The Great Debate UK
Why stasis on Capitol Hill should worry investors
By Kathleen Brooks. The opinions expressed are her own.
The markets have had to – grudgingly – get used to pricing in political risk in recent months. Instead of being moved by economic data and fundamental or technical factors, a large amount of recent price action has been driven by politicians, and that always spells bad news.
Firstly, we have had to listen to the machinations of Europe’s various branches of power as they try to muddle through to a solution to the euro zone debt crisis. This has done very little apart from cause excess amounts of volatility in the markets as politicians talk at odds to each other. The results are pathetic: more than 18 months since the Greek crisis first flared up not only is Athens still deep in its own sovereign crisis but contagion has spread to Italy and Spain and even threatens to engulf some of the core member states like France.
Although most of the focus has been on Europe, the spotlight may shift to the U.S. Republicans and Democrats have failed to agree on $1.3 trillion of cuts to the Federal Budget, which makes it unlikely that the bi-partisan Deficit Committee can come reach a debt deal by Wednesday’s deadline. The problem isn’t the cuts: if Congress can’t agree where the axe can fall then automatic cuts will be enforced. The problem isn’t even the repercussions of missing the deadline: these cuts wouldn’t be imposed until January 2013 and the missed deadline will not cause a default on U.S. debt or a government shut-down, unlike the impasse in Washington back in August.
Instead this suggests that the U.S. and Europe are in a chronic state of political partisanship. In the U.S. its two main political parties are pitted against each other and in the currency bloc the same thing occurs with inflation and austerity hawks in the North failing to bow to pressure to implement policies that could boost the financially weakened Southern states. Essentially the political stalemate is a bit like blocked plumbing since it disrupts the normal flow of things, which damages investor confidence and has the power to cause excess market volatility and a prolonged slump in the global economy.
from Global News Journal:
Perilous predictions for 2011
It’s the season to be merry - and to make forecasts about next year. Across the finance industry fine minds spend December crafting outlooks and extrapolations about how the world will fare, in the hope of a decent return over the next 12 months and avoiding the bear traps that will swallow an investment. The banks, strategic advisories and political risk consultants trumpet their analytical prowess, of course, but are also meeting a natural human need to peer into the future. We all want guidance to take the sting out of living in an uncertain world.
Nowhere is prediction more fraught with peril than in politics and world affairs. The success rate is in inverse proportion to the costs that unexpected acts in the real world can impose on the investor. So despite the difficulty of providing a reliable guide to the future there are huge incentives to try to chart the way ahead. Here's Control Risks, a risk consultancy firm, on its view of 2011, while competitor Eurasia reveals in early January, as does the World Economic Forum. Nomura has a list of 10 political challenges to prosperity that range from the prospect of gridlock in US domestic politics to brinksmanship on the Korean peninsula.
