Please keep in mind, that although
I do have strong political views about the proper role of the federal
government in our lives, my commentary about clients’ investments focus NOT on
how politics “should” be, but rather the best strategies for dealing with
current political realities.
The present political
reality is that we have a government influenced by sharp political differences.
And, the electorate has allowed one side to have “veto” power over the other.
One only needs to read the
biographies of Alexander Hamilton and George Washington as well as other historical
writings to learn that our present situation is not much different from that in
1790 and most of our history as a nation.
Our founding fathers “compromised”
to create the system where a 55% majority (53% in the 2012 presidential
election.) vote does not give the “winners” the right to force the “losers” to
submit. (Only once in our history did
our leaders fail to compromise—when the minority decided to secede and the
majority sent an invading army to subdue and conquer them.) As evidenced by the US Constitution that
requires 75% approval for an Constitutional Amendment to pass, generally unless
one side controls 66-75% of the electorate—some form of “negotiation” is
required for anything of any importance to get done. (Many believe that this protection of the minority from the will of the "mere" majority is what makes us a great country.)
Unfortunately, some
negotiators choose confrontation rather than consultation as a strategy. One
side makes a demand, and the other states “I will not negotiate”. In Game Theory, this is called “Chicken”
where the loser is the one who gives in first.
It is a proven fact that most mature and rational people hate to “deadlock”
or “fail” in a negotiation. But, for some reason, our centralized federal
government has always been full of people who believe that when playing
Chicken, even if there is a “crash” because of a deadlock, they can still win…in
the NEXT ELECTION. (Perhaps we should elect people who are great negotiators
rather than great orators and campaigners.)
Both sides of the present
argument believe that they can gain control of BOTH the House and Senate in
the next election in 2014 if they can paint the other side as “Bad” or the “Most Worse”. Since
control of BOTH the House and Senate is a big deal—especially with a lame duck
President, expect a very serious fight.
I think the probability is that it will be as big as 2011. Our massive
debt and deficits magnify what is at stake.
So let’s see how the threat
of default and a “historic” downgrade of US Credit has affected investors:
In June 2011, the S&P500
was at 1345. It fell 18% to 1099 after the deadlock on raising the debt
ceiling. It recovered back to 1345 by February of 2012. Basically, a seven month long headache. For those that did nothing from June 2011 to
February 2012, nothing really changed.
The negotiation and “settlement”
in 2011, set up another confrontation in late 2012---the Fiscal Cliff and
Sequestration. The S&P500 peaked at 1465 in September 2012 (falling 8% by December) but quickly
recovered to 1465 by January 2013. The S&P500 reached
1700 in September 2013. In two years of
almost never ending Washington drama, the S&P500 rose 26%.
Trying to profit by selling
before the crises and buying at the bottom is not an investment strategy—it is
a gambling strategy. Nobody knows exactly what will happen and when. Most of my clients are not gamblers—so other than being
conservative and patiently waiting and looking for buying opportunities with
surplus cash—my general advice is to simply watch the drama play out.
It is impossible to predict
the exact outcome. But, history teaches that markets USUALLY recover remarkably
quickly and those that continue to hold a diversified portfolio of good quality
investments get wealthier over time.
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