Yes, It May Take a Rocket Scientist to Understand Deficit Spending Numbers
By Greg Sweeney, SVP/Chief Investment Officer, Bell State Bank & Trust
Election day has passed. The good news is that political commercials are done. This alone should make everyone feel better about the economy!
Regardless of whether President Obama or Mr. Romney were the winner in this election, big themes remain in place: deficit spending so large that only astronomers know what the numbers mean … elevated unemployment with little sign of change … tax and spending issues known as the “fiscal cliff” … Federal Reserve market manipulation, stealth inflation, stagnant personal income and other factors that would take up more space than this publication provides. Our biggest question remains: Do our elected officials and the voting public have the mettle to move through the decisions and near-term consequences required to correct the bad decisions of the past and move our economy, and our country, forward?
Knowing Your Numbers
A recent survey shows that only 7% of the people asked knew how many zeros were in a billion. It seems safe to say that even fewer know how many zeros are in a trillion. Our current federal government debt is $16 trillion. In numeric form, that figure is $16,000,000,000,000. Last year at this time, the bipartisan “Super Committee” was scheduled to announce a solution to the growing debt problem. Their announcement amounted to no announcement. A year later, debt levels are worse by another $1.276 trillion; our total federal debt is $6.04 trillion higher, or 60% above where it was four years ago.
This may sound like a gloomy article, but there are no emotions intended. These are the facts provided daily by the U.S. government at www.fms.treas.gov/dts. Be advised, there should be some sort of health warning before opening this site; the numbers will nearly kill you. Total taxes (including personal and corporate income, Social Security, Medicare, estate, excise and unemployment taxes) collected last year were $2,179,000,000,000. During the same time period, total spending was $3,572,000,000,000. From the looks of it, the politicians we elect to run the country might struggle to run a lemonade stand. This is not a good foundation for future prosperity.
For You “Star Trek” Fans
A light year is the distance light travels in one year’s time. The speed of light is nearly 671 million miles per hour, which means light travels about 5.9 trillion miles a year. For you “Star Trek” fans, if Captain Kirk had asked Mr. Sulu to lay in a course for zero federal debt at warp factor 1 (traveling at the speed of light), it would take our Starship Enterprise (printing press) 2.72 light years to pay off this debt. One more point of interest: If the U.S. debt were miles, 16 trillion miles would take us from Earth to Pluto and back 2,225 times! The numbers are staggering; it is no wonder that only astronomers understand them. Maybe we should start electing astronomers, instead of attorneys, to Congress.
We see this market environment for what it is. Interest rates are at 60-year lows, and savers earn very low levels of income that turn negative after subtracting the inflation rate. This is the result of the current economic conditions, market psychology and worldwide central banking intervention.
The decline in yields over the last few years has had the effect of showing attractive return on fixed-income mutual funds and bonds, especially if they are long-dated maturities. However, unlike stocks, bonds have a maturity date, and bond price increases are only temporary because they eventually mature at par. In the end, an investor with an allocation to bonds over the long term will receive interest income only. If investors want to capture the price appreciation, they need to sell the bonds or bond funds and invest the money somewhere else. This is the catch-22 in this market environment. It is hard for many investors to get comfortable with another asset class right now.
Our approach to the fixed-income market is to remain invested and capture the most attractive coupon income without purchasing long maturities. Long maturity bonds expose clients to greater losses when interest rates rise than shorter maturity bonds. Even a casual observer can tell that interest rates have moved a long way down. Nobody knows when they will turn and move higher, which will erode the value of existing fixed-income holdings. Our goal is maximizing the delicate balance between income generation and bond maturity structure to address changing rates when they occur.
If you’d like to talk more about investment scenario planning, call Greg Sweeney to start the conversation.
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