Midterm Exams

"Everyone's trying to get out of Washington, and we're the only schmucks trying to get in."
--Julius Levinson (Independence Day)

Prediction markets currently assign a better than 75% chance of Republicans winning control of the House in next month's election, and slightly better than coin flip odds of GOP winning control of the Senate.

Because financial markets are forward looking mechanisms as well, they've surely been factoring in similar probabilities.

As such, one way to interpret current market enthusiasm is that Republican control of Congress will create gridlock on the Hill, thereby squelching Democrat agendas and perhaps even driving reversal of some previous progams and policies. A more favorable economic environment may result.

Historically, however, Republicans have demonstrated little difference in fiscal restraint vis a vis their colleagues across the aisle. And while Tea Party philosophy is likely to motivate more fiscally responsible behavior among some bureaucrats, it remains to be seen whether a) the degree of behavioral change is enough to make a difference, and b) whether this behavior 'sticks' - or whether it's back to business as usual after a short while.

Given our structural problems related to spending and debt, it's hard to see how the midterm elections make much inroads into those issues very quickly.

I'm inclinded to think that, should markets continue to rally into early November, we may be looking at a 'sell the news' event. Regardless of the outcome (i.e., Republicans or Democrats 'win'), a decent short side opportunity may present itself.

position in SH, Treasuries