Nomura rates analyst George Goncalves was in Japan during the US election, and so he got an interesting, un-conventional perspective on what it all meant:Region’s Pre/Post Election Thoughts: We were fortunate enough to have the opportunity to gauge the reaction to the US elections from a Japan/Asia perspective. Most investors expected a tight race before Tuesday night’s outcome, but the majority of clients expected President Obama to be re-elected. We were in Japan as the US state results were released. It seemed that Japan rates accounts were already long (recent MoF data confirm this) as they expected an Obama win to trigger a micro rally after the results. Following the election, many clients were surprised with how narrow the win was with the popular vote and were worried with the potential for the US remaining split and polarised by different factions. They had many questions and concerns of how negative future policies may become in the US given that a repeat of the divided government will be one most likely mired in gridlock. Lastly, they saw parallels to Japan’s political scene of the last decade where the focus at one point turned to cutting back government spending, which then led to inferior plans that entrenched them in a low growth world with multiple lost decades.
Anyone who has read Richard Koo (who is also at Nomura) knows how damaging Japan’s bouts with premature austerity have been, as attempts at consolidation were met with bouts of re-deleveraging, lost taxes, higher deficits, and more pain.
The US is in a bit better situation, and it’s been impressive how the US has avoided the world’s austerity fever so far, but… it seems inevitable that that’s coming to an end. A pure push off of everything (taxes, spending cuts, etc.) seems impossible, even under the most optimistic scenario.
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