Posted on 02/23/2003 12:59:59 AM PST by BlackJack
PALM BEACH GARDENS, Fla. (WeissRatings) -- The President recently submitted his budget with a $304 billion deficit for 2003, sending shock waves through the corridors of the Capitol, leaving investors stunned, and setting off a new whirlwind of venomous, partisan debate.
I'm non-partisan. Much as I have no business relationship with the thousands of companies I rate, I have no commitment to either side of the aisle. I look strictly at the numbers and tell it like it is:
The federal budget is a great time bomb that could soon explode. Both parties are responsible; both must suffer the consequences.
Right now, the Administration pooh-poohs growing deficit concerns with the argument that it's still a relatively small fraction of GDP.
Problem: The deficit is potentially much larger than virtually anyone cares to admit. Consider these shocking facts:
Deficit shocker #1
The $304 billion excludes the deficits of agencies that are guaranteed, backed or sponsored by the U.S. government. If you include these, you'll find that the real federal deficit is now over $800 billion, even before adding the cost of the Iraq war and any other new outlays.
Want proof? Check Table F.4 of the Federal Reserve's Flow of Funds, which shows that the government raised new money at an average annual rate of $810 billion for deficit financing in the first three quarters of 2002. The third line of the Fed's table, "U.S. Government securities," even shows the government was borrowing at the annual rate of over $1 trillion in the second quarter of last year.
Deficit shocker #2
The $304 billion deficit Mr. Bush has proposed does not include one dime for the upcoming war in Iraq, which will cost anywhere from $50 billion to $200 billion, according to government and private estimates.
Deficit shocker #3
The Bush budget includes nothing to account for proposed tax changes that are expected to cost $500 billion over the next 10 years.
Deficit shocker #4
The Pension Benefit Guaranty Corporation (PBGC) announced in late January that its $7 billion surplus of year-end 2001 has now turned into a $3.6 billion deficit at year-end 2002 -- a staggering loss of $10.6 billion in 12 months. In addition, the Director of the PBGC estimates that the pension funds it insures are under funded to the tune of about $300 billion. That implies a new infusion of federal funds into the PBGC and more red ink in the federal budget.
Deficit shocker #5
If earnings decline ... or the economy sinks back into recession (even a mild one) ... or if there is a financial disaster of any kind ... the budget numbers will be still worse.
Reason: Tax revenues flowing into the Treasury's coffers will fall almost immediately ... and cash outflows for unemployment benefits and other payments will surge.
Impact on investors
Even if the deficit's size can be contained somehow, its impacts are unmistakable.
First, any company or municipality seeking to raise capital now faces stiffening competition from Uncle Sam. Already, IPO and venture capital is drying up. Total capital invested in entrepreneurial companies fell 26 percent in the third quarter of last year to $4.5 billion.
As a result, thousands of credit-addicted companies are facing cold-turkey withdrawal. As the federal deficit grows, this situation can only worsen.
Second, long-term bond yields are bound rise, especially in inflation-adjusted terms. Reason: Huge new supplies dumped on the market depress or hold down the price.
Third, corporate earnings are likely to take another hit.
Ballooning deficits can pull scarce funds away from private companies. They can force more cutbacks in equipment spending. They can prompt companies to reduce inventories. And they can gum up the works of the entire economy.
End result: Lower stock prices.
Where to run
My advice: Get out of the stock market and to a safe haven, such as a money fund that invest exclusively U.S. Treasury securities, such American Century Capital Preservation Fund, Dreyfus 100% US Treasury Fund, Fidelity Spartan US Treasury Fund, or U.S. Treasury Security Cash Fund. Like all money markets, the yield is very low right now. But you will sleep nights.
Next, for stocks you cannot sell, seriously consider a hedge such as the Rydex Ursa Fund (RYURX: news, chart, profile). This fund is designed to rise about 10 percent for every 10 percent decline in the S&P 500 Index ($SPX: news, chart, profile). Naturally, if the market goes up instead, you can lose money with this fund. But I think the bear market is far from over.
Last, if you are concerned about rising interest rates in the wake of giant federal deficits, another hedge worth considering is the Rydex Juno Fund (RYJUX: news, chart, profile), which is designed to profit from higher Treasury rates.
Above all: Keep your money safe.
There's the give-away - - only a liberal Democrat would consider tax cuts a "cost". When anybody from CBS says "I'm non-partisan", wrinkle your brow, get a wry smirk on your face, and dive in at your own risk. And be very skeptical.
Now is the time to put all politicians on notice that we won’t pay for their stupidity and their largess with our money! The economy doesn’t depend on Special Interests and the Democratic Socialists are abandoning our Constitution to achieve these ends.
Right. And to further the analogy (if I may), those coins jungling in their pockets came from bullying another kid to once again hand over his lunch money...
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