Market whistles merrily as Romney sinks: James Saft

September 19, 2012

Sept 19 (Reuters) – Mitt Romney’s chances of capturing the
White House dwindle almost daily and financial markets seem not
bothered a bit.

Not only have equity markets been buoyant and government
debt stable but also both markets show every indication of
paying more attention to the fate of Europe and to extraordinary
central bank measures than to the election.

Romney’s chances of defeating President Barack Obama in
November are down to 33 percent, according to wagers placed
through Dublin-based online betting exchange Intrade, down from
44 as recently as Aug. 27. Since then the S&P 500
has gained 4 percent, and stands 10 percent higher than
late-June levels. The interest the U.S. must pay to borrow money
for 10 years has risen to a still historically low
1.78 percent from 1.64 percent in the same period.

The election has developed not necessarily to Romney’s
advantage, to paraphrase Emperor Hirohito at the surrender of
Japan. Romney, famously, told wealthy supporters that 47 percent
of Americans will back Obama regardless, consider themselves
victims and entitled and that “my job is not to worry about
those people,” remarks secretly recorded at a $50,000 per plate
fundraiser at a private equity executive’s Florida mansion.

Given events and given the markets, you have to conclude
that either investors don’t believe the odds or are actually
pretty comfortable, or pretty unsurprised, at the prospect of a
second Obama term.

None of this is to advocate for either candidate’s policies,
and it would be a grave error to assume that rising stock
markets are always a positive indicator of a nation’s health,
financial or otherwise. It is also important to remember that
whichever candidate wins the presidency, his ability to enact
policy will depend in very large part on the disposition of the
House and Senate.

And, of course, it is possible that markets change their
minds about the impact of an Obama victory as the possibility
grows nearer, and as the tranquilizing effect of the Fed’s
latest round of, now open-ended, bond buying, fades.

TAXING, SPENDING AND PRINTING

To the extent that politics are driving markets the main
macro issues would be taxation and spending. And while there are
huge differences in the two candidates’ plans, both sets of
policies may have positive or negative impacts on markets,
depending on your outlook.

Obama is proposing to raise tax on long-term capital gains
to 20 percent from 15 percent, and keep current rates for
couples earning less than $250,000. He would also keep a planned
3.8 percent Medicare tax on long-term capital gains and
dividends, which Romney would eliminate. Romney would keep the
zero and 15 percent rates on some dividend and long-term capital
gains, but eliminate tax on capital gains, dividends and
interest for those with adjusted gross income below $200,000.

Those are all figures which argue for a better stock market
reception for Romney, and the fact that we aren’t seeing the
prospect of these lower taxes slipping away have an effect may
simply mean the market was never counting on them.

Both candidates are proposing fiscal tightening, though
Romney hasn’t released enough detail to allow for a true
side-by-side comparison for next year. Generally it would be
fair to expect deeper cuts, over time, from the Romney camp,
cuts which would, by definition, reduce the amount of cash
flowing into corporate tills.

And there is the threat of the fiscal cliff, over which the
U.S. will plunge, with automatic spending cuts and tax hikes, in
2013 if no agreement is reached. The fiscal cliff would be toxic
for equities, and any electoral result which makes it less
likely will be good news for equities.

The only scenarios which would be bad – no, terrible – for
bonds are a loss of confidence in the U.S. or a recovery, both
of which are remote prospects. If we fiscal cliff-dive, the
ensuing recession will drive yields still lower and, perversely,
even a downgrade of the U.S. may back a short-term rally in
government bonds as investors seek to compensate for increased
risk by selling still riskier things like stocks and corporate
bonds. If we slowly, or quickly, reduce the deficit, growth will
suffer and bond prices rise.

The real underlying force in financial markets isn’t
politics but monetary policy, as the Federal Reserve yet again
pulls out the stops in an effort to breathe life back into the
economy. Conventional wisdom is that the ECB has vastly reduced
tail risk out of Europe, which is a huge boon. Even the Bank of
Japan is once again adding to the global liquidity party,
announcing the latest in an as yet unsuccessful series of bond
purchases.

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