US Election 24 October, 2012
6 November, 2012 is the next United States presidential election. Between Barack Obama and Mitt Romney, one of them is going to be the next president and the financial market is wondering what will be the impact on the mighty US Dollar and US Treasuries in all scenarios. The general feeling is that if Obama wins, there will be continuation in the current monetary policy. US interest rate will remain low for a long time. In September, the Federal Reserve said it would keep the federal funds rate at zero to 1/4 percent at least through mid-2015. US Treasury 2 year interest rate has dropped from the peak of 4% in 2008 to currently 0.4%. (You can understand why you get so little from your deposit.) Low interest rate is supposed to help business and individuals to pay less to borrow, hence have more money to grow the business or spend. (Some will say the government has made the wrong assumption that banks are willing to lend. This is another topic.)
If we stay on the Obama train, the direction is low interest rate, tax increase and government spending cut. Yes, you read it right, tax increase. The next big scary movie in US is what we called the “fiscal cliff” when tax increases due to the expiration of the Tax Relief and the spending reductions due to Budget Control. The market believes this could send US economy into recession and therefore the whole world economy will fall off the cliff. This is going to be an absolute nightmare for Europe recovery. Remember 2008 when the whole world went upside down, the US dollar was strengthening. Against the GBP, it went from GBP 1 to USD 2 in the beginning of 2008 to GBP 1 to USD 1.5 level at the end of 2008. Institution money was leaving risky asset such as equities and corporate bonds and scooping up safety asset US Treasury bonds. So if Obama wins, please watch how the “Fiscal Cliff” plays out. (source: http://abcnews.go.com/
If Romney wins, he is likely to bring some new variables to the situation and it could include influencing the existing monetary policy. Romney’s pitch to cut tax and reduce deficit have got many economists and politicians puzzled. Whatever calculator Romney is using, I want one. How can the US government take less tax income and cut spending? Currently, it struggles to any of the two. It is almost equivalent to turbo charged austerity. The market is not convinced Romney's ideal world is feasible and could lead to disagreement between political parties and spread to disconnection between government and the President. One of the outcomes could be Romney’s plan does not realize and US recovery goes off track. Institutions like soverign funds and pension funds lose confidence in US and money leaves US stock market and US Treasury. Such selling sends US stock prices lower and US interest rate higher. There was a very intereating website attacking Romney's tax plan. http://www.romneytaxplan.com/
In both cases, US stock market is not in a good position. US Treasury may remain safe asset if Obama rather than Romney wins.
Such concern over US stock market coincide with a strong 2012 in terms of stock market performance. Dow Jones Industrial Index have rallied from 12000 level a year ago to 13500 level in September 2012. As the QE3 steroid fades and election ends, the new president has to act more talk less.
