Perhaps some of the resilience is U.S. equities is the result of a perceived safe haven status. The U.S. does remain the best house in a bad neighborhood in spite of what is clearly an unsustainable fiscal situation here. But it is a really bad neighborhood! The “fiscal cliff” will likely be papered over with a non-solution solution that gets us through yearend, but we cannot continue down this road of annual deficits of over one trillion dollars. Our equity market should discount a return to some normalcy.
I spent ten years of my life as a credit analyst and I remember an important lesson: once government debt approaches 100% of GDP, which we are near now, it becomes virtually impossible to exit the downward spiral in a painless way. I am not even counting the $60 trillion or so in unfunded federal mandates known as Social Security and Medicare. This is not a political statement. It is just credit analysis and math. Every one percent increase in interest rates adds over $100 billion to our yearly deficit and rates sit at Fed-mandated historical lows now. The federal government has been ballooning in size since the turn of the century as our leaders have continued to spend with reckless abandon because it is the easiest thing to do. Both major parties are to blame here because there is no real leadership. We need to reduce spending at all levels of government. We are flirting with a European economic model just as the EU is showing the world it just does not work. We may be a relative haven for now, but our equities should not be valued near the richest valuations in our history given the stresses on our economic system.
In the end, the economic and market environments of the U.S. and across the globe are in a precarious spot because of a lack of leaders willing to pursue real solutions. Art Cashin of UBS, as usual ,cut right to the chase recently: “one sentence perfectly describes the quandary on three continents – the ultimate award for candor and honesty must go to Jean-Claude Junker (Prime Minister of Luxembourg) who apparently said ‘We all know what to do, we just don’t know how to get re-elected after we have done it.’ That says it all.”
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.