Weekly Market Commentary, 2-28-2011

sesame street sign

Sesame Street takes on the Federal Budget

It has finally gotten to me. I have seen and heard so much about budget cutting and deficits and I suspect you have too. What's the big deal about all of this and what is the possible impact on our markets and investments?

The proposals to cut the budget are pretty straight forward. Democrats want to trim $40 billion dollars from the 2009-2010 budget and the Republicans want to trim $100 billion dollars. If they don't reach some kind of agreement by the end of this week, the Government will shut down as a consequence. Unfortunately, in the grand scheme of things either proposal seems trivial and meaningless in my opinion.

Let’s start by taking a look at the current Federal Budget with some simple math and The Count

the count

Here’s the math for 2010: (According to the CBO)

2.162 trillion in Taxes (Revenues)

- 3.456 trillion in Federal Spending (Expenses)

- 1.294 trillion to Finance

Here's the projected math for 2011: (According to the CBO)

2.2 trillion in Taxes (Revenues)

- 3.7 trillion in Federal Spending (Expenses)

- 1.5 trillion to Finance (2010-11 Deficit)

Simpler Math: How much do we add to the Federal Debt ?

13.8 trillion is our current approximate Federal Debt

+ 1.5 trillion in 2010-2011financing (2010-11 Deficit)

15.3 trillion is our forecasted Federal Debt

Since a trillion (a million millions) is a fairly abstract number to most people, let’s compare it to something people are more familiar with, the GDP of the United States. If we divided our forecasted Federal Debt ($15.3 trillion) by our forecasted 2011 GDP ($15.3 trillion), then our forecasted Federal Debt would be approximately 100% of our forecasted 2011 GDP.

debt as percent of GDP

Meaningless Arguments

grover vs elmo

When you compare the 2008 Federal Budget to the CBO’s forecasted 2011 Federal Budget we plan on spending approximately $700 billion dollars more in 2011 than we did in 2008 (That’s a 24% increase over three years). This $700 billion dollar increase was spent to temporarily stimulate the US Economy and the US Consumer. Going forward this temporary stimulus appears to be becoming permanent spending embedding into our Federal Budget for the foreseeable future.

Going back to the two budget proposals, the difference between $40 billion dollars and $100 billion dollars is really just a 1% difference in trimming the total federal spending for 2011.

Looking at it this way the argument appears to be important symbolically, but meaningless in its impact on the Federal Deficit for 2011 and removing the temporary stimulus.

The Consequences

cookie monster

From a fiscal perspective, the consequences can be grave for several segments of the economy in the long run.

From a market perspective we’re just not seeing any end in sight to the amount of temporary stimulus being pumped into the economy that's rapidly embedding itself into permanent spending. We have essentially just fed the Cookie Monster, and now he can’t get enough.

My assessment is there is nothing in all the political noise to disrupt the unsustainable gravy train from pushing this economy forward. I have said it before and I'll repeat myself one more time: The Great American Ponzi Scheme needs something to keep it going until we trick ourselves into spending and consuming more which will lead to more jobs and better wages.

Until then we will continue to feed the Cookie Monster.

TIm Phillips, CEO