Commentary:
I’m going to touch a bit on the likely economic effects of the election. This is not a partisan view, this is not an endorsement. This is an expression of the facts as I see them. I know this is a subject that pundits have discussed ad nauseum. Hopefully this view adds something to the debate.
The topic of the fiscal multiplier has received quite a bit of attention of late, after an IMF report suggested that the fiscal multiplier in the EU periphery may be almost 3x higher than previously estimated. I have argued recently that the assumption that the fiscal multiplier is stable is probably incorrect – the multiplier is likely larger during periods of austerity than in periods of fiscal stimulus. I think the data has broadly borne this out. The main reason the multiplier was underestimated in the first place is because it was based on data during growth, as versus recessionary periods. In other words, during growth periods, the multiplier was estimated at lower levels than during recessionary periods.
Now, the consensus view seems to be that a Romney win will be better for the stock market. I am not sure exactly what the reasons are, since equity performance has been better under Democratic presidents. But let’s look at what Romney has proposed so far. First, he has said the he will fire Bernanke – going on record to say how low interest rates are bad for the economy. Second, he has proposed reducing the deficit by reducing spending and loopholes, but specifically rejecting any tax increases. By definition, item one is a monetary tightening event, and item two is a fiscal tightening event. This is also where the fiscal multiplier discussion comes in. If my hypothesis is correct, $1 of cuts is likely to have a larger multiplier than $1 of revenue increases.
So: to summarize, a Romney win could result in fiscal AND monetary tightening on an economy growing at a 1-handle rate. That is not a pro-growth mix, and the market has responded as such. Since Romney’s probability of winning bottomed early this month, (data from Intrade.com) risk assets have dropped. I do not think this is a case of spurious correlation.
Now, I have been espousing a pro risk view into year end based partially on the expectation of an Obama re-election. A Romney win is likely to change the outlook noticeably, although large moves should probably still be faded.
Notable:
- US Core Capital Goods Orders declined to 0% in Sept vs 0.8% exp. Worryingly, last month’s figure was revised down from 1.1% to 0.2%.
- The UK pulled out of the double dip recession posting the strongest quarterly growth in five years with help from the Olympics. GDP grew 1% q/q in the third quarter, above expectations of 0.6%.
- The Nikkei reports that the government in Japan will endorse an additional $125bn stimulus package on Friday from the BOJ by increasing the asset purchase program.
- Opposition parties in Japan are working to block a bill that would allow the government to ramp up borrowing to pay for this year’s deficit. The Ministry of Japan will hold crisis talks with bond dealers Friday as fears grow over a political standoff. The government has enough cash to last until the end of November.
- Faster Wireless Speeds are coming: http://www.technologyreview.com/news/429722/a-bandwidth-breakthrough
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- Wed: Month End, EU CPI, Unemployment,
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