Republican Scott Brown’s victory in the Massachusetts special election for the Senate seat vacated by the death of Teddy Kennedy has invigorated the Bear market and the U.S. Dollar. The reason why is because with his victory the U.S. republican party now has a sufficient number of votes to block any new legislation that could stem from the U.S. Congress.
The shift in the balance of power in the U.S. Congress has significantly increased the risk that the next economic meltdown will not be avoided. The only reason why the global economy narrowly avoid a full-blown depression after the meltdown of the financial markets in 2008 is because the U.S. Congress heeded the advice and warnings of Fed Chairman Ben Bernanke and Secretary of Treasury Henry Paulson. The U.S. Congress under a Republican President acted swiftly when it passed the $700 billion TARP to aid financial companies such as banks and insurance companies.
For many reasons, including partisan politics and the wrath of U.S. electorate against deficits already incurred from the bailouts of the financial and automotive industries in 2008 and 2009, it would difficult to envision the current Congress acting so swiftly in the event that another financial crisis should occur. Therefore, the risk to the U.S. and global economies increased with the election of Brown. The result is that this increased risk will have to be priced into the global stock markets. That is why all global stock markets were down yesterday, the day after Brown was elected. The beneficiary of this increased risk is the U.S. Dollar and that is why it hit a five-month high against the Euro only yesterday.
Finally, a strengthening U.S. Dollar is bad for U.S. exports and bad for U.S. business. Therefore, the bear has been invigorated, and I expect that the U.S. stock market will undergo a significant correction during 2010. Investors should continue to maintain 80% of their liquidity in short-term U.S. government securities.
Disclosure: Michael Markowski, the founder of OnlineFinancialSector.com and/or immediate family members currently hold shares in the public companies recommended on the OnlineFinancialSector.com website and may buy or sell shares without notice.
