Massachussetts senate election shows connectivity between politics and economy


I am continuously surprised by the amount of connectivity between politics, markets, trade, taxes, countries, economics, etc.  The win by Scott Brown, in the special election to replace Massachusetts Senator Ted Kennedy is a reminder of just how closely woven we are. On another note, the election result has really appeared to increase market volatility.  There are many lessons to be learned by watching related reactions.

Scott Brown, a republican, won a special election in Massachusetts and there are many inferred developments.  Many believe this is a vote by the people reflecting on the amount of spending by our Government and the rush for Health Care reform.  To some the election symbolizes what may happen in the 2010 normal election for new Senators and Representatives.  Whether or not this is true time will tell, but it is an indication to me that people are frustrated.  I believe Democrats assumed they would hold this seat by default in a state that has a liberal political history and Browns opponent seemed to have a large lead in the polls just a few months ago.

This surprise election result seems to have had some effect on our currency, which consequently appears to be influencing many asset prices.  I have been beating the drum in articles over the Federal Reserve’s intent to increase asset prices by increasing the nation’s debt level and devaluing the dollar, (albeit this was all done in order to prevent a financial meltdown.)   This policy has worked as asset prices have increased, but some analysts were worried about the long term ramifications of excess debt.   Many have worried about the extra costs resulting from Health Care Reform, even though arguments abound on whether this large reform would increase or decrease debt.  (The argument seems to be divided among party lines. Is that surprising?)  Well Mr. Brown’s election win appears to have placed the Health Care Reform act in great jeopardy, which depending on what side of the argument you are on, should prevent more debt. 

Consequently, so far on the trading day after the special election; the dollar is stronger, the stock market is weaker, and commodity prices are down.  The difficult part is determining if the election is the direct culprit.  Many of these movements could be small corrections in assets that may have been extended to the upside, as if they were waiting for some catalyst to withdraw from such excess premiums.

Somehow, I doubt that the economy is going to suddenly springboard strongly forward, so Government intervention will most likely continue to be over weighted towards extra stimulus.   If this is true, then the continued trend for the dollar would be to weaken further after this upside correction runs its course.   Currently, the dollar has been a key determinant in dictating asset prices recently and this should continue until another macroeconomic theme takes center stage.  Remember, just like the weather and politics, everything is interconnected and can change quickly.   In inclement times it is nice to have a good compass.