Truth Man Ship (It)

We have yet another period of trauma in Washington, DC.  Forget about which cause, what legislation, it is now becoming a sequel event and the sagacity of all parties is questionable.  Talk of ‘brinkmanship’, ‘poor statesmanship’, and other such ‘ships’ of the night abound.  We want to talk about something that is missing in these affairs de state, and it is truth.  Unvarnished, possibly equally offending to both sides, unappreciated and certainly unpracticed TRUTH.  These truths do impact markets, and markets impact investments, so we find it relevant to talk about here.  Avoiding it would be doing you a disservice, so here it is;

1. The health care law has some good things, and some bad things.  Most of all…it has uncertain things.  The greatest uncertainly of all is cost.  Private markets can handle good news, they can handle (and adjust to) bad news, but they struggle with uncertainty.  The volatility of markets is an indication of nervousness, and we have seen swings up and down for the past 9 months.  Any time you take a ‘consumer good’ that comprises 1/6^th of the economy and tinker with it, without a firm expectation of outcomes, you have nerves shaking that the doctors aren’t able to proscribe a balm to salve.  Any person who says they have a crystal ball on what will happen (who signs up, how many sign up, are the premiums right) is pulling your leg, and probably reaching for your pocket at the same time.  Be critical of the news that you hear—from all sides.
2. We tend to forget pains of the past (child birth being prime among them), but we recall to you that it was not so long ago (August 2011) that Standard and Poor’s downgraded their rating on debt offered by the United States Government (called ‘Treasuries’ most commonly). The economically largest, strongest, most dynamic country in the world had been told for the first time, “Your debt is no longer of the highest quality”.  Removing this AAA rating caused quite a stir at the time, and has since contributed to the lawsuit issued by the US Government against Standard and Poor’s (though the claimed grievance is a different affront).  As Will Rogers famously is quoted to have said; “I’m not worried about the return on my money; I’m concerned about the return OF my money”.  Add in the uncertainty of costs of a government program of the massive scale (point #1) as we see in the Affordable Care Act, you are going to have perturbations in the market.  These perturbations are NOT irrational; quite contrary, they are entirely rational.
3. The debt in this country is a growing problem that will have to be addressed. This statement is not an opinion; it is a reality.  Fiscal deficits are financed by borrowings, and we have fiscal deficits which means we are adding to the debt.  Fiscal deficits are not bad, per se, but the size of ours is too large.  we’re not here to say how it will be solved as everyone has their own (and generally implacable) opinion, but there are only two methods: tax more, spend less.  We will only point out that taxing has a point of diminishing returns, and we’ve just passed the largest tax increase in 20 years and still have large deficits.  Our own opinion is that there needs to be a progressive tax system in this country, but you must be cognizant to killing the goose.  Further, history is replete with examples that extremely few government programs will be run as efficiently as the private sector would run them, so the larger the government becomes as a percent of GDP, the lower country’s growth rate will be.  Lower growth = lower earnings.  Lower earnings = less people hired.  Less employed = lower taxes generated.  TJ Rogers, the founder and CEO of Cypress Semiconductor, comments on that fact in the attached editorial.  The spiral just puts more pressure on the next generation of taxpayers, called ‘your children’, at a time when demographics are not in their favor.  There is no use in screaming diatribes at each other; the solution is to be far less emotional and simply start addressing the issue.  Markets will remain nervous until we do.

The above is not rocket science and Wall Street and Washington both make it way too hard.  Yet notwithstanding these tales of woe, lest we forget, the economic vitality of the Unites States remains impressive.  Once again 9 of the top 10 most valuable companies in the world are American firms, as are roughly 60% of the top 50 firms[i].  Given America has only 5% of the global population, you have to give due creed to these enterprises and their resilience, which has driven up the capital markets (and your portfolio) nicely in the last two years, including last quarter.  To be clear, private companies do not deserve adulation as they have plenty of faults.  However, as sources of innovation and adaptation to maximize wealth, no better system has been devised.

Dialogue, not monologue.  Facts, not fiction.  Heads and hearts, not just one or the other.  Businesses have one primary measurement; profits. Governments have many measuring sticks, but over all they have the responsibility to provide clarity and good governance. As Larry the Cable Guy would urge; they must ‘get ‘er done’.

Whatever your solutions to the above issues, please write and urge your elected representatives to get ‘er done.  All legislative salaries and perquisites are paid by taxpayer dollars, and they must be held accountable for this country to work.

[i] Back on Top” (The Economist, September 21, 2013 print version) and Bloomberg