Alia iacta est! As the networks projected a victory for President Barack Obama, there was a sea of red: the dollar was down versus currencies and gold.
As pundits will now shift the focus to the fiscal cliff, the market appears firmly focused on what might be more relevant: an Obama win favors a continuation of the current easy money policy.
Had Mitt Romney won, Federal Reserve Chairman Ben Bernanke would have become a lame duck, undermining the credibility of the Fed's commitment to keep interest rates low way beyond the end of Bernanke's term in early 2014. With this uncertainty removed, the Fed's increased emphasis on employment is here to stay. The market rewards this certainty by bidding up gold and selling off the dollar versus all major currencies.
We don't believe the fiscal cliff is similarly important: in our "worst-case" scenario, the cliff will take place. However, once tax increases and spending cuts have taken effect, Republicans might then agree to cut taxes, thereby keeping their promise not to vote for tax increases.
While the drama might be worth watching, the market impact could be limited. Note, though, the budget deficit would still exceed 3 percent before factoring in an economic slowdown.
Yet, we won't have come a step closer to entitlement reform. Entitlement reform is unlikely to happen, as we believe the only language policymakers listen to is that of the bond market.
Keep in mind, however, that testing the patience of the bond market in the United States might be more dangerous than in the eurozone. The United States, unlike the eurozone, has a significant current account deficit. To a significant extent, foreigners finance the deficit by buying U.S. bonds. Should the bond market impose reform on policymakers in the United States by selling off bonds, the implications for the U.S. dollar might be far more severe than they have been for the euro.
As we all hope for the best, we would like to point out to that hope is not a good policy, neither for politicians, nor for investors.
We manage the Merk Hard Currency Fund, the Merk Asian Currency Fund, the Merk Absolute Return Currency Fund, as well as the Merk Currency Enhanced U.S. Equity Fund.
Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies.
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