While there was clarity in the recent election results - there will not be any impending vote recounts that would leave control of the country hanging in the balance - Tuesday night’s results did nothing to change the basic dysfunctional dynamic between the two political parties. Now the fiscal cliff will have to be addressed in the coming lame duck session, and it won’t be easy to find a solution... Congressional Republicans retained the House majority — and by extension, in their view, a stance against higher taxes. Democrats kept control of the Senate and the White House, which they see as an affirmation of their view that deficit reduction must include some serious tax increases.
Victory guarantees the president nothing more than the headache of building consensus in a gridlocked capital on behalf of a polarized public, that has become tired of struggling with heightened uncertainty. If the president begins his second term under any delusion that voters rubber-stamped his agenda on Tuesday night, he may be doomed in his second term, and so is the outlook. The probability of Ben Bernanke’s tenure at the Federal Reserve being extended has also gone up – Mitt Romney had expressed his dissatisfaction with Bernanke’s wide-ranging and unconventional measures.
In this issue of the PunchLine I reiterate my concerns regarding the growing gulf between the behavior of investors enamored with monetary largess and the realities on the ground of globally weak economies... Add the risk of more corporate-earnings disappointments and we have a situation that needs remedying. The continuing slowdown in the global economy through late 2012 will almost certainly damage household and business outlooks even into 2013… and make fiscal repair more difficult. Indeed, visible signs of growth acceleration are difficult to find as the advanced economies remain inadequate almost across the board and the expected cyclical recovery in developing countries will be slow to develop, and probably not up to previous peak trends.