is a risky strategy, since centrists in swing states - where the election will be won - are unlikely to be convinced by progressive Harris and the progressive lite campaign branding. Harris may have law enforcement credentials as a former California AG, but it won’t get the ticket credibility, since centrists mostly think Democrats are soft on crime and responsible for the situations in Portland, Seattle, Minneapolis, and Chicago. 
• Harris gets Biden nothing electorally, and very little as a running mate.  Again, “do no harm”: a Democratic senator from California gets replaced by another one, so Senate balance is unaffected. Harris' fan base will be on the already blue coasts, so won’t attract many new votes to the ticket. And Harris has only ever run successfully in California, and was a flop as a presidential candidate, with no significant debate skills other than skewering Biden once, no ability to attract or build a base, and no fundraising ability.