Yes, I know, of course there will be a "new" President. The question I meant to ask was will he be from the same party as the one who has hit his "use by date"?
According to the two latest Gallup Polls I've seen, George W. Bush has an 8-10 point lead over Al Gore. What I don't know is whether those polls were taken on the morning of October 18. You remember? That was the morning when U.S. stock markets melted down - for an hour. According to eye witnesses - and participants - the mood on the floor was scary. Well, as we all know now, someone didn't panic. By the end of trading on October 18, the Dow had clawed back most of its early losses (as did the Nasdaq), although it still closed below the 10000 level on the day. By the end of the week, of course, the indexes had bounced higher again. And of course, when U.S. markets bounce higher, everyone elses' markets bounce higher. What had been looking extremely ugly in Asia and somewhat unpleasant in Europe was looking much better by the close of the week.
Judging from what has been seen of the "debates" down here in Australia (mercifully, we don't get the campaign ads), it doesn't seem to make much difference who wins. The key U.S. policies, specifically as they relate to intervention in foreign nations and in global finance, are not set by the President. What the President (and Congress) are in charge of is the means by which these key policies will be paid for.
In this regard, about the only encouraging sign we have seen from any of the four contenders is Mr Cheney's musings on cutting back to some extent the overseas presence of the U.S. military. Mr Bush's contribution on that front was the bold assertion that he didn't think that the U.S. should have become involved in Somalia.
Yes, there will be a "new" President. Yes, he may well be from the "other" party. But all indications are that the U.S. Political establishment is contemplating business as usual after November 7.
As the gyrations on U.S. markets since Labor Day make clear, business as usual here is becoming a strain. The one thing that has not gyrated, but has kept on going up, is the global exchange value of the U.S. Dollar. The "Strong Dollar Policy" of Mr Rubin and now Mr Summers is vitally necessary to the U.S., simply because the U.S. must have a continuing inflow of foreign capital to fund its various deficits (trade, current account, etc.). It remains apparent that the Dollar is still attracting the world's capital. What is becoming less apparent is this. Once the rest of the world has bought the Dollars, where are they going to put them?
If one likes excitement, the U.S. stock markets are perfect. If one likes high stakes gambling, the U.S. corporate bond market is even better. The stock markets are melting down on almost a weekly basis, only to be rescued just as often. The corporate bond markets are a minefield, in which yield spreads are blowing out to an extent much bigger than they did in 1998, when the whole structure almost keeled over.
Of course, U.S. Dollars are also useful to buy all the things that are internationally traded in terms of U.S. Dollars. Of these, the most obvious is Oil. Unless you have your own, you have to buy Oil with U.S. Dollars. How much longer that is going to be the case is not clear, there have been many reports of nations suggesting that Oil might be priced in terms of other currencies. But so far, Oil is priced in Dollars, and only in Dollars.
U.S. Treasury debt is another place where U.S. Dollars can be parked. These are, of course, regarded as the ultimate "safe haven". While Treasury debt has retained its purchasing power quite well, the fact remains that the yield curve on this paper is "inverted", and has been since February. This has in the past been an infallible lead indicator of a recession (at best). And judging by the performance of U.S. stock markets over the past two months, and the increasing signs that price inflation is bubbling under, a U.S. recession (at best) can be seen on the horizon.
Finally, there is Gold, which has become a miraculous metal. No matter how volatile the financial system becomes, and with the combination of the soaring Dollar and whipsawing stock markets, it has become very volatile indeed, Gold does precisely nothing in $US terms.
As we have already pointed out elsewhere in these commentaries, Gold has been nearly as volatile as everything else in terms of most major world currencies. It is only in terms of THE major world currency that it has been quiescent.
Here's a quote from the Gold Commentary of a week ago:
"Outside the U.S., Gold has been a very good preserver of capital this year. Inside the U.S., it beats the stock market hollow, but it doesn't beat the Dollar. If and when the situation comes where it DOES beat the Dollar, then the jig is up."
That is the present situation in a nutshell, and it will continue to be the situation until either the Gold price breaks out of its four month trading range ($US 270-80) and/or until the Dollar reverses its long climb against the currencies of the world.
The problem for the U.S. financial establishment has been and continues to be that the first would inevitably bring on the second. The U.S. cannot afford a lower Dollar. It cannot afford anything that would stem the flow of foreign capital on which it continues to finance its present economic structure. The difference between the U.S. and Australia - which also runs huge current account deficits and whose currency has been plummeting for months - lies in two facts. First, the U.S. is the most powerful nation in the world. Second, the U.S. Dollar is the world's trade currency, reserve currency, and to this point, the world's most desired financial instrument.
The vested interest in preserving this arrangement is GIGANTIC. The fact that Gold has held its own in $US terms - while skyrocketing in terms of most other currencies - is impressive in itself. While possessing yourself with patience, remember this. The fantastic universe of financial instruments, and the even more fantastic universe of derivatives which connect to these instruments, are viable as long as the underlying asset is viable. The asset underlying EVERYTHING is the U.S. Dollar. That's how big the stakes are.