Kass: Nothing to Be Done
This blog post originally appeared on RealMoney Silver on Nov. 3 at 7:29 a.m. EDT.
"I don't see anything about this President that speaks to making peace and getting along with the other side of the aisle, and I don't see the other side coming together with him either because, beginning tomorrow, we will be in Presidential-election mode."-- Jim Cramer, " Political Gridlock Is Bliss"
In 2008, the Democratic tsunami-like victory was overstated (in its consequence) by the pundits. Rather, it turned out to be a blessing for the Republican Party.
Similarly, the 2010 Republican tsunami last night is likely being overstated in its positive market consequence going forward.
Most commentators expect the administration to move to the center, and, in doing so, to extend middle-class tax relief indefinitely and, for the top taxpayers, to grant it an extension of two years. Those pundits would add, for dessert, expectations for a reduced (20%) tax on dividends (rather than going to the taxpayers' marginal tax rate as recommended by the administration).
I am dubious.
Interestingly, I view the anticipated inertia, gridlock and growing governmental irrelevance (Jim's great term) emphasized and supported as a positive by Jim "El Capitan" Cramer's
late yesterday as a negative -- as I do negatively view, unlike Jim, the likely efficacy and
.
Importantly, the needed fiscal response and transformative jobs policy are no closer at hand today than they were yesterday before the election results were handed down. Attention to deficits, too, is a loser, with the impractical and more radical agenda (in their suggestions of closing important departments of the U.S. government) of the Republican Party's right wing (the Tea Party) not demonstrably better than the Democrats in holding down the current account balance.
Arguably, with monetary (not fiscal) policy front and center, investors in the gold market seemed to have been handed an election win last night.
I stand by my more pessimistic investment conclusions contained in my closing remarks yesterday:
The market has continued to be boosted today by the growing probability that the Republicans will comfortably win a House majority -- though the likely outcome is that the Senate will remain controlled by the Democrats. Despite protestations from several talking heads (e.g., Strategas and Bank of America/Merrill Lynch) over the last half hour on CNBC, a Republican Senate majority would likely require wins in California, Connecticut and Washington state. Victories in these states by the Republicans are unlikely. In all likelihood we will be left with gridlock after the midterm elections are over. My view is that while gridlock is seen historically as a plus for the markets, it's different this time. The domestic economy faces numerous challenges to growth -- in the form of an overleveraged consumer, still-elevated joblessness and large fiscal imbalances (local, state and federal) -- that need to be addressed posthaste. Indeed, the current anemic trajectory of growth exposes the economy to policy mistakes, a further drop in consumer and business confidence and other unknown and exogenous factors (such as geopolitical risk). Stated simply, a government divided is not a price/earnings-expanding event, nor is it a recipe for a new leg of a bull market. I would sell the market's strength into today's election results and tomorrow's quantitative easing announcement.
Doug Kass writes daily for
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Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.
