Aug 02, 2011
Debt Ceiling Done, What's Next?
By Andrew Mickey, Q1 Publishing
The debt ceiling deal is done and now it’s onto the next “crisis.”
The deal went down to the arbitrarily assigned deadline and, although details are still coming out, we know a few critical things already.
The key is these cuts aren’t really cuts at all.
The always discerning folks at the Cato Institute showed how deep these “cuts” really go in Budget Deal Doesn’t Cut Spending:
As you can see, the cuts are really just cuts in expected spending.
If you wanted to buy a $30,000 car and instead chose to buy a quality used care for $10,000, did you really save any money?
In the real world…no, of course you didn’t.
In Washington…that’s a savings.
The rest of the remaining details will come out over the next few weeks. And if you were expecting a bit of seriousness from Washington on spending, you will surely be disappointed.
But the market is already predicting how deep these cuts will really be. The defense budget, one of the few areas to really see cuts, shows the market isn’t buying the rhetoric. Shares of two top defense contractors, Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC), are both down just over 4% today compared to the overall market decline of 3%. These two stocks would have been hit march harder if their #1 customer was really cutting back sharply.
But it is all passed. Now, for your portfolio’s sake, it’s time to look forward. So here’s what’s coming up, what it means for your money, and the moves to start making now to get prepared.
The Budget
The debt ceiling debate has dragged out for months. It’s now August. A new budget plan must to be in place by October 1st.
What’s going to happen here? The safe bet, and the likely correct one, is to expect more of the same for a number of reasons.
First, a true budget is unlikely to pass. No one wants to be officially on the books for voting in a plan that increases U.S. government debt to $20 to $25 trillion in the next 10 years, which is what the passage of an official budget would signify.
Second, the eventual budget deal will include more phantom cuts.
Third, negotiations don’t end until they have to end. Both sides will hold out until the last possible moment.
The Gingrich that Stole Christmas, Part II
Back in 1994, the Republicans took the House of Representatives and Newt Gingrich was set to become Speaker of the House.
Newsweek reacted to the conservative ascendency and budget cuts to come with:
Now, due to the structure of the debt ceiling deal, it’s about to happen all over again.
The deal calls for a Bipartisan Super Commission that will
decide on where to make more spending cuts and revisions in the tax code
tax increases to reduce the deficit.
This group will certainly be as productive as every past Commission, Blue Ribbon Panel, or the dozens of others which have been formed in the past. Congress will be required to vote on the group’s proposal by December 23rd. If the spending cuts and tax increases proposed by the commission aren’t accepted, different spending cuts will be automatically imposed.
As a result, any representative who votes for spending cuts or votes against them and accepts automatic spending cuts the day before Christmas Eve will certainly be demagogued similarly to the Gingrich Who Stole Christmas.
But here’s the real kicker. Those “triggered” spending cuts won’t go in effect until 2013, buying another year of the unhindered borrowing and spending.
The Start of Bridgie Mae and Roadie Mac
Finally, and most dangerous and costly, will be the big issue in 2012: jobs.
There’s a reason no politician has taken on the jobs issue yet. They know it’s powerful and they want it to be there for the election. Now it will be time to start moving.
The foundation for a big stimulus/infrastructure/jobs program is already starting to be laid.
I’m anticipating a program that much of the public might actually buy into. Here’s what it is and why.
You see, the average independent voter isn’t opposed to government. They’re opposed to what they see as “wasteful” government.
As a result, I see a nearly trillion dollar infrastructure program kicked off. But it won’t be like other failures in the past. It will, over the long run, be far more wasteful and have a much higher price tag.
We’re likely going to see the proposal of an “infrastructure bank” to directly address the jobs issue. Think of it like the equivalent of Fannie Mae and Freddie Mac. In this case, Bridgie Mae and Roadie Mac.
It’s a win/win all the way around in the short-run.
The independent voter sees all the good side. They see private sector involvement to spend money more efficiently, very limited government spending on paper because it’s all borrowed privately and merely guaranteed by the government (which doesn’t show up on the budget), and lots of “jobs.”
The government, meanwhile, gets what it wants. It gets to pick the winners and losers, pay off their financial benefactors, and spend a lot of money without having to pay for it right way.
A program like this may be very popular. It’s focused on infrastructure and there are minimal public spending outlays.
However, it all will have come with a big price tag eventually. The government will guarantee all the debt run up by public-private partnerships.
Over the short-term the debts will be paid and all will seem well.
Over the long-term, this too shall end as badly as other big government boondoggles. Cost overruns, ever-growing operational and maintenance expenses, and everything else that goes wrong when government gets involved will leave the government holding the bag for the cost of these projects.
The price will have to be paid. That price, however, won’t be paid until a many elections down the road.
The Jobless
Recoveryless Recovery
That’s what’s coming in the short term.
It will cause growth to remain slow. Many infrastructure projects and business investments will be held back to see if they can get a government subsidy. And the private sector and consumers will continue to be worried about the inevitable tax increases to pay for it all.
The general economic malaise will continue for years.
Remember, we’re coming out of a debt crisis and we will never emerge and return to the strong-growth days when the debt is either repaid or, the much more likely, cleared away by default and deflation. Invest accordingly.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1
Publishing
