Market Insight - The US Debt Crisis
Even today’s very good numbers on new unemployment claims, which fell below the 400,000 level for the first time since April, got lost in the swirl of legitimate concern, groundless speculation and partisan fear mongering surrounding the debt ceiling debate.
The point is, as we all indulge in the real time media fueled orgy of worry and self pity, the real worrisome and potentially damaging issues run the risk of being obscured or completely ignored.
As investors, we can look back at countless economic episodes, serious in their time, “crises” that periodically develop, get worse, create worry and fear, and are almost always resolved in an acceptable way. The things that have really hurt us weren’t accompanied by this kind of build up; they came without fanfare.
In making the asset allocation and investment recommendation for your portfolio, a wide range of market and economic scenarios are factored in. We expect and account for the frequent episodes of irrational enthusiasm as well as emotion driven despondency and fear, like the present. (And there’s nothing like watching a dysfunctional government in real time, to whip up our dismay and even disgust.)
We don’t believe that any President who stood in front of the American people and took the oath of office would ever permit the US to default on its obligations. The failure of the executive branch to act in those circumstances would be unthinkable. The very small chance of a minor delay in payments exists, but one that would be brief and not disastrous.
The effects of a downgrade are more serious. Again, fears of immediate skyrocketing interest rates, mass selling of treasuries and financial panic seem almost silly, like a doomsday scenario lifted from a corporate version of The Twilight Zone. Unfortunately, the rating agencies and infrastructure, which courageously maintained a AAA stamp on billions of dollars of worthless mortgage-backed securities, are still the only game in town. And we may see a downgrade no matter what. Even a small rise in the core cost of borrowing is bad for a struggling economy, and the economic implications can have ripple effects of their own. This is the greater concern, a little obscured in all the teeth gnashing and public angst.
The Bedminster Group
July 28, 2011