The “Kansas crossroads” federal budget impasse I wrote about last week continues. While I expect some sort of deal will keep the government grinding along, I haven’t heard anything to make me think that the spending and revenue issues that have gotten us to this point will be dealt with. For that reason, I expect at least one of the major bond rating agencies will downgrade U.S. Treasury bonds from their current AAA rating. Should that occur, I believe the immediate impact on investors will probably be negligible, but in the longer term, the erosion of U.S. credibility will worsen.
The media have been full of useless, competitive blame-leveling for this situation but, like Pogo (“We have met the enemy and he is us”), we must remember that for several decades, we kept voting for folks who consistently spent more of our money than they ask us to pony up. Regrettably, that’s not just water under the bridge (to nowhere?) because it adds up to $14.5 trillion we already owe and will have to repay in one fashion or another.
We also have to remember it will be many years before the huge amount of private debt we’ve accumulated during last decade’s buying binge will be reduced to the point that we can overcome the effects of the recession. As a consequence, I believe even a spurt of economic growth is unlikely to free us from the burden of our government’s debt. In sum, governments at all levels could reshape policies to help the economy grow faster and more sustainably, but we already ate lunch and, guess what? It wasn’t — and won’t be — free.
So, how about some good news? By and large, U.S. businesses are benefiting from financial prudence, greater efficiency and global expansion and coping surprisingly well. I’ve been hearing for months that profit margins have peaked, but S&P 500 companies that have reported for the second quarter managed earnings of over $98 per share. Some 80% exceeded their earnings expectations, and most exceeded revenue expectations as well. While the political posturing continues, American businesses have remained focused on the opportunities that a less-than-ideal environment provides them and, in my opinion, investors should do the same.