Fiscal Mudslide

November 2012 Investment Commentary by Richard W. Boyer, CFP®, CFA

by / Monday, 12 November 2012

Just prior to the election four years ago, in my November Investment Commentary I wrote, “The economic issues today…are much bigger than either of the presidential candidates. The loser might be the winner in this election.” I could repeat that statement today except the part about the loser being the winner. I’m confident Mitt Romney would not agree.

In 2008, both candidates made promises that were ridiculously impossible to keep. It was naive and arrogant in 2008 for either candidate to promise Americans that he could lead us out of that economic disaster in just four years. Anyone who knew anything about economics could tell it was going to take many painful years for our economy to recover from 2008. 2008 was NOT your ordinary economic crisis.

So here we are four years later and Obama’s excuse for failing to reduce unemployment is, “Wait a minute…it’s not my fault…I inherited a huge economic problem.” Of course he inherited a huge economic problem. I knew it then. You knew it then. Even Obama knew it then. But that didn’t stop him from promising that his plans for economic stimulus would reduce unemployment to 6% in four years. Four years? I’m not sure he’s going to be able to do it in EIGHT years!

Candidates say what they HAVE to say in order to get elected. They have to lie. Not just Obama…all of them. Listening to the Romney/Obama debates was painful at times…although not nearly as painful as listening to Joe Biden and his “friend” in the vice presidential debate. (The presidential debates would be infinitely more interesting if both candidates were attached to electrodes such that they would receive a painful shock whenever they said something that was not true. Just an idea.) (BTW, in the second and third debates, not one time did Obama use the phrase “corporate jet owners.” I was impressed.)

So here we are. America has voted. Barack Obama recovered from his disastrous first presidential debate and accumulated well over the 270 electoral votes needed to live in the White House for the next four years. Florida is still unknown at this writing but who cares? Obama didn’t even need Florida.

Obama is the President, the Democrats control the Senate and Republicans control the House. Wait a minute… isn’t that where we started? They spent hundreds of millions of dollars on all those campaign ads and we’re back where we started?

Now that the election is over, we can focus on the “fiscal cliff”…which may turn out to be the biggest non-event scare since Y2K. The fiscal cliff (when the Bush tax cuts are scheduled to expire December 31st) is likely to be more of a fiscal mudslide, if that. President Obama can go to work on it immediately. In his first term, Obama ignored the economy for the first year because he was focused on getting Obamacare passed. This term he can focus on something more immediately important. The Republicans can focus on it immediately because they don’t have the same incentive to make Obama look bad now that he is serving his final term as president and they won’t have to run against him again.

Both parties are going to compromise. They are going to compromise for two reasons. 1) They don’t have any good reasons to NOT compromise. 2) The entire country wants them to fix it! The entire country wants it so badly that the Republicans can agree to higher taxes without committing political suicide and the Democrats can agree to entitlement reform without committing political suicide. So stop worrying about Y2K…I mean the fiscal cliff. It ain’t gonna happen.

One of the casualties of the past four years has been the concept of capitalism…how capitalism is unfair and how the rich get richer and exploit the poor…and how governments need to help level the playing field for the little guy, yada, yada, yada.

The well-meaning but misguided Occupy Wall Street movement expressed their anger at the egregious acts committed by Wall Street bankers (I agree…they were egregious). What they didn’t realize is that their anger needed to be directed at Washington, not Wall Street.

Every now and then people need to be reminded that capitalism is a lot like airplanes…you only hear about the disasters. You don’t hear about the thousands of successful take-offs and landings that occur daily. You only hear about Enron, Fannie Mae, Lehman Brothers, etc. You don’t hear about the thousands of companies in our country that provide for their employees because of capitalism.

There are 11 of us working at Boyer & Corporon Wealth Management. Those 11 employees have nine spouses and 16 dependent children. That’s 36 people who have shelter, food, warmth, clothing and comfort…because of capitalism. Last year it was 28 people. Next year we hope it will be over 40.

I suppose we could just give our employees the money that we pay them without making them work for it…like a charity. That would probably be a lot nicer. I mean, why not just share the wealth? That would be so much more charitable, I suppose…at least for a while. We could probably do that for a year or so, but then they would have to go somewhere else to get their charity because we wouldn’t have any more money to give them because all of our clients left us for another wealth manager whose employees were working.

There are thousands and thousands of companies like ours all over America and they work very well. Capitalism may not be a perfect system, it’s just better than all the other lousy ones.

The best form of charity is capitalism. The best form of travel is an airplane. They both have disasters. We shouldn’t give up on either one of them.

The stock market gave back a little in October, down almost 2%. Since last October, the S&P 500 is up an impressive 15.2%. However, the two days after Obama was elected, the U.S. markets were down over 3%. The Dow Jones Industrial Average fell 313 points the day after the election, its largest drop of 2012. Investors certainly seemed unhappy with the outcome of THAT election! I guess maybe they were expecting a different outcome, huh?

Call us crazy but we took the opportunity to put money in stocks. We love it when investors get emotional and sell stocks simply because they are angry or scared. That gives us an opportunity to find bargains. We also love it when investors get emotional and buy stocks because they are elated. That gives us an opportunity to take profits.

At Boyer & Corporon Wealth Management, we feel a short period of “economic certainty” is looming. I didn’t say you are going to like this era of certainty, just that it will be less uncertain. Europe has been kicked down the road. (Not solved! Just postponed.) The fiscal cliff will be kicked down the road. Obamacare will not be repealed. Our national debt will someday become a large problem…but not in the next six months.

Four years ago, I wrote, “We are not positioning our portfolios to accommodate the result of the election.” That is basically true today as well. The election removed one unknown for the stock market: Who is going to win the election? Stock markets like certainty…at least they like a lack of uncertainty. It doesn’t even have to be “good” certainty. Whether you like it or don’t like it, we know who is going to be president for the next four years. That is certain.

Over a longer period of time we see fiscal policies, both here and abroad, leading to uncertainty of the value of currencies. To that end, we will always look to increase our exposure to investments related to hard assets – particularly companies who extract hard assets out of the ground (e.g. gold mining companies).

However, in the near term, as long as the Fed continues to hold down interest rates, investors are going to be challenged to find yield. One of the places they can find yield today is the stock market. There are many stocks which pay dividends of 2% – 5%. Some of them are good companies with good products and are growing their earnings. Although we don’t expect a roaring long-term secular bull market, we think there are some good investment opportunities after the sell-off and have slightly increased our equity exposure.

Meanwhile, I will still use airplanes for my long distance travel.