Voters are angry. They are angry at incumbents, and they are angry about taxes.
In last Tuesday's highly interesting elections, voters -- especially in New Jersey and Pennsylvania -- revealed deep-seated indignation. For the bond market, their exasperation means upward pressure on interest rates.
The bond market likes predictability, but it won't get it, at least if the elections foreshadow the year ahead. If voters are determined to throw the rascals out and not pay higher taxes, budgets won't be balanced easily, and all levels of governments will lurch along out of control. Lurching along is exactly what bond investors dislike.
The outlook is so filled with unknowns and variables that it is difficult to see who will benefit, other than the financial press. Consider what happened in New Jersey, the only triple-A state left in the Northeast and one of only 11 in the country. Last Tuesday, Republicans took control of both houses of the state Legislature for the first time in 20 years, holding enough seats to override any veto by Democratic Gov. Jim Florio.
Regardless of whether you're Republican or Democrat, you're unlikely to view this political mix as optimum for running a tight fiscal ship. On winning, New Jersey Republicans reiterated their pledge to roll back about $550 million of Gov. Florio's $2.8 billion tax package enacted 16 months ago by a Democrat-controlled Legislature. If the outlook for revenues is as bleak as we believe, this rollback (reducing the sales tax, to 6% from 7%), won't be much of an answer. Taxpayers will still be angry, and the state's budge will not be balanced.
In the Pennsylvania race for U.S. Senate, Harris Wofford, a liberal Democrat, trounced Dick Thornburgh, a member of the Reagan and Bush cabinets, in an election that demonstrated voter anger at Washington's handling of the economy and at rapidly rising healthcare costs.
While it showed the anti-Washington anger of the voters, the Wofford victory also showed increased doubts about the federal government's ability to solve its financial problems. If the voters want more unemployment insurance and a national health service, yet they refuse to pay higher taxes or reduce other spending, the federal deficit will only worsen. The latest estimate for the current fiscal year is $400 billion, and the Federal Reserve is pushing down snort-term interest rates, the dollar is declining in foreign exchange markets, and the Treasury's poorly handled refinancing last week revealed weak demand for $26 billion of notes. All this should not be surprising even if it is discouraging.
With fiscal affairs beyond control, and voters demanding more but offering less, nothing will be sorted out until after the 1992 presidential election. Last Tuesday produced provocative, stimulating politics, but the financial implications are foreboding.
