Deficit? What Deficit?
During my years in the Navy, I used several foreign language pocket phrase books provided by the Defense Department. Originally produced by the War Department for use after the landings in Normandy, later editions in many doubtlessly unforeseen languages accompanied our forces all over the world.
The formats were almost identical. Each began with the appropriate translation for inquiring about the directions to (never from) the capital city. After questions about finding food and beer, every version contained my favorite, “Do not become alarmed. The American government will pay for the damage.”
This summation of much of our foreign policy history also applies to the current controversy about the government’s dealing with the federal debt ceiling. It would be a heedless and stupid blunder for our elected officials to incur the costs that a default would bring from higher interest costs. The U.S. is still the world’s largest economy, free of the constraints that strangle fiscal policies in Greece and Italy, and need not sabotage its own fiscal interests.
Today’s federal deficit should hardly be a surprise as it is the inevitable product of conducting two wars with today’s expensive equipment while cutting taxes. All three of these actions received majority popular support at the time so nothing is gained today by quarreling about past responsibility. There are many differences between public and private fiscal management but Congress currently sounds like a bitter family arguing over who was the biggest offender on the credit card bills.
Beginning in the Johnson Administration, spending grew for the Vietnam War as well as domestic programs. The legacy was an extended period of inflation. The possibility that current fiscal strains will bring a similar rerun is a background risk that could be very damaging to returns on longer-term bonds. The Federal Reserve has repeatedly noted its awareness of this risk although its present emphasis is rightly on its statutory duty to promote employment through eased monetary policies.
These are working, albeit slowly, with the housing sector continuing to be dead weight. The real scapegoat for the painfully slow recovery is the severity of the housing market collapse, already down more from its 2007 peak than the 31% peak to trough fall during the Great Depression. Creation in the 1930’s of the FHA and other successful combinations of public and private funding such as the Tennessee Valley Authority aided recovery. Similar efforts to address today’s problems including infrastructure and energy production may lie ahead after we work past today’s headline crises.
Unlike housing, business sectors like advanced manufacturing that demand innovation and competitive export strengths are doing quite well. Their June quarter earnings reports are likely to reflect this progress, making buys timely now. Big caps include 3M (MMM-$96), IBM (IBM-$174), DuPont (DD-$55), Intel (INTC-$22), Int’l Flavors and Fragrances (IFF-$64) and EMC (EMC-$27). Attractive smaller companies include Sigma-Aldrich (SIAL-$74) and Rockwell Automation (ROK-$84).
The stock market continues to behave rather well in the face of discouraging current news. This indicates underlying buying strength and smaller companies should see increasingly favorable stock price action. FEI (FEIC-$37), an advanced microscope maker, combines rapidly growing sales and earnings with a reasonable valuation. Safeguard Scientifics (SFE-$18) has an outstanding record from venture investments among smaller companies in life sciences and technology. Owning it provides instant diversification into a select portfolio of small cap stocks.
Accretive Health (AH-$28) is a new management services company for hospitals and other health care providers. Its valuation is high but so is its growth with sales sprouting well over 30% quarterly with earnings growing even faster. The company has a high-powered Board that should provide additional momentum.
I continue to believe this debt ceiling crisis will pass without fiscal suicide attempts. As before, the government (meaning us) will pay for the damage. Economic recovery with accompanying greater tax receipts will mitigate the damages although the long-term costs may be the return of serious inflation.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] (949)494-1376/ (800)697-2622 www.crowellroberts.com