Morning After or Eve of Destruction

November 7, 2016

The winner of Tuesday’s U.S. presidential election remains very much in doubt. Final opinion polls on nationwide popular voter preferences give Clinton a far thinner lead than the 75% likelihood that London bookies had attached to British voters rejecting the proposal to leave the EU on the day of that referendum vote 4-1/2 months ago.

One wonders as the U.S. and world approach a momentous decision whether we are at the Eve of Destruction as the 1960s song sung by Barry McGuire implied, or whether there has to be a morning after, the theme song of the 1970s Poseidon Adventure sung by Maureen McGovern. In fact, the two messages are both similar and hold relevance to current U.S. political circumstances. Eve of Destruction is a sarcastic response to popular disbelief in the face of a world in geopolitical distress.

Citing a litany of core strains, Eve of Destruction has this to say to those protesting that things are not really so dire: “And you tell me over and over and over again my friend, you don’t believe we’re on the eve of destruction.” The U.S. election tomorrow pits more than two candidates with widely different experiences, styles, belief systems and policy plans. Underlying divisions involving class, ethnicity, gender, and education will not be resolved by an up or down voter verdict. Democracy either way will struggle to function effectively and as intended for the foreseeable future thereafter.

McGovern’s song expresses hope, but it is hope with constraints: “There has to be a morning after if we can hold on through the night.” One part of America will wake up feeling relieved and vindicated, but the slice of the population that loses will be more anxious and disconnected than ever. The tension of mixed emotion on Wednesday will be profoundly global, since issues like the response, if any, to climate change are at stake. A vast audience far exceeding the list of travelers on the U.S.S. Poseidon will be decided by those registered U.S. voters who actually bother to vote.

One lesson from the British Brexit referendum is that financial market activity will be concentrated on U.S. assets. That means the dollar, Treasuries, and U.S. share prices. Compared to closing quotes on June 23, the day of the U.K. referendum, the dollar has soared 20.8% against sterling, but movements relative to other advanced economy currencies have been limited. The dollar is up 3.4% against the euro but down 2.1% against the yen. It has risen 4.8% against the loonie, 1.5% relative to the Swiss franc, and 0.8% versus the Aussie dollar while edging down against the kiwi by 0.7%. Britain’s Ftse has climbed 7.4%, while the Dow Jones Industrial Average shows just a 1.2% net advance since June 23. Even though the Bank of England halved its policy interest rate and the Fed is expected to tighten in December, the 10-year British gilt yield has risen 17 basis points since the referendum, more than twice as much as the 8-bp net rise in the 10-year U.S. Treasury yield.

Another lesson from the U.K. post-referendum experience is that the market reaction to the U.S. election may come in waves, with a sharp initial move followed by subsequent tremors and alternating periods marked by relatively calm market consolidation.

It’s become abundantly clear during the long U.S. campaign that market participants, both in the United States and abroad, much prefer to see Clinton be the next U.S. president than Trump. Investors are not under any illusion that happy U.S. days are around the corner if she wins on Tuesday. But a Trump presidency, to coin one of the Republican candidates most used words, is considered a disaster until proven otherwise.

The results of senate races, seats in the house of representatives, and governor races matter, too. Getting through America’s night of tension will encompass a much longer time span than a single day. Speaking metaphorically, American democracy is suffering now from a nasty case of the shingles caused by the same virus that exploded as chicken pox during the 1860s. World financial markets are trying to assess the potential costs and damages of the present relapse. That process figures to extend for years as well.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.




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