Like everyone from Santa Rosa Beach to Sandestin, I value entertainment that offers a pleasing alternative to mainstream network television. Last week, I began watching the first season of the TV drama “Breaking Bad.” The storyline features Walter White, a financially struggling New Mexico high school chemistry teacher whose world is rocked when he is diagnosed with terminal lung cancer.
The treatments are expected to cost $90,000 out of pocket and he must write a weekly check for $1,900 at each chemotherapy session. White tells his wife that he is borrowing from his teacher’s pension fund to partially pay for the treatments. But he “breaks bad” to save his family finances and utilizes his educational knowledge to cook a potent and pure brand of illegal methamphetamine with a former student. White’s immersion into the world of producing and distributing meth for profit, while he attempts to maintain a normal family life and hold down his teaching job, creates a compelling and bizarre story.
Fast forward from fictional television characters to the federal debt ceiling debate. In May 2011, Treasury Secretary Tim Geithner announced that the government was borrowing from the pension fund of federal employees to offset the current federal deficit. Investments were curtailed in the Civil Service Retirement and Disability Fund and the Thrift Savings Plan G Fund. Geithner assured Congress that federal employee benefits would not be impacted. Then move westward from Washington to Illinois, where that state’s public employee pension debt is estimated at just under $100 billion dollars.
Everywhere, it seems, from fictional television dramas to the halls of Congress to state legislatures, we are “robbing Peter to pay Paul.” The debt ceiling debate has been temporarily postponed, but eventually a serious conversation on government spending must be undertaken.
How then can our markets be enjoying such a heady ride? To begin, the economy does not a market make. Or better stated, the quality of a country’s economy is no longer reflected by the performance of markets. We often think of markets as a symbolic reflection of how a country’s economy is performing, but in the modern era, it’s not true.
In 1929, there was a stronger connection between markets and the economy. When it was recognized that overspeculation had fueled an inflated market, stock values plummeted and the Great Depression ensued. FDR’s New Deal programs and the onset of World War II manufacturing needs eventually restored the U.S. economy. In 2008, markets again underwent a drastic tailspin and the economy followed suit. In 2009, government stepped in with QE1, reduced interest rates to record low levels, and attempted to spend its way to economic recovery.
Has it worked? Somewhat, temporarily.
Europe in the last half of 2012 is another classic example. The EU was, and is, in serious financial trouble and European markets were slumping on continual bad news. Yet, European markets enjoyed a better than expected second half in 2012, even in the face of these horrible economic realities.
The troika of financial manipulation in the EU, the International Monetary Fund, European Central Bank and European Banking Authority stepped in, offered aid, and eased markets by promising to do whatever is necessary to sustain the economies of countries like Greece.
Things are actually no better in Greece. Unemployment is at 25 percent. Citizens are burning roadside signs for firewood to heat their homes. Long time business owners are shutting down and emigration is rampant. But the perception that Greece will be saved overrides the reality of its economic depression, and the backing of the EU financial troika has kept European markets afloat.
Problem is, eventually countries like Greece, and the U.S., must pay the piper, with current money, and not dollars borrowed from government workers’ pension plans. Ultimately, our government must sit at its own kitchen table, devise a budget like your family’s and mine, and live within its means.
So while we are all enjoying this new market bullish trend, we are hedging our bets with our traditional defensive investing philosophy. We concentrate on American companies with a broad global presence that produce staple goods and provide essential services. We want to own some protection on the downside when the day of reckoning arrives.
Margaret R. McDowell, a chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, a fee-only registered investment advisory firm located near Sandestin. Call 850-608-6121 or visit www.arborwealth.netfor more information.