``The only conquests which are permanent and leave no regrets are our conquests over ourselves.”- Napoleon Bonaparte
JUDGING from the reactions of the global financial markets in general, the recently completed elections in the US had been essentially discounted, as markets have not revealed signs of any MAJOR twitch YET.
Since the US markets today appear to be the inspirational leaders in the flow of funds activities across the world, there could be some repercussions to the recently concluded political exercise where the incumbents at the Legislative Chamber had been palpably dethroned.
Strangely enough, despite the so-called “economic recovery” in the light of largely buoyant financial markets, the setback by the ruling party [GOP] appears to reflect on heightened discontent with the present political policies. Stated differently, the economic and financial status of the voting population usually undergirds the satisfaction level with the political leadership, where the defeat by the incumbent could possibly signify inauspicious financial standings by the majority, or that the economic recovery had been largely imbalanced.
If history were to be used as basis for measuring performances of the financial markets under a political gridlock, based on a study by the Financial Analysts Journal (written by Scott B. Beyer, an assistant professor of finance at the University of Wisconsin-Oshkosh; Gerald R. Jensen, a professor of finance at Northern Illinois University; and Robert R. Johnson, a managing director at the CFA Institute.), Mark Hulbert founder of Hulbert Financial Digest and columnist for CBS Marketwatch observed that there had been little statistical impact on stockmarket performances. Mr. Hulbert wrote (emphasis mine), ``The researchers found no evidence that the stock market performed better during periods of gridlock. In fact, they found limited evidence to the contrary: The stock market actually performs slightly better during periods of harmony. However, in an interview, Jensen stressed that this finding in favor of harmony is of limited statistical significance. The most important takeaway from their research, according to Jensen, is not that harmony is particularly good for stocks; instead, the important lesson to draw is about gridlock: The markets do not perform any better when it exists than when there is harmony.” Mr. Hulbert concludes, ``Leave the political handicapping to others, and focus your investment energies on analyzing other factors more directly relevant to your portfolios.”
What doesn’t work for the stockmarkets works for bonds, a favorite straight shooting economic opinion writer, who incidentally is not a formally trained economist, Bloomberg’s Caroline Baum quotes Jim Bianco, ``Historically, gridlock is good for the bond market, according to Jim Bianco, president of Bianco Research in Chicago. ``It's not the composition of government per se but the pace of regulatory growth that affects financial-market performance,'' Bianco says. ``When the Federal government is divided, as it last was from 2001 through 2002, regulatory growth nearly grinds to a halt...The bond market does well in this environment'' -- which makes sense since regulation raises the cost of doing business -- and its returns are over twice the average of all periods.”
Legislative impasses lessen the odds for the imposition of more regulatory policies, which essentially allows, to quote Ms. Baum ``market's natural ability to provide the goods and services consumers want at prices they will pay”. Put differently, the lesser the economic meddling, the more favorable it is for the markets and for the economy.
At the end of week, we observe that US stocks across the board were sharply higher following last week’s reprieve, while the US bond markets rallied strongly to expunge most of its decline during the previous week, as shown in figure 1. It is the same story for the Philippine asset class.
Figure 1: US Government Securities (red line) and Emerging Market bonds (black line)
Also superimposed with the US Government Securities “bonds” Index [USGAX] is the JP Morgan Emerging Debt Funds [JEMDX] which has depicted an even better performance. This means that global bonds led by the US have rallied strongly since end-June (note of the synchronized bounce by both indices) or even prior to the culmination of US elections whose result was largely expected based on survey polls.
Come to think of it, the message of the markets has been diametrically opposed. The bond markets have been expecting or has priced in a SIGNIFICANT slowdown scenario, whereas the equity markets have been reflective of a NO LANDING/strong growth scenario. ONE of which could eventually be proven wrong.
Past performance do not signify future outlook, yet if the resiliency of the world’s economy were to be measured by exports alone, here is what Panglossian economist Dr. Ed Yardeni of Oak Associates has to say, ``A global boom in exports? You bet! Exports are on steep uptrends and at or near record highs in most major economies. Exports are growing above 20% y/y in Russia (29.9%), China (29.3), India (21.7), and Germany (21.0); above 15% in Argentina (18.2), Brazil (18.2), and Indonesia (16.7); above 10% in Mexico (13.3), France (11.5), South Korea (11.3), and Italy (11.1); and high single-digits in Japan (7.9), Turkey (7.7), and the UK (7.5). Canadian growth lowest at only 1.5%....Any good news in September's trade report? US exports and imports are at record highs, reflecting a global economic boom. September's merchandise exports rose twice as fast as imports, i.e., 20.0% y/y vs. 9.7%. Meanwhile, the politically sensitive US trade gap with China hit another one-month and 12-month record in September, and could come under renewed scrutiny given the new Democratic majority in both the House and Senate.”
Oops, politically sensitive trade gap. Let us leave that for a moment and proceed to a dissenter, the high profile chief economist of Morgan Stanley, Mr. Stephen Roach, who argues that the Political Gridlock today could be timed wrongly as the US economy is in a fragile state, he wrote, ``With a split Congress at worst and a Republican White House, such an outcome now seems quite possible — at least on paper. In my view, that would be tragic — gridlock is the last thing America needs. Granted, there are times when government can, indeed, get in the way. But there are also circumstances which demand leadership and decisive policy actions.”
Mr. Roach pinpoints three areas of concern for the need of political harmony, namely chronic savings problem, Federal government’s structural fiscal deficit and Trade policies.
In a political stalemate landscape, the “chronic savings problem” would be dealt with the status quo or to quote Mr. Roach ``rely increasingly on the Kindness of strangers” which essentially exacerbates the currency and real interests rate risks dimensions, if and when foreigners lose confidence on the stability of the present system.
On the other hand, the fiscal deficit dilemma in a slowing economic environment could exert revenue pressures on growth-sensitive areas which may lead to ``another round of cyclical deterioration in the federal budget deficit and renewed pressure on national saving and external financing” notes Mr. Roach.
And finally, the growing risks of protectionism in the light of present trade policies, or in his words, ``Washington in effect says no to globalization and threatens sanctions on offshoring.”
While both analysts belong to the opposite side of the fence in terms of confidence levels in view of the present financial and economic milieu, we can observe that both agreed on one issue, the trade issue. 
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