President Obama can claim that his government never once exceeded the budget in his first four-year term because Congress never passed a budget. The US has not had a budget in four years. As the country increased the national debt by about $5 trillion in deficit spending, it never went over budget. Ridiculous, no?
The threat of the Fiscal Cliff was dispatched at year-end with tax increases and no spending cuts. Dealing with the issue of spending cuts was deferred by our praise-worthy representatives until late March. The larger issue became the debt ceiling. The accepted limit for the United States’ national indebtedness stands at $16.4 trillion dollars. The President has argued that we will not be constrained by such arbitrary limits and that the US will pay its bills. He adds that this is non-negotiable.
Republicans haven’t been faring well in the recent few disagreements. They have confronted the President and Democratic majority in the Senate the way a squirrel confronts an eighteen wheeler on the turnpike. Their latest strategy after last weekend’s retreat in Williamsburg is to delay the vote on the debt ceiling until May 19th. This allows the next major debate to focus on spending cuts required by the Fiscal Cliff that must be addressed by late March. It seems the Republicans feel they are on more solid political ground on this issue. Don’t hold your breath!
There is an enchanting aspect to the proposed May 19th debt ceiling deadline: if either house does not pass a budget by April 15th, there will be no salaries paid to the members of the respective delinquent house. Congressmen and Senators without pay? Woo hoo! Finally, these guys might feel a pinch. We are not convinced but love the concept.
While the political symphony plays its syncopated, cacophonous worst, markets are doing pretty well. Without spending cuts, the fiscal deficit stimulus continues unabated, and the monetary stimulus barley hints at reduction. The waves of cash continue to support the economy and keep interest rates low. Earnings so far are generally positive, and share prices are climbing.
When the majority feels fat and happy, we begin to worry. The Investor’s Intelligence survey just released reports that only 24.5% of advisors are currently looking for a “correction.” That’s fat and happy. Against a background of artificial fiscal and monetary support and an abundance of positive sentiment, we continue to feel cautious.
The good news is that a number of pension, insurance, and municipal funds are showing a shift from very high priced bonds back into equities. This is a trend we have anticipated for some time, and it strikes us as healthy. The S&P 500 Index is up 4.75% through January 22. A pull-back is in order, but we think the music will continue to play as long as the government dollars continue to flow. Woe to him who hasn’t a seat when the music stops.