The election is over. Has anything changed? The short answer is that it has not. And had Mitt Romney won, it probably wouldn’t have either. All the problems that existed pre-election remain with us. Given the lack of politically possible and transformational ideas delivered up by the campaign, it’s likely to stay that way.
Take the US debt. I discuss this with Marc Faber in this week’s interview, but the key point is that the vast majority of American government expenditure (around 70%) is mandatory – the government is legally required to pay the likes of Medicare, for example. Add that spending to the interest on the US debt (also pretty non-negotiable) and the total already comes to more than America collects in tax revenue.
So, as Simon Black of the Sovereign Man newsletter puts it, even if America were to cut out 100% of its discretionary spending (the military and so on), the country would still “be in the hole by a quarter of a trillion dollars”. That’s a number that is going to keep rising: America’s dodgy demographics mean that every day 10,000 new people start receiving some kind of mandatory payment.
There might have been a time when all this could somehow have been prevented but, while we are bound to see some tax hikes and spending cuts from here, it is almost impossible to imagine them being dramatic enough to bring revenues and spending close enough together to reduce the deficit by more than a rounding error. The only way out then, as Faber says, is money printing (“until the system collapses”) and inflation.
So what does all this tell you about the market? The election result itself tells you nothing. There has long been a general view that the party of the man in the White House makes a difference to the way the stockmarket performs. It doesn’t. Look at the charts (there are links to some on our blog) and you will see there is no discernible difference. What matters to the market is not who is in the White House, but how cheap stocks are when he arrives. Right now, American stocks aren’t cheap.
However, the deficit and the slow growth rates of the US economy do tell you something. As John Stepek noted in our Money Morning newsletter this week (Why you don’t need to worry about the US election), “the stockmarket in the US performs the same political function as the housing market does in Britain” – as long as it isn’t falling, most people feel OK.
So just as our politicians appear to devote themselves almost entirely to keeping house prices up, US politicians spend far more time than real life warrants worrying about the stockmarket. For Faber this means that any major fall on the back of lousy fundamentals will mean a new kind of quantitative easing – the Fed buying into the stockmarket directly. The result? A brand new stockmarket bubble, one born directly out of failure.