Will The Tea Party Congress Bring Recovery?
By: John Browne
Senior Market Strategist, Euro Pacific Capital, Inc.
Friday, 7 January 2011
While the markets have known for almost three months that the 2010 election delivered the House of Representatives to the tea-infused Republican Party, I did expect a greater reaction on Wall Street to the formalities of the opening sessions of Congress yesterday.
If the Republicans make good on their campaign promises, we will see cuts in government spending and an end to fiscal stimulus. Given that short-term stock market performance is very much dependent on such government assistance, the current rally is hard to fathom. Meanwhile, gold and silver have experienced a counterintuitive correction (although to be honest, pundits are making much more of this 4% pullback than the size of the move merits). Could it be that the markets now believe that fiscal restraint in Washington is the best pathway to growth? Can a leopard really change his spots?
Not likely, I say. Rather, I believe that we are simply seeing some short-term momentum. Speculators tend to buy and sell on momentum, while investors tend to accumulate on dips and sell on fundamental changes. Anyone with a pragmatic view of Washington must realize that real change is unlikely.
Most new Republican representatives are well-meaning and genuinely wish to honor their election pledges of reducing the massive government spending and regulations that are strangling the US economy. If they hold enthusiastically to their good intentions, austerity likely will hit America as the natural counteraction to the massive and irresponsible asset booms of the late ’90s to mid-aughts. The question is whether these Republicans will stick to the guns when voters feel the pinch. My feeling is that they are more likely to seek political cover.
Given that many European countries opted for austerity in 2010, it is instructive to gauge the current political situation across the Atlantic as a preview of what may confront Washington.