Economy

Please note that we will be presenting a webcast on Thursday March 11 at 10:00 AM EST for the Americas and EMEA regions and on March 12 at 9:00 HKT/12:00 AEDT for APAC clients. We will be discussing macro themes and investment strategies. Highlights EMs (ex-China, Korea and Taiwan) are better positioned to handle higher US bond yields today than they were in 2013. Yet better does not mean they will be unscathed. The combination of rising US bond yields and a firming US currency will suffocate EM risk assets in the near-term. A neutral allocation is warranted in EM stocks and credit markets within global equity and credit portfolios, respectively. Feature Ever since the US elections concluded in January with a Blue Sweep, we have been warning that rising US bond yields could trigger a setback in global markets in general, and in EM markets in particular. EM equities, currencies and fixed-income markets have recently experienced a correction (Chart 1). The question now is: Is the market rout over? Or is there more to come? We are inclined to believe that the correction is not over. Rising US Treasury yields have been the culprit of the shakeout in global growth stocks, EM equities, as well as EM currencies. Therefore, taking a stance on US bond yields and on the US dollar is critical for assessing the outlook for EM financial markets. Odds are that the selloff in US long-term bonds and the rebound in the US dollar are not yet over because: Positioning and sentiment on US long-dated Treasuries is neutral, as illustrated in Chart 2. Chart 1Rising US Real Yields Have Caused A Shakeout In EM Chart 2Investor Sentiment And Positioning In US Treasurys Are Neutral   Typically, US bond yields do not reverse their ascent until investor sentiment becomes downbeat and bond portfolios are of materially short duration. These conditions for a top in bond yields are not yet present. US government bond yields would have been much higher if it were not for the Federal Reserve and US commercial banks’ massive bond-buying spree. The Fed has bought $2.8 trillion and US commercial banks have purchased about $300 billion of Treasurys in the past 12 months (Chart 3). One of the main motives for commercial banks to buy US Treasurys has been the SLR relief initiative which commenced on April 1, 2020.1 This SLR relief is due to terminate on March 31, 2021. Unless it is extended, commercial banks will drastically curtail their net government bond purchases. This will exert upward pressure on Treasury yields. Regarding the greenback, investor sentiment remains quite bearish (Chart 4). From a contrarian perspective, this heralds further strength in the US dollar. Chart 3Surging Purchases Of US Treasurys By The Fed And Commercial Banks Chart 4Investors Are Still Bearish On The US Dollar   From a cyclical perspective, US growth will be stronger relative to its potential, and vis-à-vis other DMs, EMs and China. Growth differentials moving in favor of the US foreshadows near-term strengthening of the dollar. Structurally, the bearish case for the US currency hinges on both the Federal Reserve falling behind the inflation curve and ballooning US twin deficits. In our view, this will ultimately be the case. Hence, the long-term outlook for the US dollar remains troublesome. That said, twin deficits alone are insufficient to produce a continuous currency depreciation. The twin deficits must also be accompanied with low/falling real interest rates – in order to generate sufficient conditions for currency depreciation. As long as US real rates continue rising, the dollar’s rebound will be extended. The USD/EUR exchange rate has been correlated with the 10-year real yield differential and this relationship will persist (Chart 5).  Bottom Line: US government bonds will continue selling off. Rising bond yields (including rising real yields) will support the dollar in the near-term. The combination of rising US bond yields and a firming US currency will cause global macro volatility to rise (Chart 6). This will suffocate EM risk assets and EM currencies. Chart 5US Real Yields (TIPS) Will Continue Driving The US Dollar Chart 6Aggregate Financial Market Volatility: Higher Lows   Impact On EM: 2013 Versus Now Are we entering another Taper Tantrum episode as in the spring of 2013 when many EMs were devastated? There are both similarities and differences between the current period of rising US bond yields and the 2013 episode. Similarities: Today, as in early 2013, investor sentiment on EM is very bullish and investors are long EM (Chart 7). Chart 7Investor Sentiment On EM Stocks Was At A Record High In January In early 2013, as is the case today, EM local currency bond yields were very low and EM credit spreads were too tight. When US Treasury yields spiked in the spring of 2013, EM assets tanked. Many commentators blamed it on the Fed. We disagree with that interpretation. Remarkably, the rise in US TIPS yields in 2013 had little impact on equity indices such as the S&P 500 and Nasdaq, or on US corporate spreads (Chart 8). The correction in the US equity market lasted about a week. Yet, EM equities, fixed income markets and currencies experienced a prolonged slump, and in many cases, a bear market. There is no basis to believe that the Fed’s policy and US bond yields are more important to EM than they are to US credit and equity markets. The core rationale for the EM bear market in 2013 was poor domestic fundamentals. The Fed’s tapering was the trigger, not the cause. Differences: The key difference between the current episode and the 2013 Taper Tantrum is EM macro fundamentals. Specifically: EM economies (ex-China, Korea and Taiwan) entered 2013 with booming bank loans and strong domestic demand as well as high inflation (Chart 9). Chart 8US Markets Were Not Hit By The Taper Tantrum In 2013 Chart 9EM (ex-China, Korea And Taiwan): 2013 Vs Now Chart 10EM (ex-China, Korea And Taiwan): 2013 Vs Now Presently, EM bank credit is subdued, domestic demand is dismal, and inflation is tame. Besides, EMs (ex-China, Korea and Taiwan) had a very large trade deficits in 2013 and were financing them via foreign borrowing, which was roaring prior to 2013 (Chart 10). Presently, their trade balances are in surplus and foreign indebtedness has not increased in recent years. Bottom Line: In 2013, EM economies (ex-China, Korea and Taiwan) were overheating and were addicted to foreign funding. These were the reasons why EM currencies and fixed income markets teetered when US bond yields spiked in 2013. Presently, the majority of EM economies (ex-China, Korea and Taiwan) have different types of malaises: domestic bank loan origination is too timid, consumer spending and capital expenditures are moribund, inflation is low and fiscal policy is tight. Consequently, EMs (ex-China, Korea and Taiwan) are better positioned to handle higher US bond yields today than they were back in 2013. Yet better does not mean they will be unscathed. Investment Strategy Equities: The key variable to watch to assess the vulnerability of both US and EM equity markets is their respective corporate bond yields. Historically, rising corporate bond yields (shown inverted in both panels of Chart 11) heralds lower share prices. Chart 11Rising Corporate Bond Yields Are Bad For Share Prices Given that both EM and US corporate credit spreads are too tight, they are unlikely to narrow further to offset rising US Treasury yields. Instead, EM and US corporate bond yields are likely to rise with US Treasury yields. This will trigger more weakness in share prices. Besides, rising EM local currency government bond yields also point towards more downside in EM equities (yields are shown inverted on the chart) (Chart 12). Chart 12Rising EM Local Currency Bond Yields Heralds Weaker Equity Prices Concerning equity style, global growth stocks have peaked versus global value stocks. In the EM equity space, we have less conviction on growth versus value. As to regional allocation in a global equity portfolio, we continue recommending a neutral allocation to EM, underweighting US and overweighting Europe and Japan. Commodities: Investors’ net long positions in commodities are very elevated (Chart 13). As US bond yields rise and the US dollar continues rebounding, there will be a de-risking in the commodities space resulting in a pullback in commodities prices. Currencies: We continue shorting a basket of EM currencies – including BRL, CLP, ZAR, TRY and KRW versus the euro, CHF and JPY. Several EM currencies have failed to break above their technical resistance levels, suggesting that a pullback could be non-trivial (Chart 14). Chart 13Investors Are Record Long Commodities Chart 14Asian Currencies Hit Technical Resistances   In central Europe, we are closing the long CZK/short USD trade with a 3.8% gain. Continue holding the long CZK/short PLN and HUF position. Local fixed income markets: EM local bond yields have risen in response to rising US treasury real yields and the setback in EM currencies. This might persist in the near-term, but we continue to recommend receiving 10-year swap rates in selected countries where inflation risks are low and monetary and fiscal policies are tight. These countries include Mexico, Colombia, Russia, China, India and Malaysia. A further rise in their swap rates would represent an overshoot and hence, should not be chased. EM currencies are more vulnerable to a selloff than local rates are. We continue to wait for a better entry point in currencies to recommend buying cash domestic bonds instead of receiving swap rates. EM Credit: A neutral allocation to EM sovereign and corporate bonds is warranted in a global credit portfolio. Our sovereign credit overweights are Mexico, Russia, Malaysia, Peru, Colombia, the Philippines and Indonesia, while our sovereign credit underweights are Brazil, South Africa and Turkey. Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com   Footnotes 1 The Supplementary Leverage Ratio (SLR) is equivalent to Basel III Tier-1 leverage ratio and varies from 3-5% for US banks. Under the relief program last April, the Fed allowed US banks to exclude holdings of US Treasury Bonds and cash kept in reserves at the Fed from their assets when calculating this ratio. The SLR relief is planned to end March 31, 2021. Equities Recommendations Currencies, Credit And Fixed-Income Recommendations

Highlights The US has largely passed a “stress test” of its political system. Rule of law is intact. The US dollar and treasuries may fall further due to cyclical and macro developments but not due to a structural loss of confidence in US governance. The judicial system will become the key check on the Biden administration as it shifts from short-term economic relief to its longer-term agenda, especially on executive orders. The court becomes even more important as a check if the Democrats muster the votes to remove the filibuster. This is possible but not imminent. Packing the court is much harder. Major court cases only sometimes have a major impact on the stock market but key sectors can be given certainty through court verdicts after being disrupted by policy. The US dollar is bouncing on the basis of economic recovery and political stability which poses a near-term risk to cyclical sectors. Feature US government bonds continued to sell off over the past week as the economic recovery gained steam and investors rotated into cyclical equities and commodities. The US Senate passed the $1.9 trillion American Rescue Plan – a massive and likely excessive infusion of fiscal relief – sending it to the House where it will be ratified shortly and passed over to President Joe Biden for signing. Across America shops and restaurants are opening up as immunization to COVID-19 advances and hospitalizations collapse. Meanwhile the Supreme Court announced its first set of rulings under the Biden administration: it dismissed former President Trump’s last challenge to the 2020 election and ruled on other issues such as free speech. The country has tentatively passed a political “stress test.” The rule of law remains intact. On the surface these two trends stand in opposition. US treasuries have been attractive to a savings-rich world not just because of the size of the US economy but also because of the country’s 245-year tradition of good governance – the balance of freedom and stability in its government and financial markets. The share of foreign holdings of US treasuries is declining but the reason is that the Federal Reserve is increasing its share (Chart 1). Foreigners are not liquidating their holdings just yet, although it is a risk given the US’s combination of extremely easy monetary and fiscal policy and populist politics. Chart 1Foreign Holdings Of US Treasuries In this report we focus on governance in the wake of the Trump administration and COVID-19 pandemic. Is US governance eroding? If so, how will it impact the markets? How will the courts interact with the Biden administration? Should investors care about the rule of law? With a new business cycle beginning, any assurance of a basic level of US governance allows risk appetite to recover and enables investors to pursue higher-yielding cyclical assets with less inhibition. But it also suggests that US assets will remain safe havens. How Rule Of Law Matters To Investors Rule of law and the independence of the judiciary are critical aspects of good governance that make a market attractive to foreign investors and secure for domestic investors. Nowhere is this clearer than in the breakdown of global reserve currencies. The United States and its developed market allies hold pride of place (Chart 2). Nevertheless the US has lost some of its reserve status to other currencies over two decades of partisanship and repeated crises, from 9/11 through Trump’s trade war. Chart 2Rule Of Law: Bedrock For Reserve Currencies Government bond yields exhibit some degree of correlation, inversely, with rule of law: better governance implies lower yields and vice versa. As the global savings glut grew over the past few decades, investors sought to preserve capital in securities perceived to be the safest. This is apparent whether judging by a simple comparison of developed and emerging market bond yields or by the World Bank’s Worldwide Governance Indicators.1 The relationship between governance and bond yields is strongest with emerging markets but it loosely holds among developed markets like the US, as shown in Chart 3. Chart 3Bond Yields Lower Where Laws Rule It is the level of governance rather than any change matters, since bond yields have fallen for all developed markets regardless of changes in governance over the past decade. However, governments that take negative steps that harm governance attract fewer foreign purchases of their debt than those that improve governance (Chart 4). This is true of developed and emerging economies. The implication is that demand for US treasuries would have been even greater over the past decade if the US political system had remained stable like Canada’s. Chart 4Improved Rule Of Law Attracts Bond Investors Differences in developed economy governance only slightly (if at all) correlate with portfolio or direct investment flows (Charts 5 and 6). This is not surprising as governance does not translate into short-term corporate earnings growth and foreign countries invest directly in developed markets to access technology and consumer markets. By contrast, in emerging markets, better governance goes along with stronger equity demand and foreign direct investment. Chart 5Rule Of Law A Boon For Equity Flows? Chart 6Eroding Rule Of Law Discourages Direct Investment Still the global phenomenon suggests that an erosion of rule of law can shake up one’s faith in a government’s ability or willingness to make debt payments and its operating environment for private companies. Domestically focused investors have to be concerned about rule of law since its collapse would undermine political stability as well as property rights, the surety of contracts, and the redress of grievances. US Rule Of Law Post-Trump And Post-COVID The US has the world’s longest continuously running constitution and one of the highest standards of living. Other countries with similarly high standards of living have similar constitutions or even adopted theirs from the United States. At the same time US governance has deteriorated in recent years, raising the question of whether bond investors or private entrepreneurs face greater governance risk. The drop in rule of law is apparent in the World Bank’s index (Chart 7A). The turmoil of the 2020 election cycle proves beyond doubt that the US suffers from some serious governance problems. At the same time the independence of the US judiciary is rising in the ranks (Chart 7B). Looking ahead, this trend will likely continue as the judicial system managed to get through the disruptive Trump presidency and the 2020 pandemic and election with minimal damage to its independence. Chart 7AUS Rule Of Law Erosion Will Pause Chart 7BUS Judicial Independence Has Improved This is a remarkable feat as the underlying problem in the US system – political polarization – threatens to entangle the judiciary as much as any other institution. Today, with polarization subsiding yet still at a historically high level, the court’s integrity and credibility are critical to the overall maintenance of the rule of law (Chart 8). Chart 8US Polarization Set To Fall Chart 9Trust In Supreme Court Fairly SteadyPolarization creates gridlock in Congress, which forces other branches of government to fill the vacuum and deliver solutions, thus becoming more controversial. This process has ensnared the high court from time to time as well as the central bank and other institutions.2 Over the past ten years the courts have struggled to minimize the damage from polarization. Confidence in the high court has fallen, but not catastrophically, and most voters feel about the same as ever toward the court (Chart 9). Meanwhile disapproval of Congress is stuck around 80%. The Trump era featured a range of claims about the rule of law in America that can now be assessed with some distance. The Democratic Party was not able to remove President Trump through extra-electoral means, while President Trump was not able to ride roughshod over the courts via executive order. Several of Trump’s initiatives were upheld, such as his immigration ban, while others were shot down, such as his attempt to deport the so-called “Dreamers” or add a question about citizenship on the US census. The 2020 election irregularities were not enough to sway the outcome of the electoral vote while the insurrection at the Capitol stood no chance of overthrowing the system. Supreme Court Justice John Roberts refrained from presiding over Trump’s second impeachment – differentiating it from the impeachment of a sitting president – without intervening to tell the Senate whether it could impeach a previous president. Going forward, however, the courts will act as a check on the Biden administration and therefore new controversies will arise. One of the Trump administration’s lasting legacies was to appoint three justices to the high court, creating a six-to-three conservative ideological leaning on the court. Since the Democrats won control of both the White House and Congress, the Supreme Court becomes a critical check on the administration and will thus attract opposition (Chart 10). Speculation about a conservative ideological takeover of the court has proved overrated, based on the court’s neutrality amid the election. Antagonism will inevitably increase going forward as Biden moves away from COVID relief and economic welfare to his larger legislative agenda. Yet the second reconciliation bill, which features infrastructure and green energy investments, would have to include major surprises to create anything as controversial as the dispute over the individual mandate, which imposed a tax on citizens who did not purchase health insurance.3 In other words, a major clash over legislation is more likely only when the Senate Democratic majority removes the filibuster, the rule that effectively requires 60 votes in the Senate to pass regular legislation. This can happen but it does not appear imminent. Senator Joe Manchin of West Virginia opposes removing it, keeping the Democrats at least one vote shy of repealing it, though he has recently shown some flexibility by suggesting that the Senate return to the good old days when senators had to deliver a filibuster in person (and therefore the procedural hurdle was more burdensome to maintain). Chart 10Balance Of Power In The Three Branches Thus the main arena of friction between the Biden administration and the judiciary will boil down to executive action, as with the Trump administration. Not all of this friction will be partisan but certainly ideological leanings will matter in the most important cases. While the number of Trump’s judicial appointments is often exaggerated – President Obama appointed more (Chart 11) – it is still the case that conservatives possess an improved ideological advantage due to the past few decades of appointments (Chart 12). So far Biden has faced pushback on his 100-day deportation moratorium. Chart 11Trump's Judicial Impact Overstated Chart 12Federal Courts A Bulwark For Conservatives Table 1 highlights the most investment-relevant Supreme Court cases coming due in the current session. The court will determine, among other things, whether Facebook can be treated similar to a telephone company in some respects; whether the federal government or states oversee cases brought against oil and natural and gas companies over climate change; and to what extent tech company acquisitions include patents and copyrights. The use of executive authority to reallocate funds that Congress has appropriated for different reasons, and state exemptions for Medicaid requirements, are also on the docket. Table 1Major Cases Pending At Supreme Court In addition we would identify several policy areas that are likely to become relevant to investors due to contemporary political and geopolitical concerns combined with historical precedent: National Security: The Trump administration relied heavily on the Supreme Court’s historic deference to presidents on issues involving national security and foreign policy. This tendency will likely continue, giving President Biden a freer hand in cases where he claims a national security justification, particularly in dealing with export controls vis-à-vis China. The hack into Microsoft’s Exchange email system, allegedly committed by Chinese state-backed hackers, highlights our Geopolitical Strategy view that the Biden administration will not reduce the US-China power struggle. Industrial Policy: The Supreme Court famously rebuked President Harry Truman for trying to seize control of private steel production during the Korean war (Youngstown Sheet & Tube Company v. Sawyer, 1952). Similar cases could emerge in an era in which the president is attempting to assert US government control over critical supply chains in health, tech, and defense. Immigration: The Supreme Court rebuked the Trump administration on the question of the “Dreamers,” undocumented immigrants brought to the US as children, whom the Obama administration refused to deport under an initiative called Deferred Action for Childhood Arrivals (DACA). The court said the Trump administration failed to provide adequate procedural justification for revoking the DACA program. Now the Biden administration’s executive orders loosening immigration and border controls face challenges from lower courts that could ascend the ladder. Also, following from the logic of Trump’s defeat on this issue, it is possible that the Supreme Court could overturn some of Biden’s revocations of Trump’s orders if not adequately justified. Environment: The Biden administration has pledged to phase out the fossil fuel industry over time, yet legislative majorities will be lacking and much of the activity occurs on private land free from direct federal control. The result is that Biden administration will revive regulatory expansions from the Obama era to attempt to raise the cost of carbon emissions. These actions will likely provoke court rulings. Labor: One of the Clinton presidency’s biggest legal controversies, outside the impeachment, centered on executive orders aimed at stopping businesses from hiring replacements for workers who went on strike. The Biden administration explicitly aims to have a muscular policy on labor regulation and to promote union interests and these could run afoul of the courts. Big Tech and free speech: The court has just ruled with an eight-to-one majority in favor of a free speech case on campus. The only reason Chief Justice Roberts dissented was because the case was moot. Future cases may not be moot in an era in which first amendment quarrels are heating up as Big Business, Big Tech, and mainstream media ramp up censorship of disfavored speech. The Supreme Court is likely to enforce first amendment protections robustly which could result in breaking open the digital arena for alternative platforms and services with looser standards. Bottom Line: With Democratic control over the White House and Congress, the judicial branch will become a critical source of limitations on the Biden administration’s policies. While controversial cases could possibly arise from any ambitious proposals in Biden’s second reconciliation bill, the main source of friction will center on executive orders. This is the case at least until the filibuster is removed, which is possible down the road but not imminent. Could Democrats Pack The Court? Finally there is an ongoing concern over the risk of “court packing,” i.e. partisan enlargement of the Supreme Court, under the Biden administration. During the 2020 campaign several leading Democratic Party figures suggested the party could increase the size of the high court so as to reduce the six-to-three conservative leaning. The threat was partly intended to motivate the progressive voting base and deter the Republicans from going forward with the confirmation of Supreme Court Justice Amy Coney Barrett ahead of the election. However, the possibility of court packing remains as long as polarization is extreme and the ruling party has at least 51 votes needed to repeal the filibuster in the Senate. President Biden said he was “not a fan” of court packing but one of his first acts in office was to appoint a commission of experts to study the idea of Supreme Court reform. This can be interpreted as a way of sidelining the question or as a preliminary to packing the court should it become possible later. Packing the court is politically explosive so while Democrats could remove the filibuster if and when they get the votes, they are less likely to succeed at packing the vote due to public opinion (though it cannot be ruled out over the long run). The bar to altering the filibuster is much lower than that to changing the composition of the court. History suggests that it would be a market-relevant episode if court packing were attempted. Franklin Delano Roosevelt attempted to pack the court after it ruled elements of the New Deal unconstitutional, notably a wage hike mandated by the National Industrial Recovery Act (Schechter Poultry Corp. v. United States, 1935). Roosevelt narrowly fell short of expanding the court after the Senate majority leader, a key ally, passed away unexpectedly. The S&P rallied when higher wages were struck down but there are many reasons for these developments – industrial production was rallying at the time, and when industrial production recovered later, and court packing was ruled out, the market remained low. At minimum one cannot say the case was inconsequential to the market (Chart 13). Chart 13FDR Tried To Stack The Courts In a more recent example of a Supreme Court ruling having a substantial market impact, the court ruled with a narrow five-to-four vote to uphold the legality of most of the Affordable Care Act, or Obamacare, the signature legislative effort of Obama’s presidency (National Federation of Independent Business v. Sebelius, 2012). The market reaction at that time was positive, even in the health care sector, as the result removed uncertainty. Only later, in 2015, when the major provisions of the law took effect, did the sector start to feel the negative effects (Chart 14). It is reasonable to expect that any showdown over a major piece of legislation and the courts would have a similar impact today: the market would struggle with uncertainty but rally on the verdict. Chart 14Supreme Court Ruling On Obamacare Had Market Impact Otherwise the Supreme Court’s ideological balance will likely be in place for a while. Justice Stephen Breyer, appointed by President Clinton, is 82 years old while Justice Clarence Thomas, appointed by President Bush, is 72 years old. The other justices are all younger than 66, meaning that conservatives would retain a five-to-four advantage even if Biden had the chance to replace both Breyer and Thomas. Bottom Line: As things stand, court packing is out of reach, more so than removing the filibuster, and therefore the current Supreme Court balance will remain an effective check on the Biden administration. Investment Takeaways The judicial system will become the major check on the Biden administration if its second reconciliation bill contains surprisingly ambitious and controversial provisions or if the Democrats ever get the votes to remove the filibuster. Otherwise the court is primarily a check on Biden’s executive orders. Climate policy is a likely area of friction given that the Biden administration will attempt to pioneer new areas of federal involvement in raising the cost of private industry when it comes to carbon emissions. At the same time the court could insist that the digital arena is a common forum where different voices must be heard, which could open the way to competitors to the tech giants. While the energy sector faces policy risks, it is favored by cyclical economic factors and will also benefit from checks and balances. Whereas the tech sector is not cyclically favored and could face some pushback from courts regarding competition (Chart 15). US rule of law is mostly intact. The selloff in the dollar and treasuries is driven by cyclical factors, not a structural loss of confidence in the rule of law or the American legal and political system. The Trump saga did not in itself trigger a collapse of the US dollar or government bonds – what did that was the Federal Reserve’s shift back to ultra-easy policy and the blowout fiscal spending stemming from the COVID-19 crisis. The US dollar is bouncing on the strong outlook for the economy as well as political stabilization. Chart 16 highlights that this is a near-term risk to cyclical sectors. Assuming the dollar resumes its cyclical weakening path it will power the next leg of outperformance for these sectors. Chart 15Courts Could Impact Energy, Tech Chart 16Dollar Bounce A Near-Term Risk To Cyclical Outperformance   Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com     Appendix Table A1Political Risk Matrix Table A2Political Capital Index Table A3APolitical Capital: White House And Congress Table A3BPolitical Capital: Household And Business Sentiment Table A3CPolitical Capital: The Economy And Markets Table A4Biden’s Cabinet Position Appointments   Footnotes 1     The World Bank uses expert judgment and opinion polls to evaluate rule of law, defined as quality of contract enforcement, property rights, and functioning of the law and justice systems. Biases stem from the policy elite and non-governmental organizations of the western world. For instance, Hong Kong’s high rankings have all too predictably been undercut by Communist China’s power grab there.              2     Polarization escalated after Roe v. Wade and similar rulings that legalized abortion (1973), the Bush v. Gore ruling that decided the 2000 election, the NFIB v. Sebelius ruling that approved the Affordable Care Act (2012), and the Obergefell v. Hodges ruling that legalized gay marriage (2015).   3    The individual mandate is not expected to get shot down by the court this year, though it is conceivable. Even so, Biden’s second reconciliation bill would give the Democrats the chance to respond to any court ruling on health care reform. Biden’s health initiatives of automatic enrollment and government-provided insurance will be challenged but do not seem as controversial as the individual mandate in principle.