Powerful men tend to play games with high stakes and mystifying tactics. That does not only hold for spectacular TV series, but also in reality with the political kings of our generation. The more power and the more experience these political players have, the more likely they are to win the game. Even those that have been on the throne for a near eternity will fall from grace at some point. The question is how and when, not if.
In Italy, for example, is seems like visibility is increasing by the day on how a former king of politics will see his career end. That is not to say however that in all games of thrones currently at play the end result is already becoming clear. In Washington the battle between leadership in the White House and that of the House of Representatives on Capitol Hill only seems to intensify despite the fact that part of the government has closed for almost eight days already.
In what House Speaker Boehner has labelled as an “epic” fight on the future design of the US government it remains to see difficult what will bring US President Obama close to anything that would be an acceptable compromise for the influential Tea Party fraction of the Republican party. Many political pundits and most market participants are still assuming that reason will prevail in the end and an actual default of the US government will be prevented at the very last moment. And actually it is only rational to expect this as both historical patterns of these type of political show-downs (in both the US and Europe) and the most reliable negotiation tactics suggest that one should expect a further increase of the tension before a last-minute deal can be reached.
To a large extent this awareness probably explains the relative resilience of markets that have corrected less in recent weeks than during the run-up to most previous fiscal policy battles in the US or crisis summits in Europe. This could be seen as either resilience or complacency and therefore it could be used as both an argument of future strength or weakness. To a large extent this comes down to the question if this time it is different than the significant number of political crises that we have observed in recent years. Different in the sense that it ends with a Paulson -like decision where personal preferences, emotions and (lack of) mutual trust rather than rationality, common sense or mutual benefits drive the final outcome.
The fact that Lehman was allowed to go bankrupt underscores that the track record of much more frequent last-minute solutions provides only limited comfort as it shows that rationality does not always prevail in these tense political circumstances. Therefore, the uncertainty that this creates needs to be acknowledged and prudently balanced against the constructive undercurrent of fundamental trends and (monetary) policy settings. This translates into not changing our course (having a growth oriented allocation stance with equities and commodities as overweights), but driving less aggressively. This means monitoring closely how the investment landscape is changing, adapting our stance more frequently and reducing the risks we take gradually for as long the debt ceiling cloud hangs above the horizon. We do not expect the rain to start pouring, but it is justified to carry an umbrella for an unexpected turn in the weather.
Valentijn van Nieuwenhuijzen is head of strategy at ING Investment Management
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