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Outlook After the Election

President Barack Obama

President Barack Obama

Now the uncertainty of the US presidential contest has been removed, investment markets have shifted their focus to other major uncertainties – the “fiscal cliff,” the European comic opera, the China slowdown.

I suspect they will continue to weigh on the markets for a month or three before the clouds clear.

The probabilities are:

  • The fearful economic consequences of allowing tax and spending to plunge the US economy over the fiscal cliff will drive Congress into a temporary patch-up either just before or soon after the end-of-year deadline.

Unfortunately that won’t solve the fiscal deficit problem, which won’t happen soon because both rival parties are largely under the control of their fundamentalist wings, and Obama, unlike previous Democrat presidents such as Bill Clinton, has proved to be too partisan to be a good negotiator. But even a patch-up will calm investors’ fears.

  • The dominant factors in Europe will continue to be abundant nearly-free credit from the central bank, and governments that edge away from their publicly intransigent positions. There is no way the German and French leadership will force their banks to write off massive amounts of sovereign bad debt.

It will become clearer that the Eurozone will survive in some form or another, weakening the anti-euro hysteria.

  • It will also become increasingly clear that China is making a success of its controlled slowdown and stimulation of rebalancing towards greater domestic demand as the new leadership begins to exercise control and switch from constraint to moderate stimulation, lifting investor sentiment, not only in China itself, but also its East Asian co-prosperity sphere.

Early next year we should see the “risk-on” assets, especially equities and precious metals, resume their uptrends.

CopyRight – OnTarget 2012 by Martin Spring

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