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Coping With The Debt Limit, Fiscal Cliff Stock Market

By (David Kotok) |  Market Overview  |  Nov 26, 2012 08:19AM GMT  |   Add a Comment
 
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Debt limit is a term that creeps into the political lexicon every so often; it happens when America’s legal borrowing limit reaches its congressionally-set upper bound. Since the US nearly always runs an annual deficit, it has to confront congressionally-approved borrowing limits. Congress persistently acts in the worst interest of the country by using the debt limit as an excuse for brinksmanship confrontational politics.

The debt-limit debate is a charade. Everyone who understands it knows that. The US has been a borrower for nearly two centuries. It has never defaulted. But we do use this congressionally-introduced fiction to exacerbate political animosity. We are about to reach our debt limit again and witness another debt-authorization fight.

Fiscal cliff is another fiction. We do not need to have expiration dates on legislation, tax policy, or spending mechanisms. Congress designs them to mature immediately following a national election. Again, this is a charade created by the scoundrels that we elect to serve us in Washington. In fact, Democrats and Republicans agree on this one. They coalesce into a common threat to us by purposefully choosing termination dates that follow hard on the heels of elections. They exploit the short memory span of the distracted American electorate. Shame on us for having such short memories.

Now, we will witness both the debt-limit and fiscal-cliff debates; both charades are in play.

Why aren't Americans furious about this game that is being played at their expense? American voters don't want this charade, and they know the uncertainty caused by it is harmful to them.

We could chastise Congressional representatives, senators, and the White House and its advisors, each and every time they engage in these shenanigans. We don’t. American voters, CEOs, Wall Street investors, and the working public could make that chastisement a consistent, intense, and vitriolic affair. We don’t. Our so-called leaders could be told, "I am sick and tired of you manipulating the political process in order to create a crisis that hurts me. If this nonsense does not stop, you will not be able to convince me to be loyal to you because I am a Republican. You will not be able convince me to be loyal to you because I am a Democrat. You will not be able to convince me that you are responsible in the execution of your public office. Instead, you will have become my enemy. Therefore, I will vote you out. My most important political mission will be to get rid of incumbents like you who create a crisis when none is necessary.”

We could say that. We don’t.

Winston Churchill said, "It has been said that democracy is the worst form of government except all the others that have been tried." Churchill also said, "You can always count on Americans to do the right thing – after they've tried everything else." Sir Winston was correct.

We hope your Thanksgiving holiday was a good one. It provided America with Black Friday, football games, traditional turkey cuisine and our custom of familial gathering. 150 million of us moved around to visit the rest of us. We have enjoyed our uniquely American tradition. Now we must get back to business.

We will soon approach year-end, with its next round of holidays and celebration of a new year. Between now and then, we will watch the Washington charades play out. Will we remain distracted and voiceless as our lame and lame-ducked leaders continue these charades? Sad to say, this writer thinks we will be too silent.

Our greatness as a country is that we move on in spite of our government. We thrive, not because of Washington but by overcoming it. We succeed because half of our US economy is privately owned and independently managed. That’s right; over half the GDP comes from small business. The majority of jobs are created by those firms.

When it comes to publicly owned business, the US stock market realizes the world is not coming to an end. Market agents and investors recognize that the Federal Reserve's policy is firmly in place, that we will not permanently go over the fiscal cliff, and that we will not default despite the debt limit charade. Markets are beginning to accept that the Fed will keep interest rates extraordinarily low for a number of years.

During that time the US GDP will grow from the present level of $16 trillion to about $20 trillion by the end of the decade. The key drivers of that growth will be in services. But we will also see a “kick” coming from housing recovery and energy sector expansion. American growth will slowly morph from tepid to robust. Remember: this will take several years.

The recognition of these facts will send the stock market higher, maybe much higher, maybe very much higher. We have continued to be fully invested and are likely to be in that mode during an extended bull market run. We expect the S&P 500 Index to close above 2,000 before the end of this decade. The Index is about 1400 now. We expect the S&P 500 Index earnings to rise from the present level of about $100 to a level of $125-$140 by the decade’s end. Any surprise is likely to be on the upside.

If we are close to being right with our forecast, US stocks are cheap.

BY David Kotok
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