Weekly Market Commentary 7-18-2011

Much Ado About Nothing - A Shakespearian Comedy That Exists today

Weekly Market Commentary 7-18-11

Tim Phillips, CEO – Phillips & Company

much ado about nothing

We’re into the weeds on the debt ceiling debate there’s no doubt about it. Like the Shakespearian couples in his classic comedy, there is a lot of talk yet no real outcome. I continue to stand by my prediction that much of this is political silly pre-season posturing and a debt deal is going to be finalized. What I'm trying to determine is the impact on growth and where to invest.

Let's review some current numbers:

the 2011 federal budget

For every $140 billion dollars in cuts to federal spending we theoretically cut 1% out of GDP. These are big percentage cuts especially when the economy is only growing by 1.9% so far this year.

The so-called "political leaders" are bouncing around $1 trillion to $4 trillion dollars in cuts over 10 years or $100 billion to $400 billion a year. Given the big cuts to GDP and growth, I would be willing to bet almost all of these cuts will occur in the theoretical outlying years (years 6-10) of the plan. No one is really willing to make significant cuts to the budget and GDP while the economy is bouncing along the bottom.

Frankly, even in the outlying years $400 billion in cuts on a $1.4 trillion dollar deficit is a nice start, but doesn't begin to solve our problems.

Short of fiscal policy solutions, the monetary solutions are fairly straight forward - keep the US Dollar cheap relative to other currencies and inflate your way out of debt.

So what happens to asset classes when inflation is low and rising over many years?

what happens to asset classes when inflation is low

We know one of the Fed's mandates is to keep inflation low, so we can anticipate much higher interest rates. Here's a look at what asset classes do in rising rate environments.

multiple asset classes that have achieved positive returns during rising rates

Let's brace ourselves for lots of hot air and much ado about nothing.

As always we appreciate all of your feedback. Please email your thoughts and comments to me directly.

Tim Phillips, CEO – Phillips & Company

tphillips@phillipsandco.com

@PHCOAdvisors

Primary Research done by:

Adam Gulledge, Associate – Phillips & Company

Special thanks as well to:

Scott Edwards, Vice President of Wealth Strategies – Phillips & Company