AGI’s Neil Dwane sees extreme politics around fiscal cliff should Obama win

Neil Dwane, CIO Europe at Allianz Global Investors, has summarised his view of the upcoming presidential election following a fact-finding trip to the US.

If president Obama is returned, investors should be prepared for extraordinary political brinkmanship on the fiscal cliff issue, particularly as a hung Congress is then likely. Political uncertainty from the fiscal cliff and the presidential election is damaging the animal spirit of the US economy.

President Obama won the 2008 election on a mandate of change. In the 2012 presidential election however, voters are questioning whether, in fact, anything has changed. The mood in the US is poor, with a third of people feeling the country is on the wrong track. While Obama’s presidency has, therefore, been a disappointment, comments by republican candidate, Mitt Romney such as, “47% of Americans are government-dependent victims” have made the Republicans appear so unlikeable that US voters feel they have no choice but to back Obama.

Washington believes the election will be a closer call than the polls suggest and expects that president Obama will serve a second term – providing he can encourage his supporters among America’s youth, the Hispanic and African American communities to go to the polls.

For Mitt Romney to win he has to win Florida and Ohio but the polls show him trailing by 20 points in Ohio and history shows that no Republican president has ever won the election without winning Ohio. Only if Ohio starts to turn, therefore, should we start to think about a change of president.

The Economy and Finance

If Obama wins the presidential election, the problem will be a hung Congress and Obama has previously shown little sign of compromise. Consequently, the chance of any serious deal is significantly lower if Obama is returned to the White House. This is creating real concerns on both sides of the House that the fiscal cliff will be a re-run of August 2011, when we nearly went over the debt ceiling issue. With Congress likely to take the fiscal cliff to the wire at year end, investors should, therefore, be prepared for extraordinary political brinkmanship and any solution is likely to be the minimum they can deliver.

The rest comes down to whether voters believe in ‘big government’ or ‘small government’. After four years of ‘big government’, Mitt Romney is making a strong case that it hasn’t worked and that it’s time for an alternative. The Republican perspective is that Romney has shown an ability to get deals done and, as a Republican Governor in Democratic Massachusetts, to push through structural reforms like health care reform. They argue strongly that voters should give him a chance because, unlike Obama, he understands the meaning of the word compromise.

There is also much concern about the health of the US economy. The reading is that Washington doesn’t know how bad the real economy is because it exists in a bubble. Consequently, Washington is less supportive of QE3. On both sides of the House there are questions about why Ben Bernanke is continuing to try to pump the US economy.

Although the Democrats are very clear that nobody leaned on Bernanke for more QE, to increase Obama’s chances of re-election, it is evident that the Federal Reserve is worried that any further uncertainty over the fiscal cliff could cause another US recession. Overall, political uncertainty about the fiscal cliff and the presidential election is damaging the animal spirit of the US economy. Observers in Washington are also very concerned about Europe but feel that increasingly the Germans and EU are containing the situation.


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