He has made history in becoming the first African-American president. That in itself, deservedly, will be the subject of many essays by many political commentators all over the world today.
As investors, we must take a step back from the spectacle of this historic event and ask a more pressing question. What does this mean for the world economy and the world’s stock markets?
First the economy...
Almost 70 per cent of Americans named the economy as the number one motivation behind their vote.
A vote for a man that has so much influence on us all.
After all, when America sneezes, the rest of the world catches a cold. And when the US subprime bubble burst, we caught pneumonia. We are caught in a storm of macro crises: the credit crunch, housing slumps, recessions and bear markets across the globe. The responses by the world’s leaders affect all of the above and all of us.
As leader of the free world at such a low ebb, Barack Obama’s next move is so important.
President Obama wasted no time, addressing the economy in his acceptance speech:
"Even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime — two wars, a planet in peril, the worst financial crisis in a century.
"There is new energy to harness and new jobs to be created; new schools to build and threats to meet and alliances to repair."
The President must, in the coming weeks, outline a convincing plan of action to help the world’s biggest economy get back on its feet.
What’s next for the economy?
A big recession bailout.
The last intervention by the US was the $700 billion bank bailout. That was about the financial system, not the recession.
The last recession bailout was the $150 billion of rebate cheques handed out to ordinary Americans. This fiscal injection was a bad call, one that the new President-elect opposed, and it had an artificial effect on the economy.
The money could have been much better spent and the next round of monies will be better spent.
How much money?
$300 - $500 billion is being touted as the size of the next injection. That’s what is estimated as necessary for America to spend to offset the downturn of the private sector.
- $300 billion is equivalent to a 2% boost to GDP.
- $500 billion is equivalent to a 3.4% boost to GDP.
The expectation is that rather than give everyone $600 to fritter away, they’ll put the money into big infrastructure projects to spur "job creation."
Digging holes in the ground, building bridges... the Keynesian approach.
The good news is that it should all now happen a lot faster.
We have a Democratic President and a Democratic Congress. That means that we are unlikely to face the same sentiment-crushing political hurdles that we encountered with the $700 billion bailout.
SocGen Cross Asset Research
The bad news is that it only delays the inevitable. The US, the world’s largest recession and an economy that affects the UK heavily, is still going into recession. Even a supersized deal would not prevent recession in the US and, if anything, will probably push debt levels over 50% of GDP.
It’s a bad move in the long term, but having led his campaign on the economy, Barack Obama has no choice but to spend, spend, spend.
What’s next for the stock market?
It’s ‘as you were’.
There has been a lot of talk about a stock market rally following the election result. However, since the year 1900, markets have only rallied on average 1 per cent in the week following an election.
Nothing to write home about.
With the dour mood in the markets, this post-election rally might be similarly muted.
In the long term, investors have reasons to be concerned, according to Fortis analyst Joost van Leenders:
"Obama’s economic plans are in principle investor unfriendly: higher taxes and a flirt with protectionism."
This is not something to fear yet. We have few details on what exactly Barack Obama will do and when he will do it. The headline story remains the deteriorating state of company fundamentals.
That’s something that even Barack Obama cannot change.
It is The Fleet Street Letter’s view that we are facing a global balance sheet recession. Companies across the board can expect to earn between 30 and 50 per cent less than they have in the past. And while this persists, we will struggle to see a sustained stock market rally.
How do you protect yourself against this?
We offer a different way to play the market. We have introduced two hedges into the portfolio, both of which are currently showing a profit.
They are plays that actually improve as the recession worsens. If you’d like to get these recommendations, you can do so right now, by joining up for a no-obligation three-month trial. Click here to find out more about The Fleet Street Letter and we’ll send you our latest issue in an email by return.
Until tomorrow,
Theo Casey
For Fleet Street Daily
Urgent Currency Warning - You must act before 12 noon tomorrow!
Ben Traynor
Meanwhile, our own Bank of England meets tomorrow to decide interest rates. The question on most investors’ minds is not "Will they cut?", but "By how much?" And while a rate cut would be welcome in some quarters, it could spell disaster for the pound.
We believe the currency market has priced in a half percentage point cut... but there’s a very real chance the Bank could go further. If it does... watch out! To discover how you could turn the situation to your advantage, follow this link
The Daily Reckoning - This is not a new dawn
Bill Bonner
As Dick Tuck put it, after losing a California election to Richard Nixon:
"Well...the voters have spoken. The bastards."
America’s voters spoke yesterday. And they said "Give us Obama."
And it came to pass that the man called Obama was given unto them.
"America is a place where all things are possible," said the man himself in his victory speech.
And yes, it is possible for a half-black man to be elected. But no, all things are not possible. It is not still not possible to get rich by spending money. Nor is it possible to save a man from too much debt by giving him more credit. And you still can’t trust a politician...or his money.
The election "changed everything," shouts the headline on today’s International Herald Tribune. But the eternal verities still apply; Barack Obama is not going to change them.
You can read the Daily Reckoning in full here.
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