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With election out of way, real fretting can begin: James Saft

[October 25, 2016] By James Saft

(Reuters) - (The opinions expressed here are those of the author, a columnist for Reuters.)

Not since the trial of O.J. Simpson has America had a news story that transfixed people more and affected financial markets less.

With Donald Trump's presidential campaign trundling toward a resounding defeat and the possible capture of the House and Senate by Democrats, that relative tranquility may end.

Should Democrats sweep and control the government, investors will go from ignoring the unthinkable but improbable to grappling with the here and now. That could imply some downside for markets due to the risks, or the promise, if you prefer, of tighter regulation, less corporate-friendly policies and a less- tightly knit global economy.

A diluted version will likely happen under any scenario not involving the term "Trump wins."

To be sure, if Trump pulls out a victory, the market will "have puppies." But not adorable ones - they'll be the kind that make a mess everywhere and then bite you.

That Trump could threaten U.S. global alliances and the nation's good faith and credit while flouting the basics of trade policy and yet not particularly discomfort financial markets was a testament to several interrelated forces. Not only did few think he would prevail, but fewer still thought he'd carry out his plans if victorious and yet fewer figured they, as investors, were paid to try and front-run the disintegration of U.S. credibility and cohesion.

Once those slight but high-impact risks are out of the way, it will be easier to focus on the more symmetrical but still important political risks of the next four years.

"For many U.S. market participants, there is a risk that a Clinton victory could be too emphatic if it leads to Democrats regaining majorities in both chambers of Congress. We suspect the most positive outcome for markets would be a Clinton win combined with Republicans retaining their majority in at least one chamber,” Jim O’Sullivan, economist at High Frequency Economics, wrote in a note to clients.

Given that betting exchanges are still giving Republicans better than a three in four chance of retaining the House, the likelihood is a rally of mild relief, of the sort you feel when a particularly bad play ends and you can go get a drink.

TRADE A WILDCARD, AS IS "POPULISM"

The Clinton tax plan, as advertised, would shave four-tenths of a percent off GDP in 2017, according to a forecast from the Committee for a Responsible Federal Budget, which also sees it increasing growth by more than that 20 years out due to reduced debt levels. My guess is that investors, looking at inflation and Treasury markets, will be more inclined to let the future worry about itself and fret instead about growth and corporate profits in the near future.

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Harder to forecast will be an HRC administration stance toward trade. Clinton's change of heart on the TPP agreement is perhaps not deeply felt, but it will be hard for any elected U.S. official, or one anywhere in the developed world, to ignore a rising public disenchantment with the bargains struck as part and parcel of globalization.

While even a divided Congress would be easier to manage than the European Union, it is notable that opposition from the tiny Belgian region of Wallonia has stymied a planned EU trade deal with Canada.

Economist Dani Rodrik, of Harvard University, argues that trade deals find themselves in trouble in no small part because their actual on-the-ground impact on voters has been misrepresented.

"Instead of decrying people's stupidity and ignorance in rejecting trade deals, we should try to understand why such deals lost legitimacy in the first place,” he writes. "I'd put a large part of the blame on mainstream elites and trade technocrats who pooh-poohed ordinary people's concerns with earlier trade agreements."(http://rodrik.typepad.com

Just because Trump, and Bernie Sanders, were defeated in 2016, that does not mean a new Clinton administration can ignore the way the wind has been blowing.

It isn’t just Wallonia. It is Britain, where similar sentiments contributed to the vote to exit the European Union.

Many of the implications of this threaten growth, and most threaten the share of GDP corporations claim as profits.

These are changes, like tighter regulations or more redistributive taxation regimes, that will come at a slow pace but can be heard from far, far away. So even if there are no election night fireworks, don't expect champagne corks to pop on Wall St.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at http://blogs.reuters.com/james-saft)

(Editing by Dan Grebler)

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