What is going to happen after November 7th to financial markets?

It is often observed that the first casualty of war and elections is the truth. There is a suspension of reality in the name of a higher objective. In the US mid-term elections this means Republican control of congress, crucial if George W. Bush is not to become a neutered President or worse face possible impeachment for his actions in Iraq.

Treasury Secretary Hank Paulson has made the maximum use of his friends on Wall Street as a very recent ex-chairman of Goldman Sachs. Word is that Goldman Sachs started the oil price plunge by switching a key asset allocation this summer.

The gold price has also been hammered to preserve the illusion of inflation being under control. And the entire Wall Street mafia has been engaged in the massive hype of the sucker's rally of the past couple of months.

End game

Now the game is almost up! Economic realities, however unpleasant, can resurface. Step forward the US housing crisis which threatens a recession in 2007. The dismal headlines are already starting to appear, with a 10 per cent fall in new home prices in September the worst figure in 30 years.

Then what about the yield curve inversion, now three-and-a-half months old? The Federal Reserve itself admits that the past six yield curve inversions of longer than three months have all led to a recession. Not a fact that Wall Street has paid much attention.

Indeed, the most we will get from commentators is a note that historically adverse mid-term election results in previous administrations have led to a correction in asset prices. It could be that history repeats itself on this occasion.

Caveat emptor

Surely, any wise investor would be taking money off the table now and cashing in on any gains from the past few months. For in a big sell-off the good tends to get dragged down as well as the bad, and almost everything suffers.

Cash and precious metals are the best safe haven in an investment storm, and indeed the US dollar will probably rally as it did in the sell-off this May. But what happened in May could be just a dress rehearsal for something much bigger this time.

After all US asset markets, and all other global markets except perhaps the Middle East, are priced for a strong growth economic scenario which looks less likely by the day. And if it did come true that would mean higher interest rates to combat inflation which would be bad for markets anyhow.

This is a lose-lose situation so why stay around to find out if this is going to be like 1987 again?