You Can’t Handle the Truth

Thursday, September 1, 2011

In his role as Colonel Nathan Jessep in the movie A Few Good Men, Jack Nicholson shouted the now well recognized phrase, “You can’t handle the truth”. It seems that the current debt ceiling debate has revealed that neither Congress nor many Americans are currently willing or able to “handle the truth”.

The U.S. debt clock currently shows the nation’s debt at $14,638,125 million (rising at a rate of almost $2 million per minute)*. This debt along with our current annual deficit of over $1.4 trillion (brought on by spending of $3.6 trillion exceeding annual revenues of $2.2 trillion), are the facts which must be faced. The proposed solution however, which was arrived at after weeks of debate and hand wringing, was not to cut current actual spending, but rather to cut the growth of spending over the next ten years; thus allowing the debt to grow by several more trillions over that time frame.
 
Then, when Standard and Poors cuts the U.S. credit rating, the administration questions why they did it. Simultaneously the media wants to blame the Tea Party for having the nerve to seek spending cuts. All of this resulted in equity markets declining over 12% in the three weeks (ending August 12th) accompanied by record daily volatility in both directions as well as record setting gold prices.
 
The market appears to be wrestling with the fear of further economic weakness on the one hand and money creation induced inflation on the other. The economic experience of Japan over the past two decades is often identified as a possible comparable path that the U.S.may be following.
No one knows how the economy will unfold between now and the 2012 election, but longer term the “truth we need to handle” is that excessive debt worldwide is likely to serve as a damper to long term growth. High current corporate earnings combined with artificially low current interest rates make equities, especially those with low P/E’s and high dividends look relatively attractive. Some recent market favorites with high P/E’s could still be
vulnerable if the economy enters a double dip and market psychology remains fragile.
 
*Go to www.usdebtclock.org to watch the inexorable rise in real time.

Denis Amato is an Investment Advisor Representative of Ancora Advisor LLC an SEC Registered Investment Advisor.