Debt Ceilings and the Wealth of Nations
 | Tim Terry | |
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As serious investors, the spectacle of our government’s inability to resolve critical budget issues should be sobering. Not only are the consequences of inaction dire, the results of inappropriate measures can be equally harmful to our country’s long term economic viability. Recognizing this, most investors are justifiably concerned.
We have carefully followed the debate about raising the debt ceiling as well as the market’s response (or lack thereof). While commentators have attributed short-term price fluctuations to the debate; we know from experience the markets will eventually register their verdict on the proceedings. That response may not be completely evident until months or years into the future. For this reason, we remain skeptical of reading too much into short-term market movements.
The failure to achieve a timely resolution of the debt ceiling will become a market event. We envision a short-term decline in equity values of ten percent or more. This is the way in which markets express their displeasure. Once the matter is adequately resolved, markets will return to business as usual. That is just the way things work.
What investors need to be concerned about are the long-term consequences of the dysfunctional process of addressing the national debt issues. These will become more apparent with time. We expect the credit rating of U.S. securities to come under increasing pressure. This will drive both interest rates and unemployment higher.
While all of this captures our immediate attention, we have not lost sight of the big picture. Our entire investment approach is built on the importance of allowing adequate time for markets to sort through crises. That is why we have consistently counseled our clients to avoid equities for any funds they will need over the next five years. Beyond that timeline we remain confident well diversified portfolios will continue to deliver reasonable returns.
As always, be assured we are committed to the preserving the wealth of our clients. Our disciplined investment approach has proven itself through many market cycles and crisis. We are confident it will continue to provide safe passage through irrational markets.
As always, do not hesitate to contact us should you have any questions or concerns.