After subjecting readers and myself to what seemed like endless discussion of the frightful “fiscal cliff,” I was done talking about the incessant shenanigans coming out Washington, D.C.
I hoped we as investors had better things to occupy ourselves with such as corporate profits, stock valuations, overseas markets and other financial metrics. For a while it looks like we did. With no pending manufactured political catastrophes and no election year duplicity, U.S. markets were able to have a great start to the year.
But alas, not to be overshadowed by the reality we all live in, Washington is back at it again. Now, with the dreaded “sequester” upon us, we find ourselves once again subjected to the insanity of the federal government.
The sequester refers to the automatic across the board federal spending cuts from the 2011 deal to extend our nations credit limit, the manufactured crisis that resulted in our nations credit rating being dropped.
The cuts were to equal $85 billion per year over and were supposed to target both defense spending and domestic programs so Republicans and Democrats would both have “skin in the game” by having their pet programs impacted. The spending cuts are designed to begin phasing in today.
Apparently these cuts are a bad thing and the President has been touring the nation telling us how much we are going to miss when this $85 billion is gone. In his defense, I think he really believes what he’s saying, but I’ll take the other side of that bet and it looks like investors come down on my side.
Investors hate uncertainty more than just about anything. In the case of the sequester, there is no uncertainty. We all know the day when Washington is no longer able to spend recklessly is coming. We can get there on our own terms – and the sequester is a good start – or we will eventually get there on the terms of the bond and currency markets. Either way, the party is getting late.
I believe this is why investors are yawning at this most recent political crisis. Sure GDP growth is probably going to slow a bit, and unemployment may unfortunately trend higher over the short-term. Over the long-term however, this process is necessary and quite frankly late in coming.
So as an investor I’m willing to take the other side of the President Obama’s bet, but I’ll go even further. I’ll bet that the great majority of us don’t notice any difference at all after the sequester. The federal government is an inefficient and expensive provider of services. If something vital happens to slip through the spending cracks, it likely to be picked up by states, charities or local governments, and they’ll probably do a better job at it.