Odds of a Republican victory in the House of Representatives has surged over the last 18 months. According to Intrade there is now a 70% chance the Democrats will lose the House to the Republicans in the upcoming elections. The implications here are extremely important. Republican control of the house likely means there is a very low chance of more fiscal stimulus in 2011 and 2012. This is important because it means the Fed will continue to push on a string as the only component of government that can help boost the economy. In other words, we might be months away from seeing what the private sector really looks like without all this government aid and my guess is we won’t like it one bit.
It will be interesting to see how this all unfolds over the next few months. The economy appears to be on the ropes two full years after Obama has taken office so the Republicans will want to capitalize on this. The Democrats likely realize they have precious few months before their majority evaporates. This means we could see critical attempts at last second stimulus in the coming months. President Obama has already proposed tax cuts, but the Republicans will likely attempt to vote this down as any signs that Obama is willing to be more centrist will be an obvious Democratic victory. This could very well be the most important election in many years. While gridlock is generally viewed as a stock market positive, the current environment could prove otherwise as the private sector remains weak and government is forced to step aside under political gridlock.