Ravengate
Partners - Stock market, economic and political commentary by Patricia Chadwick

The volatility in the markets this past week may be reminiscent of what took place in August and September of 2008, but this summer of our discontent is a far cry from what the world faced three years ago. Thank goodness!

That is not to say that the issues roiling the markets today are insignificant or of little consequence. To the contrary, the recent sharp decline in equity markets around the world reflects the host of global challenges that face economies and governments. And the equity market will likely continue to be volatile for a number of reasons.

For one thing, the banks remain under stress. The good news is that the entire banking system is not as leveraged as it was in 2007/2008. However, the largest banks still have far too many distressed loans on their balance sheets. That puts them in the unenviable position of being a reluctant lender, preferring to hoard cash.

Perhaps most important, consumers, the driving force for growth in our economy, are both underemployed and over-indebted. Such a condition severely crimps discretionary spending. Consumers, like the banks, are being forced to reduce their own debt and downsize their balance sheets. This process takes a long time and is the reason that economic growth is likely to remain sub-par for a number of years into the future. And lest we blame the young for profligate spending, it should be noted that it is the 40 and 50 and 60 somethings who have perpetrated this overindulgence. It is refreshing to see how many of the 20 and 30 somethings are choosing to live within their means, utilizing debit cards rather than the potentially bottomless pit of credit cards. And they seem to understand the need to save for their own retirement.

What they are entitled to expect is credible, prudent leadership from Washington. Our political system is choking on rhetoric – all talk and no action, or maybe better put – all shouting and irresponsible, self-centered brinksmanship. I wonder sometimes if the shrillest of the voices in our national legislature don’t reflect the views of but a small percentage of the population. Where is the representation for the nearly silent vast majority that is centrist in its politics and its values? Where is the leadership that can bring both sides together as President Reagan, working with Speaker of the House, Tip O’Neil, was able to do? I am willing to wager that, come the next election, the most secure seats in Congress will be held by those who have been willing to meet in the center over major issues.

Our challenges are daunting but not insurmountable. They will require major restructuring of long term retirement programs currently provided by the Government. Social Security must and will be means tested – the sooner the better. We will also need to overhaul our tax system. A good start is the elimination of all loopholes, those secretly agreed upon ‘deals’ that get slipped into legislation in the dead of night. (I sometimes wonder if the only way to get rid of tax loopholes is to outlaw lobbyists. The only bad news from that would be that the unemployment rate would likely sky-rocket – at least in Washington, D.C.)

The stock market reflects the outlook for corporations to generate profits and pay dividends. Profit growth in the U.S. has been excellent since the recession bottomed out in 2008. Today, nearly 40% of the stocks in the S&P 500 yield more than the current 10-year Treasury rate. The list includes such household names as PepsiCo, Merck, Kimberly Clark, Johnson & Johnson, Proctor & Gamble, Staples, Sysco, McDonalds – all companies that are sound, growing and most likely will be raising their dividends for years to come. Of course corporate earnings are not immune from economic activity, but today’s valuation of the S&P500 seems attractive, particularly when compared to the returns available on fixed income securities.

Three years ago, our economy as well as those of much of the rest of the world came close to hurtling over a precipice. The invaluable and too much maligned support from the Government did in fact save the day. We went through a serious recession and are still clawing our way back to prosperity. The challenges facing us today are long term structural issues. They must be confronted and resolved before they mushroom out of control. But they do not compare in urgency or magnitude to the events in the summer of 2008.

The markets around the world are rattled silly this morning by the first ever downgrade of the U.S. Government’s debt by Standard & Poors. That is understandable but not, in my mind, rational.

There is no way the U.S. Government is going to default on its debt obligations. Its debts are no less safe this morning than they were on Friday or one year ago or ten years ago. It is true that our country’s balance sheet is less healthy than it was a decade ago, but look what we have been through – a recession the depth of which had not been experienced since the 1930’s while simultaneously engaging in two wars. Debt buildup and fiscal deficits were inevitable.

At the end of World War II, our debt as a percent of GDP was far higher than it is today. The Government spent huge amounts of money subsidizing mortgages and providing education through the GI Bill. The country emerged from that era into a sustained period of growth and prosperity which allowed the balance sheet to right itself.

Today we face more than a few challenging issues but they are not insurmountable if only our elected officials would work for the good of the people. There is a need first and foremost to get the economy revitalized. The reason that is proving so difficult to achieve is because the balance sheet of the consumer is still going through a downsizing. In addition, the banks are also continuing to downsize their own balance sheets. It is difficult to spend when you are trying to pay off debt.

Corporations are becoming the easy whipping boy for not hiring more of the unemployed. But they are not the culprit. They came through the recession in solid financial shape and they would like nothing more than to see good demand that would allow them to increase employment.

One thing is for sure – a massive tax increase will NOT be productive for the economy or as a means of reducing the debt levels of the Government. Such a strategy would be counterproductive. However, eliminating tax loopholes –the unfair tax treatments that allow large and profitable companies to pay nearly NO taxes – is an essential step in moving towards reducing the fiscal deficit. The same is true regarding individual taxes – the wealthiest individuals should not be able to take advantage of tax loopholes that allow them to pay the lowest tax rates. It is appalling that Congress cannot agree in a bipartisan way to eliminate tax loopholes – genuine loopholes, NOT the very legitimate deduction of mortgage interest and charitable contributions.

Longer term there is no doubt that the issues of Social Security and retirement health care must be addressed. At least they are now being discussed. Only a decade ago, they were referred to as “the third rail of politics”. So progress has been made. At some point in the not too distant future, Social Security will be means tested – as it should have been all along. And individuals will be required to work longer before receiving their benefit. This is simple arithmetic that goes hand in glove with the increase in life expectancy. A better solution would be to allow – no, to force – individuals to save for their own retirement. The money would be their own, not the Government’s, and they would be able to pass it on to future generations if not consumed in retirement. Admittedly, such a program would need to provide supplemental support for those who could not save sufficiently during their working life. That would be the Social Security part, but it would be necessary for the few not the entire population.
I admit that none of these issues is really simple but what is disheartening, or perhaps better said, infuriating is to watch our lawmakers on both sides of the aisle engage in brinksmanship rather than productive dialogue and action.

Congress spared no words demonizing ‘Wall Street’ for the recession of 2007 and the precipitous decline in the markets, never admitting their own culpability in the debacle. Today the turmoil in the markets can be laid right at the feet of Congress. Let’s hope they understand the seriousness of their criminally inept behavior.

The markets around the world are rattled silly this morning by the first ever downgrade of the U.S. Government’s debt by Standard & Poors. That is understandable but not, in my mind, rational.
There is no way the U.S. Government is going to default on its debt obligations. Its debts are no less safe this morning than they were on Friday or one year ago or ten years ago. It is true that our country’s balance sheet is less healthy than it was a decade ago, but look what we have been through – a recession the depth of which had not been experienced since the 1930’s while simultaneously engaging in two wars. Debt buildup and fiscal deficits were inevitable.
At the end of World War II, our debt as a percent of GDP was far higher than it is today. The Government spent huge amounts of money subsidizing mortgages and providing education through the GI Bill. The country emerged from that era into a sustained period of growth and prosperity which allowed the balance sheet to right itself.
Today we face more than a few challenging issues but they are not insurmountable if only our elected officials would work for the good of the people. There is a need first and foremost to get the economy revitalized. The reason that is proving so difficult to achieve is because the balance sheet of the consumer is still going through a downsizing. In addition, the banks are also continuing to downsize their own balance sheets. It is difficult to spend when you are trying to pay off debt.
Corporations are becoming the easy whipping boy for not hiring more of the unemployed. But they are not the culprit. They came through the recession in solid financial shape and they would like nothing more than to see good demand that would allow them to increase employment.
One thing is for sure – a massive tax increase will NOT be productive for the economy or as a means of reducing the debt levels of the Government. Such a strategy would be counterproductive. However, eliminating tax loopholes –the unfair tax treatments that allow large and profitable companies to pay nearly NO taxes – is an essential step in moving towards reducing the fiscal deficit. The same is true regarding individual taxes – the wealthiest individuals should not be able to take advantage of tax loopholes that allow them to pay the lowest tax rates. It is appalling that Congress cannot agree in a bipartisan way to eliminate tax loopholes – genuine loopholes, NOT the very legitimate deduction of mortgage interest and charitable contributions.
Longer term there is no doubt that the issues of Social Security and retirement health care must be addressed. At least they are now being discussed. Only a decade ago, they were referred to as “the third rail of politics”. So progress has been made. At some point in the not too distant future, Social Security will be means tested – as it should have been all along. And individuals will be required to work longer before receiving their benefit. This is simple arithmetic that goes hand in glove with the increase in life expectancy. A better solution would be to allow – no, to force – individuals to save for their own retirement. The money would be their own, not the Government’s, and they would be able to pass it on to future generations if not consumed in retirement. Admittedly, such a program would need to provide supplemental support for those who could not save sufficiently during their working life. That would be the Social Security part, but it would be necessary for the few not the entire population.
I admit that none of these issues is really simple but what is disheartening, or perhaps better said, infuriating is to watch our lawmakers on both sides of the aisle engage in brinksmanship rather than productive dialogue and action.
Congress spared no words demonizing ‘Wall Street’ for the recession of 2007 and the precipitous decline in the markets, never admitting their own culpability in the debacle. Today the turmoil in the markets can be laid right at the feet of Congress. Let’s hope they understand the seriousness of their criminally inept behavior.