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October 27, 2010

what the markets think about the election

I was in a foundation board meeting today, in DC. We heard the usual presentation from investment advisers about the state of the endowment and the future of the markets. Their boilerplate document treats as a positive factor the coalition governments in Britain and Australia and the likely divided government in the US starting in January. Apparently, there will be more checks and balances now, hence more stability and predictability. I presume such thinking helps explain, or justify, why many large investors are backing Republicans.

The coalition government in Britain has actually launched a radical experiment in austerity during a recession that, at best, makes the future there quite unpredictable. Meanwhile, in the US, I fear we will see gridlock that preserves the status quo, which means a long, slow, painful climb out of the hole we're in.

One interpretation: the finance guys are right. Divided government means stability, and that's good for "the economy."

A second interpretation: Republican and Tory victories are good for financial markets but not for most people. Investment advisers know that but don't say it, even to their own clients, for fear of alienating people who might have different values.

A third interpretation: Investment advisers believe exactly what they write, although they are too optimistic about the public benefits of conservative policy. Their sincere but wrong beliefs tell us something about the micro-structure of ideology.

I don't know which is correct, but I do know these folks are advising their clients to invest in "emerging markets." In other words, welcome tax cuts here but outsource your capital to countries with actual growth.

October 27, 2010 6:42 PM | category: none



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