Though our goal is not to be political in these monthly communications, and politics will always exist, there really is no way to talk about investments right now without talking about the current Washington DC fiscal cliff issue. It’s in the news every day and hangs like a pall over the market. Therefore, we’ll walk into this deadly lair and then get out, not by way of a Houdini act but rationally and with truth to guide us. Hopefully, we’ll contribute some knowledge to you in the process.
First, let’s recognize the obvious. Nobody should be surprised by this cliff. It’s been out there for 20 years or more so it’s not a surprise in the normal sense. The Europeans have been marching toward their cliff for some 30-40 years and they’ve operated pretty well until recently, though their options are more limited now than they’ve ever been. We can act, and responsible politicians should act (nope, won’t go there with you right now), to solve the more immediate crisis. You only get hurt by this cliff if you purposefully walk off of it. So, as we would tell our children, “Don’t walk off it.” “Be a grown up.”
Second, as too often happens in politics, we start focusing on the wrong details and miss the bigger picture. Squabbling about a trillion here, trillion there, is not the big issue. Nor is 2% more, 4%, who’s got the button game worthy of our intellect.
We have a $16 trillion total deficit and that’s a big number. However, if governments were corporations, they’d have to report their true liabilities for the future. A Wall Street Journal piece (“Why $16 Trillion Only Hints at the True U.S. Debt”, Cox, Archer, November 27, 2012) the writers state that the actual liabilities of the federal government—including Social Security, Medicare and federal employees’ future retirement benefits— already exceed $86.8 trillion. That’s 550% of GDP, and now we’re not in Kansas anymore, and these aren’t cans being kicked down the road. They’re barrels.
We have to have a societal safety net, we have to protect folks who will need Social Security, etc. If we don’t, we’ll have riots in the street (witness Greece, Portugal, Spain, it’s not some secret). The only way to protect those social programs is to bolster the economics and make them sound. In the past 40-80 years, the time from when these programs were first instituted, average life expectancies have gone up 10-20% i.e. we live longer. No surprise here, is there? The programs have to change to reflect these realities. People who really care about people must admit it and pretend “it isn’t the other guy.” Stop the politics. It’s us, as Pogo said.
‘How’ is always hard because politicians shroud themselves with words and proclamations to make themselves look good. The solution will involve taxes going up, probably some on rates as well, but not back to the 50-90% marginal rates of the 1960’s. Benefits will have to be adjusted as well…if you really want to save the program and look at the above numbers, there is simply not enough tax to make a difference. Grow up, face the music, and compromise. Tell the public the real story.
Against all of this, and the fact that this ‘crisis’ ain’t new, we hope you can see we don’t have to walk off the cliff. It’s a choice. Further, even with this news well known over the past year ended September 30, 2012, the US stock market has gone up 30%. Yes, that’s 30% in the Core Equity II fund held in your portfolio (DFA Fact Sheets), and actually a little more performance due to your Small capitalization and Value weightings. The world markets, where much of the turmoil is, have been up 13-17%. What we’re seeing happen is the private markets doing fine, but it is the governments that are doing poorly in managing their finances.
Take a look at the article from Westin Wellington, as it points to the problem of listening to the experts who would have had you pull out of the markets one year ago, and thereby miss the gains you experienced. As one of the world’s top finance economists and stock market researchers, Eugene F. Fama, has said;
“I’d compare stock pickers to astrologers, but I don’t want to bad-mouth astrologers”
(Prof. Eugene F. Fama, “What Wall Street Doesn’t Want You To Know” 2001).
May you and your family enjoy the positive spirits of the season. Crises like this one are not created in a day and they won’t be fully solved in one (or 30 days). However, the fact that they are being talked about at all is a sign we are beginning to put the truth on the table. Pass that news around the table
