Evercore Pan Asset

The death of Bin Laden is an important event in US and world politics. It gives a boost to President Obama’s chances of election for a second term. It gives the US more options in its military and diplomatic interventions throughout the Middle East. A President who began as a reluctant warrior, lacking decisiveness over the Afghan commitment before sending in more troops, now has a  tangible victory in the US war on terror which even his Republican critics admire. The President could now use his new position of strength to speed up the US withdrawal from Afghanistan, and accentuate the US reluctance to lead the Libyan intervention. Alternatively the military might persuade him to attempt more, now he has a success on his hands. I suspect the cautious Obama will emerge, and if anything the US will shy away from further commitments.
 
The President has been an even more reluctant convert to the need to fight the budget deficit. The President concentrates on what needs doing to win a second term. The death of Bin Laden secures his position on foreign affairs in American eyes. He looks like a man who knows that re election only comes to Presidents who preside over economic good times. That is why he has hurled more public spending, more public borrowing, and more money printing into the fight to get the US economy to recover rapidly. That is why he has been reluctant to cut spending, and has been prepared to accept some Republican tax cuts that philosophically his party is less keen on. He has decided to administer as big a stimulus as possible to get the economy and the markets moving.
 
The price of this has been rising political alarm about the size of the deficit, a falling dollar, and the recent warning that even US state debt could be downgraded from triple A status if the borrowing keeps on ballooning. US inflation is on the rise, though not to UK or Asian levels.  The last elections to the House and Senate saw important advances for deficit and spending cutting Republicans and tea party proponents. In various State legislatures tough actions are being taken to rein in state level spending and borrowing. The President recognises there is an important constituency of swing voters as well as Republicans who fear the stimulus is getting out of control and leaving the country’s finances weakened.
 
In the run up to the Presidential election in November 2011 the administration is likely to talk more about bringing the deficit down in future years, and to seek to work with the moderate Republicans on future budgets. They are unlikely to want to cut domestic spending programmes or raise taxes on any other than the rich. Cutting military spending would be the obvious way of squaring the circle, which would require the President to reduce some of the US commitment to the Middle East. We expect the US economy to perform relatively well this year as the full impact of the monetary and budgetary stimulus is felt. Many companies are enjoying a favourable climate to generate more profit and cash.  Next year the going might get tougher, assuming no third round of quantitative easing of money, as some of the tax cuts to stimulate investment drop out. 
 
The death of Bin Laden will make it easier to rein in military spending, but I doubt there will be a major assault on the US deficit this side of the Presidential election. The improvement in Mr Obama’s chances of winning again means fewer tax cuts to drive faster growth, with continued emphasis on federal spending programmes. We anticipate the dollar staying weak with no great change in the present policy mix of lax monetary policy and high borrowing levels. This means more dollars, and more inflation.

As published in Investment Week