Getting the Country’s Fiscal House in Order
The debt burden we have amassed as a country is on an unsustainable trajectory and will, with near certainty if not corrected, saddle the next generation with lost opportunities and a debt burden that leaves our children scratching their heads and wondering what in the world just happened to them.
George Bernard Shaw, Irish playwright and cofounder of the London School of Economics, once said, “When a thing is funny, search carefully for a hidden truth.” I thought of this recently when I was speaking to a local community gathering that reflected a broad cross-section of our society. Attending were people from many walks of life: retired professors, current middle school teachers, attorneys, bankers and homemakers, to name a few. My topic was the economy and our outlook. In addressing the financial and sovereign debt challenges currently facing the European Union including Greece, Spain, Italy and others, I made the comment that tear gas is in short supply in Greece today. Laughter filled the room as though I had just nailed a great joke and the drummer had given me a “bada-boom.” Search carefully for the hidden truth when a thing is funny. I went on to say that what we see with the riots in the streets of Greece – the government lobbing tear gas at people protesting their dissatisfaction with spending cuts designed to bring a fiscal catastrophe under control – could easily be broadcast from our own American streets if we do not work together to solve this country’s debt crisis. It wasn’t a joke. It is not funny. It is the truth, and we had better be paying attention to it.
We are entering the “silly season” in this country, when our presidential and congressional candidates running for election/re-election make promises we all know can’t be kept – yet we want to believe them. What we need to believe in is ourselves and our ability to understand the challenges clearly and thoughtfully. We need to help each other comprehend the true ramifications of the decisions we make. Ultimately, we need to make those decisions that result in a country and a world we can be proud to hand to our children and grandchildren, knowing that it is in better shape for them than it was for us, that it is capable of providing more opportunities for them than it did for us and that it is unconstrained by the challenges our country faces today.
That means we need to get our fiscal house in order. The debt burden we have amassed as a country is on an unsustainable trajectory and will, with near certainty if not corrected, saddle the next generation with lost opportunities and a debt burden that leaves our children scratching their heads and wondering what in the world just happened to them.
Challenging Times Ahead
These are very challenging times. Over the next six months, a host of significant events will chart the course for the markets over the next several years. We must address the expiration of tax cuts (stated another way, the certainty of tax increases), mandatory January 1 spending cuts, cuts in defense spending, a debt ceiling increase in the first quarter of 2013 and a solution to the European Union’s economic issues. The creation of economic growth in this environment is a delicate balance.
In the investment world, we continuously seek to decipher the risks of today’s global economic environment. Through careful consultation and thoughtful debate, our Investment Committee charts the course for our clients’ investable assets to protect them in times of uncertainty, yet provide opportunities for meeting financial goals. In the current environment, we are focusing on strengthening the quality of our portfolios, reducing interest rate risk and investing in firms with strong balance sheets, attractive dividends and sustainable earnings that protect interest payments to bond holders and dividend payments to stock holders.
Our stock market has proven resilient in the face of adversity. In mid-September, our market (S&P 500) was trading at four-year and one half highs, up over 120% since March 2009. Corporate earnings are at near record-high levels, and valuations remain reasonable. Earlier this month, Ben Bernanke spoke in Jackson Hole, Wyoming, and reiterated the Federal Reserve’s concern over the tepid economic growth and weak employment, adding that the Federal Reserve stands ready to deploy additional stimulus through various tools.
This position essentially seeks to keep interest rates low for some time, which also lends support to the stock market. The debate around whether a Federal Reserve “put option” on the market is good or bad, right or wrong, is for another time. At the present time, alternatives to the stock market seem less than attractive, which has lent support to this three-year rally in stocks.
What the Future Holds
Going forward, we expect continued volatility exacerbated by the decisions coming out of Washington. Uncertainty will remain elevated, and clarity will come with time. That takes me back to my earlier comment on investment strategy. This environment requires prudence focused on quality, fortification and agility, which is exactly what our team is committed to providing for the benefit of our clients.
Thank you for the trust you have placed in us; we appreciate your business.
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