What If Romney Isn’t Kidding?

06/27/2012 10:15 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

Suppose the candidate’s advocacy of austerity is more than just campaign-trail fluff. Stocks could be in for a rude shock, writes MoneyShow.com senior editor Igor Greenwald.

It’s November 7, 2012. The stock market has just soared 2% out of sheer relief that all those rumors of a last-minute comeback by President Obama proved unfounded. The S&P 500 is almost back up to 1,200 now, putting another breakeven year within reach.

President-elect Romney says 8.8% unemployment is proof that his predecessor’s failed policies must be replaced wholesale. He’s convening a working group with leaders of the Republican majorities in both chambers of Congress to design a plan of action for the next 100 days, focusing on deregulation, tax reform, and measures to control the budget deficit.

This is where the scenario forks. Supply-side true believers have by now thanked God, Sheldon Adelson, and all the Kochs for deliverance from socialism’s grubby clutches. In their world, businesses tied down by red tape burst forth to recreate the millions of jobs fruitlessly sought by Obama.

Those jobs in turn stimulate demand, as does a flatter tax system less guilty of redistribution. Pretty soon John Galt emerges from hiding to reveal that Galt’s Gulch is returning Stateside from the Cayman Islands.

But say you’re not a true believer but a left-leaning cynic, like Joe Wiesenthal of Business Insider. In that case, Romney’s win still has a silver lining where the economy is concerned. Because instead of demanding austerity, a friendly Congress merely extends the Bush tax cuts and gives the new president everything denied Obama to get the economy going, at any cost.

I used to think this was solid analysis, because after all, the Romney economic team is simply George W. Bush’s recycled coterie, and there’s no reason to think they won’t find deficit spending just as appealing the second time around. Also, it’s easy to caricature Romney as a seeker of power with few bedrock convictions and a pawn of Wall Street who will ultimately do its bidding.

This is the Romney investors would really like. He would find a way to give the economy some extra juice. And when it came time to replace Federal Reserve Chairman Ben Bernanke, as Romney has said he would do at his earliest opportunity, it would be with a team player like a Richard Fisher or a Kevin Warsh, who know where their bread is buttered.

There would be an assault on all those wasteful entitlements, of course, to offset some of the expense of the tax cuts. But the net effect would be anything but the sort of austerity that broke apart Europe. Defense and drug war spending would swell unchecked. Industries like health insurers and for-profit schools would vacuum up public subsidies unimpeded.

The only trouble with all these assumptions is that they may well prove wrong. The serious money backing Romney almost certainly has a much more radical agenda, and legislative leaders like Rep. Paul Ryan will be there to make sure it’s not ignored.

The serious money is, like Romney’s Caymans stash, seriously tilted toward bonds. Fortunes in the hundreds of millions don’t need home-run stocks to generate sufficient income. A lousy 3% yield will satisfy most whims short of Trumpian megalomania.

For this crowd, the recent years have served as a huge wake-up call. They’ve seen the elevated costs of a social safety net tarnish the US credit rating, and though the bonds have only gained in value since it didn’t have to play out that way.

Similarly, while this Fed didn’t dare to tolerate higher inflation to bring unemployment down, a different Fed might have. So the Fed as an institution must be “fixed” so that it never again contemplates such an unfriendly policy.

And coincidentally, here’s Stanford’s John B. Taylor, a potential Bernanke replacement, talking about strict monetary policy rules and questioning the efficacy of just about everything Bernanke did during the fiscal crisis.

Taylor wouldn’t tarry too long before “normalizing” interest rates, and if the stock market doesn’t like it, too bad: the stock market wasn’t the one funding the super PACs. As for the bond market, the more bitter the economic medicine, the lower the yieldsâ€"and the fatter the long-term capital gains.

Romney is a committed proponent of austerity, and not because it’s particularly popular; if anything, it’s likely to cost him lower-income votes in the battleground states. It certainly prevents him from offering many sweeteners to the undecided voters.

Romney’s Mormon faith, his career in private equity, and his temperament appear to have yielded up solvency as a core value. He may not discard it as easily as the cynics suppose after an election win.

The end result could well be a 2013 recession that will be used to cut taxes and entitlements, exaggerating income inequality. That would be terrible news for the stock market, but merely the cost of doing business to a president enacting the wishes of his most ardent backers.

And those backers don’t give a fig about the return on common stocks in any given year.

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