Research Note: U.S. Election Preview

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OUR SUMMARY VIEW OF THE U.S. 2010 ELECTIONS

Galaviz & Company assists its clients (many of whom are in Asia) in the areas of government relations and strategic analysis of government policy making. We particularly focus in the areas that have an impact on the travel and leisure sector. Therefore, we actively monitor political developments that we believe have consequences for our clients in the hotel, casino, airline, and real estate industries.

We see the U.S. election outcome on November 2, 2010 as having a significant impact on the perception of the U.S. business marketplace. Yet, the reality of the election outcome will only yield a marginally different U.S. business climate, in our view.

There will be a tremendous amount of news coming out of the U.S. this week and it is important to make sense out of it (particularly for those residing outside of the United States). Sorting through the news to understand the real impact of the mid-term elections on November 2 will be critical to a strategic understanding of the U.S. marketplace. There are some elements of this mid-term election that will be historical.

OUR FORECAST: REPUBLICANS MAKE SUBSTANTIAL GAINS

We believe that the Republican Party will make broad gains in the Congress of the United States, with particular success in the U.S. House of Representatives. As stated in our September 2010 research note, we see the Tea Party movement (it is not a political party, yet) has having a major impact on the political dynamics of the United States.

The Democrats seem to be having significant problems with communicating an agenda. Essentially, most of the Democrats, including the President, seem to be speaking more about what they have done, rather than what they are going to do. The majority of Americans voting on November 2 want dramatic change.

We see Republican control of the U.S. House as being neither dramatically positive, nor dramatically negative, for the U.S. business climate. The risk of a multi-party control situation of the U.S. government, i.e. President is a Democrat, U.S. House possibly controlled by Republicans, and U.S. Senate possibly controlled by Democrats, is elevated. However, legislative gridlock means that there will likely be very little transformational change in U.S. government policy on the foreign and domestic fronts.

IMPACT: THE TEA PARTY

It continues to be the case that the the mainstream media continues to be 'playful' with the Tea Party topic without focusing on the serious and significant impact this movement will have. Furthermore, the popular media seems to incorrectly associate the Tea Party movement with only Sarah Pallin and other conservative figures in the U.S. political spectrum.

The Tea Party movement is not a conservative movement (in fact, many Tea Party activists are registered Democrats). Most of the Tea Party movement participants that we have seen are socially-liberal and economically conservative. In essence, the Tea Party is fundamentally libertarian - an ideology that believes in maximum social freedom and maximum economic freedom.

Ultimately, we see the major story for the next two years, post election, being whether or not the Tea Party will see Republicans doing enough to advance their agenda of major government reform. If the Republicans do not respond to the Tea Party demands, you might see the Tea Party convert from a movement into an actual 3rd political party in the 2012 political cycle, attracting support from both Democrats and Republican voters.

THE REALITY: OBAMA IS STILL PRESIDENT

Unlike the parliamentary systems of many countries in the world, the U.S. can have a situation in which Congress (the House or Senate) is controlled by a different party than the U.S. President. So, it is important to recognize that while the Republicans will likely take control of the U.S. House (and may just barely take control of the U.S. Senate), it is still a fact that President Obama will still be the U.S. President on November 3, the day after the election.

The power of the President to veto legislation passed by Congress is a significant political tool. While the Republicans will likely take control of the House, their majority will not be enough to constitute a 2/3's majority required to override presidential veto's. Hence, Obama's influence over the U.S. political agenda remains relatively intact.

CONCLUSION

Ultimately, the dynamics and stability of the United States will remain positive, firm, and stable in the global context regardless of the outcome this election cycle.

As the news and impact of this election cycle wears off, we believe our clients should still look at the U.S. market as a place that provides excellent opportunities in the travel and leisure sector, particularly as it relates to inbound/outbound investment.

Asset devaluations, combined with a weak U.S. dollar, make the macro-investment climate of the U.S. extremely favorable for Asian companies with an expansion mentality, regardless of the 2010 election outcome.