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How the Lack of Balance in US Government Is Affecting Your Portfolio


The scenario for the United States -- both in general economic terms as well as pure investments -- is a Democratic president with a Republican Congress.

"To world peace..."

Many of you who have known me over the years, and perhaps raised a glass or two containing a tasty adult beverage, know the quote above to be my standard toast – lifted directly from the great movie, Groundhog Day. The first time Andie MacDowell ("Rita") meets the horribly self-centered character played by Bill Murray ("Phil"), he clumsily asks her, "What shall we drink to?" and she haughtily answers, "I always drink to world peace." From that moment forward he woos her with that very line as each day magically repeats… Well, we weren't wooing any beauties at the pub in the quarter just passed, but it was eerily similar to a year prior. Same people, same problems, similar results – they should take a lesson from the movie and learn from their prior mistakes.

Also, I state only "similar results" because, although the emotional energy of the quarter at times was just as negative as last year with corresponding negative volatility, this year the market lost < 1% for the quarter, whereas last year the S&P 500 was down almost 12% in the same period.

My themes remain similar as well: a (very) muted global recovery with short-term (month-to-month) ups and downs, a terrible U.S. residential housing market, extremely low interest rates (more because banks refuse to lend, rather than lack of demand), "Old" Europe in rolling economic distress, and every other reason in the world to NOT invest your money – the "wall of worry." However, you know my feeling that going against the herd is generally the correct position – as long as you are not blind to the outlier symptoms that truly can cause havoc in the long term with little hedging ability.

Of course, those outlier risks also continue to dwell in the same neighborhood as before, in my opinion, and that is in the realm of the toxic political environment right here at home. Which is why the quote I opened with narrowly won out over another pop-culture favorite, "Fear and Loathing in" the US -- because my political fears are also coming closer and closer to fruition.

The GOP seems to continue to focus like a laser on removing President Obama by employing the strategy of continuing to talk down any recovery, discussing doomsday scenarios as likely, and directly acting in ways contrary to what is necessary to continue our climb out of the smoking economic hole of 2008. As stated before, I think this is disaster – for both the country and the Republicans. Yes, "it's the economy, stupid," once again as Mr. James Carville famously stated, but if things remain weak – and more importantly negative psychology ("the malaise" discussed last summer) – takes hold of our citizenry once again, I think all incumbents are in danger. This will serve to completely scuttle the majority the GOP holds in the House and waste any chance they have of taking the Senate.

I have my interests politically, but I write reports to give perspective to what I believe would be best for our portfolios. As my good friends at JPMorgan have shared in a past chart, the BEST scenario for our country – both in general economic terms as well as pure investments – is a Democratic president with a Republican Congress. Of course I realize we need to spend less, stop our wasteful wars, stop funding everyone else's country with money we don't have and with little to no appreciation from the recipients, etc., etc. However, none of that is ever actually accomplished unless the political crazies are marginalized on each extreme. Both are useful as a foil to the other side's message, but their actual policies are too narrow and extreme to be effective and beneficial in country our size. (Unfortunately, as any politician will affirm, moderates don't write checks.)

The foolishness of Americans as it relates to finances and the culture of growing self-centered lack of understanding continues as well. There was a poll released the other day stating that an almost two-thirds majority thought it was preferable for the US to DEFAULT, rather than raise the debt ceiling with no further action. The marketing major in me recognizes how poorly the question was worded with nothing but a Hobson's choice – the correct answer would be, of course, to cut spending, trim future budgets, and add a trigger to lower the debt ceiling again once the budgetary constraints kick in and our fiscal house swings back into balance – but the respondents chose the worst possible outcome of any for the long-term health and viability of our economy, not to mention the absolute destruction of our credibility as a global leader.

This, to me, outlines another emerging cultural trend that is equally as troubling as one experienced in the 1990s. Back then, there was a noticeable shift away from personal responsibility; everyone thought they "deserved" to be rich, that investing was easy, and if they actually lost money, it was clearly someone's "fault" and they should be compensated. (See the continued wild growth of class action lawsuits and plaintiffs' attorneys as blight on all business and innovation.) The current trend, I guess, is an offshoot of that mentality – there is no stigma attached to reneging on your financial obligations, either via a "walk-away" from a home / mortgage, a credit card, or whatever the case may be. There appears to be no cultural shame in not fulfilling an agreement – even those knowingly and freely undertaken – and that is troubling for our country's culture in general, not to mention the consequences in the investment world. You think complex mortgage bonds, a few big banks, or a little country like Greece can cause trouble when people lack confidence in their willingness and ability to pay? Child's play…

Of course, our political "leaders" have been brilliant as always in setting up a fall guy for their lack of ability to properly understand the issues or take appropriate actions that they feel have no obvious role in their reelection. That fall guy is currently Ben Bernanke.

I will by no stretch of the imagination say that I agree with everything the chairman says or does, but I do believe that his grasp of the problem is far superior to those of his political bosses in Congress. And the fact that extremists like Ron Paul somehow think that having Congress oversee (and politicize) our central bank could lead to anything but disaster is laughable. Whenever things in rest of the world get crazy, money still flocks to U.S. Treasury Bonds – do you really think that is because there is confidence in the great stewardship of Congress?
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No positions in stocks mentioned.
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