Monday, 20 August 2018

All eyes on US as contest unfolds

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So, all has been said which can be said and it is that wonderful time when I can analyse the outcome of the election before the votes have even been cast. Irrespective of who sneaks home – my money would still be on the incumbent – there will be no clear mandate, one way or the other. The US is split down the middle. On the law of probabilities, Mitt Romney will carry the popular vote but Barack O’Bama will have the electoral college behind him.

Anthony Peters, SwissInvest Strategist

They explained on the radio this morning what happens when the the electoral college is tied, how the House and the Senate elect the President and the Vice-President, respectively, but failed to mention that electors can still individually change side when they cast their vote, so even if tonight’s count were to reveal a tie, the game’s not over.

Anyhow, were it to come to a result of extreme closeness, as in the case of Florida with its multiple recounts and the hanging chads in the 2000 presidential election, the outcome would surely be determined in the courts and not in the electoral college.

However, as tight as the call may be, the outcome might not reflect this. In the legendary fight between Richard Nixon and John F Kennedy in 1960, the popular vote went to the latter by 34,220,984 to 34,108,157 (on a turnout of 63.1%) and by just over 12,000 votes, but the electoral college split was 303 to 219.

Kennedy went on to become one of the most loved Presidents in the nation’s history. I believe he would have still been, even if he had lived to serve out his term and most likely a second one and Nixon finally took the White House in 1968 and again in 1972, only to be hounded out of office as its most reviled occupant of the 20th century.

As far as the elections for the House of Representatives and the Senate are concerned – the presidential election has been so tight that there has not had too much news coverage over there – the forecasts are for the former to remain Republican and the latter Democrat. This means that, irrespective of who wins the Presidency, the legislative process on Capitol Hill will remain a messy and unpleasant nightmare.

Nobody, either at legislative or executive level, will be able to claim a clear mandate. The leader of the West will not be in a position to do much leading and, let’s face it, the fiscal, budgetary and economic issues which are facing the US will probably keep him busy enough as is.

Managing meaningful spending cuts

The eurozone crisis in general and the cases of Greece, Portugal, Ireland and Spain in particular have demonstrated how difficult it is to manage meaningful spending cuts without impacting on overall economic performance – no surprise there – and we will have to watch what happens over the pond during the coming years.

Even with the optimism which springs from the developing pick-up in economic activity, times will be tough and neither Republican nor Democrat rhetoric (I struggle to call it an ideology) will make much of a difference to that. I look forward to being an active observer.

Gunning for S&P

Meanwhile, a court ruling has been handed down in Australia against Standard & Poor’s which will award compensation to local councils which bought structured products on the back of a Triple A rating placed by the agency on some ABN stuff. I don’t know what the products in question were, but I do recall the appearance in the market of the ABN created CPDOs (constant proportion debt obligation).

However, what the banks were doing was quite simply arbitraging the ratings agency methodology. They were in fact actively hiring analysts from the agencies in order to help them do just that. The CPDOs, possibly the cleverest structured credit product ever (for what that’s worth), took the ratings arbitrage to the extreme and, I must confess, we were all pretty impressed by the way that ABN, a sleepy Dutch bank, had left all the clever investment banks for dead.

I don’t know the details of the case but condemning the ratings agencies is, to me, tantamount to suing parliament for creating tax laws which leave loop-holes for corporate and private tax evaders to slip through.

Mis-selling is one thing but gunning for the ratings agency is something completely different. I don’t know who obliged the buyers to rely on the agency ratings but aren’t they more culpable that the agencies themselves? I suspect that the judge, along with most of the rest of the world, does not understand the whos, whys and wherefores of the financial world.

I’m not sure that even I do either but if this ruling is not absolutely pulverised on appeal, we might as well stick to rolling three month bank deposits, pack up and go home. Mind you, that should not let some of the banks with their deliberate and occasionally malicious ratings arbitrage off the hook.

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