The US Presidential Election in November 2004 is now the event that all investors need to keep uppermost in their minds.
Under a presidential system the election cycle has a strong influence on economics. It is perhaps no coincidence that the US presently has three giant stimuli prodding its huge economy to grow: low interest rates, tax cuts and a falling currency.
And the beast has reacted with a nice spurt in Q3 economic growth and a nice crop of Q3 financial results. This is enough to maintain heartbeats on Wall Street, and more than enough to ward off the return of the bears and any talk of a financial collapse.
However, there is still a very serious undercurrent to this position. As Deutsche Bank Chief Economist Professor Norbert Walter said in Dubai last week ‘2005-6 still keeps me awake at night’.
His reasoning is that the winner of the 2004 US Presidential Election will have ‘the worst job in the world’. There will be the unprecedented twin deficits to correct with higher taxation, plus the need for higher interest rates to defend the US dollar.
Thus it is a fair bet that the financial crash has been postponed rather than cancelled. It could well be that the day of reckoning is still on the horizon.
Certainly if you look behind the recent stock market rally there is little to support a more optimistic view. Gold is approaching $400 per ounce, and the oil price is stuck around $30 a barrel, above the Opec price band of $22-28. The US dollar is at an 11-year low against the British pound sterling, and bond markets still point to higher interest rates in the near future.
Under such a scenario it would be folly indeed to commit money to US equities. All the risk is stacked on the downside. A sideways stock market drift can be supported so long as the US continues its policies of economic profligacy, but this can not continue for ever.
Like the credit card spender who eventually reaches the limit on all the cards that he or she has managed to obtain, and has re-mortgaged the house, there comes a point when lenders will lend no more. Or at least when they will only lend more at a huge rate of interest that will bankrupt the borrower.
Perhaps the US can sidestep this economic reality. But would you really want to put your money on it? Why take the risk? Better to diversify into assets in other currencies and sit on the sidelines.
Is the upside potential really good enough to justify doing anything else? For the US Presidential Election next year may herald a major realignment of global economies, and for once the US does not look like being the winner.