What does a US presidential election mean for investors?

George Soros had an interesting message for the World Economic Forum in Davos. His contention is that President George W. Bush's pre-election economic policies will produce a boom in 2004 and a crash in 2005.

Now surely this is too simplistic? How can it be that economics can become so warped by politics? And yet this seems to be the case.

In the past year or so we have seen US tax cuts, high levels of government expenditure and ultra-low interest rates. This is an economic stimulus package designed to kick even a stubborn mule of an economy into action.

It has certainly worked. US GDP is now motoring ahead. However, the budget deficit is rising and so too is the huge trade deficit with the rest of the world. At the same time the US dollar has fallen against the euro and other major currencies and gold.

So far Asian countries have continued to acquire bonds denominated in US dollars despite very low interest rates and a devaluing currency. But how long can this continue? Does not the iron rule of the market point in the opposite direction?

The danger is that everybody decides to run for the door and sell US assets at the same time, like on Black Monday in 1987 or worse. What would be the alarm bell that might cause the exit stampede?

Let us suggest George W. Bush makes it back to the White House. What happens next? Remember his father's promise 'Read my lips, no more taxes' which of course was followed by a tax rise. George W. will follow in his father's footsteps once more.

This time it will be not only taxes that have to go up to pay for profligate foreign policy, interest rates will also have to rise to steady the dollar and prevent inflation. It is not a very joyous post-election outlook. But then once re-elected Mr. Bush will never have to face an election again.

Now in this economic scenario, one which will not be discussed much before the second half of the year - except by acolytes of Mr. Soros, a not unsuccessful investor - what should the rational investor do?

Sell into any rally would be one obvious answer. Do not get caught long on US stocks or other financial assets when the markets turn down. Similarly any recovery in the US dollar is a chance to switch to another currency.

On the other hand, after the 1987 crash the negative correlation of GCC stock markets was very pronounced. Thus a contrarian might well plump for investment in GCC real estate and stocks as a necessary portfolio readjustment. And given that other global capital markets are likely to follow the US downwards, where else could you invest?

Gold! Yes, most probably the yellow metal will rocket in value during a global financial crisis. But it is priced in US dollars and may not hold up so well against other currencies. In any event a warning from Mr. Soros is not something to be ignored and investors do so at their peril this year.