24 hours away from the US election result

Of all the swing states, all eyes will be focused on the key Midwest state of Ohio where 18 electoral votes could well prove to be decisive. Obama has an advantage in this stay after effectively saving the US auto industry from bankruptcy following the Great Financial Crisis. This will give him an edge tonight.

There has been a record turnout of early voting before election day, and this could mean the largest number of actual voters in recent times. In America voting is not compulsory as it is in most other democracies.

If Obama prevails by a small margin, the election carries a high probability delivering of the Democrats a weak hold on the Senate with a small majority and the Republicans continued control of the House of Representatives. This will not be positively received by the market with the approaching “fiscal cliff” less than a few months away.

The US economy faces the possibility of $600 billion in automatic spending cuts and tax hikes should Congress not agree on a package to lessen the effects. If Congress procrastinates on delaying tax increases, spending cuts and lifting the debt ceiling, the economy and the stock market will suffer. We believe that whatever the outcome in the 2012 election, the politicians will find a way around the fiscal cliff, because the outcome for America will be dire if there is no change in course.

As we saw in Europe earlier this year when faced with the breakup and unraveling of the Eurozone through policy inaction, Germany changed its stance and provided the relief needed to the troubled economies. We believe the same will happen in America although expect some bickering if Obama wins.

A Republican win on the other hand would see a smooth transition for the US economy and this would be well received by the markets. Recent weakness in the US indices has all been about an Obama win being priced in.    

One early winner in the 2012 election campaign has been Rupert Murdoch with News Corporation benefiting from the record breaking advertising spending efforts on both sides.

With concerns over the aftermath of the US election, the US dollar has sustained a strong recovery in recent weeks, but has a long way to go yet before one could be confident in a change of trend. The US dollar index has bounced energetically off the important 78.5 support level. It is doubtful however that the momentum will continue, particularly now that the Federal Reserve has commenced its third (and ongoing) debt monetization program.  

We think the likely outcome will be that Congress agrees to mitigate the fiscal cliff budgetary constraints which will lead to further fiscal stimulus and another blowout in the national debt. Under George Bush, the national debt climbed from around $5 trillion to $10 trillion in just 8 years, and this was predominantly before the GFC. 

Under Obama the national debt has increased from $10 trillion to nearly $16.5 trillion in four years, and this should easily eclipse $20 trillion in the next four years, regardless of who is elected. The daily interest bill on the national debt is now $3.9 billion, and this is with government debt securities paying the lowest interest rate in history.

Hu’s next

While the Americans are about to sort out their Commander in Chief for the next 5 years by tomorrow, China is still worrying itself sick over who should take over from Hu.

The Chinese military chain of command is about to change once Hu retires in a few months, but it is a complex process of internal jockeying for position that has often led to bloodshed.

The importance of China’s military power grows every year and the person in charge will assume responsibility for some quite pressing issues. The South China Sea and the perennial issue of Taiwan’s independence (read: relationship with the US) as well as the country’s awkward relationships with North Korea and Russia will keep the top man very busy indeed.

A smaller matter further south may not be high on China’s agenda, but Australia is building up its relationship with the US once again by allowing US troops to be based in Darwin. The Chinese won’t necessarily see that as a friendly gesture.

China’s overall new political leadership team is close to being announced, so the world will be watching and waiting to see which direction the country will take.