Yet again.
October 17th looms large as a critical inflection point in our economic/political discourse. On that date the U.S. Congress is supposed to “raise the debt limit”, which simply means allocating the funds to cover debts already incurred by the Federal government. The date is being held hostage by both political parties in order to relegitimize the previous election (2012) and to dial-up the rhetoric of disparate political ideology.
Thus far, the markets have reacted with trepidation, fear, or dispassion about any ideology that inhibits the engine of capitalism from humming.
But let’s take a look at a wider aperture perspective about October 17th. On that date, no one suspends the laws of physics, gravity, biomedicine or chemistry. No one questions whether the Earth will continue to orbit the Sun. Babies will still be born, and, sadly, some of us will also die.
No, the issue on October 17th is how the world’s financial markets might react to a man-made catastrophe in which two political parties hold diametrically different viewpoints about how the machinations of government and finance should operate. Should the U.S. default on its debts, the consequences could be ominous and cataclysmic as one side argues, or merely a temporary imbalance of payments as the other side believes.
Either way, and quite simplistically, my job is to navigate my client’s financial resources through the man-made mess so as not to take on too much water, and to emerge on the “other side” (whichever it might be) relatively unscathed and intact. I will do this not by “timing” the market, but through prudent asset allocation and a healthy realization that crises are part of the exogenous debris through which one must traverse to actualize long-term tenets of objective science and subjective expectations.
Process.
By traditional measures, this budget debate is a relatively new phenomenon. The debt ceiling has not always been the rhetorical obstacle it has become today. Paying for one’s debts, after all, is something all households and businesses do regularly. The difference here is that the U.S. government is not really a business, per se. It also holds the power to print currency if it needs to, something you and I can’t quite manufacture.
So as the markets lurch towards this artificial Armageddon, we must still be thankful for life’s basics: birth, death and everything in between.
There is no question that interest rates, not just stocks, will be significantly affected if a “default” were to occur. Mortgage rates, bond interest, and the cost of money will become “more expensive” under a cloud of global suspicion that the U.S. cannot get its fiscal house in order. In a climate where we’ve already painted ourselves into a manufactured low interest rate corner, a rate reversal (and its magnitude) could have significant stopping power on an already fragile economic recovery, not to mention that any uncertainty about corporate growth might also stunt valuations in the stock market. This is a rebalancing of factors for which no one can fully prepare.
Even if stock prices fall, history tells us (as do current cyclic trendlines) that momentum is on our side. Two years into a recovery, quantitative performance is far more influential upon anticipated returns than is the political debate in Washington, although make no mistake that this “exogenous noise” does pose some short term debilitation to the data. Some have suggested that the current government shutdown and the fiscal debate could shave one percent off fourth-quarter GDP projections. This crisis, as with others, will have a resolution. When, is another matter.
Investors can hold on to the fear of a calamity about to befall us, or they can widen their examination of current events and global demographics to realize that their family is still first in their priority, their health is the most important thing, and that long-held theories of market analysis will not dissolve by attribution to one man or political party. It might not make sense this week, but we have the tools to get through this.
Scotty C. George
(212) 624-1147
The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and it accuracy cannot be guaranteed. It is intended for private informational purposes only. Any opinions expressed are subject to change without notice. Du Pasquier Asset Management and its affiliated companies and/or individuals may from time to time own or have positions in the securities or contrary to the recommendation discussed herein.
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