Thursday, July 28, 2011

Debate and Dysfunction

Although both sides are gridlocked on the debt and budget deficit debate, we believe that our nation’s debt ceiling will ultimately be increased.  There is really no other reasonable choice at this point in time than to increase our country’s borrowing limit.  An actual default on the payment of any of our financial obligations would be disastrous to our economy, our currency and our future growth opportunities as a country.  We believe that our politicians will see the light on this issue and come to an 11th hour resolution.   

Our leaders must come up with a budget proposal that begins to reduce our deficit and creates a realistic plan for reducing future government borrowing.  All the political wrangling of the past few weeks has brought to light the dysfunction that exists in our government, and it has greatly increased the possibility that the rating agencies will downgrade our nation’s credit worthiness.  Although we would agree that debate is a healthy part of the process, at some point compromise becomes as equally important.    

If the U.S. loses its AAA credit rating it will ultimately lead to an increase in borrowing costs for not only our federal government, but also businesses, municipalities and consumers.  Although not as threatening as a default, a credit downgrade could derail our fragile economic recovery.  Gridlock in Washington is already creating confusion for corporate America.  Businesses are delaying hiring and capital expenditure decisions because of uncertainty.  In a July 27 Wall Street Journal article, “Companies Bracing for U.S. Default,” Ford, GE, and Eaton Corp. all stressed that the uncertain environment has led them to maintain more than usual cash positions and even to draw on lines of credit to increase cash reserves.        

We believe investors should maintain their core equity positions through this volatile time period.  Corporate profits remain strong and stock prices are reasonably valued.  If stock prices decline significantly it may create a buying opportunity for long-term investors.  We also think it is prudent to keep bond maturities short and quality high on a significant portion of ones fixed income portfolio.