The Death of Common Ground
Galway Investment Strategy
By Liam Molloy and Bethany Carlson
September 15, 2011
An all-or-nothing mindset has taken hold of Washington. The days when a Ronald Reagan and a Tip O’Neil would hash out a compromise used to be called leadership. Neither gave up their core beliefs but that did not impair the building on common ground. Compromise is now perceived as weakness. Since the rise of cable news and other noise-creating outlets the extremes on each side of our political spectrum have become emboldened, leaving the middle a lonely place. The increase in partisanship is not just a matter of rhetoric. It can be seen clearly in how Congressmen are voting.
Graph courtesy of the Center for the Study of the Presidency and Congress
So far in Congress #112, voting along party lines is averaging 92%, so the trend is continuing in the wrong direction. Congress has gone from voting across party lines around 20% of the time to less than 10%. Over 20 short years, common ground has been cut in half.
Thursday September 8, 2011 is the first meeting of the United States Congress Joint Select Committee on Deficit Reduction. This is the group of 12 tasked with cutting $1.5Tr from the US budget over the next 10 years – by Thanksgiving. CJSCDR is a major downgrade from the Group of Six that came up with the $3.7Tr proposal earlier this summer. It has lower ranking participants, more of them, and not one but two party whips. Senator Pat Toomey (R – PA) least often votes along with CJSCDR co-Chair Senator Patty Murray (D – WA). Patty has a video playing on her homepage lambasting the other co-Chair’s (Representative Jeb Hensarling (R – TX)) budget proposal. With Social Security as the blue sacred cow and taxes the red one, they’ve left themselves very little room to bargain. Plain and simple without each side giving up some of what they hold sacred we simply cannot get there from here.
The Truth Lies Somewhere in Between (and France Sucks)
Unless you’re a dictator, being effective typically means building on common ground. Entitlements make up 43% of our budget, and growing; spending outpaces revenues by 64%. Revenues need to increase and spending needs to be cut. It’s not possible for our fiscal problems to be resolved if either entitlements or taxes are sacred cows, never mind both. So where is the common ground? The S&P may, in a backwards way, have provided Congress a way to take a bite out of our deficit and save face. Our debt was downgraded, and France’s wasn’t? Really? Are we going to be whipped by France, for god’s sake? Let’s dust off the Freedom Fries and see if that can’t get us some modest entitlement and tax reform that Americans can respect. We may not agree on much, but just about everyone hates France (and their banks).
Which brings us back to the economy, confidence, and markets. We don’t have a crystal ball. There is a lot of uncertainty. But stocks are cheap. The market can still bounce around quite a bit, so not a good time to lever up. But it’s not a great time to throw in the towel on equities, either. They’re paying twice the dividends of intermediate-term Treasuries. Some pretty boring investing – focus on fundamentals, pay attention to price, and diversify your holdings – is a good strategy.
When You’re in the Middle, You Look Crazy to Everyone
The propensity for the absurd is not exclusive to politicians. In the world of market strategists the middle road is one that is becoming less traveled. The view we are muddling through with a mixed bag of data doesn’t sound like front page news. Wilbur Ross makes headlines with his talk of the return of the Celtic Tiger – Ireland will have a v-shaped recovery and lead Europe. Our firm is named after a town in Ireland and even we have a hard time completely swallowing this. Or try this flavor of crazy: a Societe Generale analyst stated the S&P 500 may go down to 400 in the next 12 months. To put that into perspective, if valuations contracted to a P/E of 10, that would mean each of the 500 companies in the index would have to earn an average of a quarter for the whole year. Consensus earnings for 2012 are about $104 for the S&P 500. Now that consensus is surely too high, but to contract over 60%? I guess I would be pretty pessimistic too if I owned a bunch of Greek debt and was loose with my derivative exposure. Don’t you just love the French?
We have been called bullish and bearish by both ends of the bi-polar spectrum. The fact is growth is weak, labor is weaker, and leadership is the weakest. There is such a vacuum of leadership you are seeing the unprecedented move of corporate leaders like Howard Schultz stepping into the void, saying “we can’t wait for Washington.” The good news is exports are increasing, balance sheets are very healthy, and inventories are low as opposed to the high levels typically seen pre-recession. When a muddle-through outlook led by exports and hampered by deleveraging is called wildly bullish you know you have reached a significant level of fear. Fortunately the most extreme outcomes seldom occur and when they do its unlikely the market will predict it.
With investors and politicians polarized, it makes being in the middle a lonely place. From the perspective of folks on one side of the spectrum we look like we’re on the opposite horizon. But really all we’re saying is that things are likely to be neither as good as we hope or as bad as we fear. The reality of the somewhere in between is not a bad place to be.
As always, we are pleased to be your partner in building on common ground, and proud to be a leader in Intellectual Exploration and Stewardship Without Compromise.
From data available on www.opencongress.org.
Effron, Lauren. “Howard Schultz: ‘We Can’t Wait for Washington’, and CEOs Need to Show Confidence in the Economy”. ABCNews.com, September 7, 2011.
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www.galwayinvestmentstrategy.com
