Please Remain Calm

We heard those three words of assurance uttered by one of the talking heads on one of the daily business shows last Friday. The context of the soothing advice was in reference to the rather schizoid and negative behavior of the world’s stock exchange tracking indices. If you are inclined toward the short term analysis and perspectives offered by many of the business channel readers/analyzers spewing dime a dozen projectile opinions, “please remain calm” may only be slightly better advice than those who are promoting gold purchases or laying in a year’s supply of canned goods.

At TheFundamentals, we have been asked several times this last week one of the following questions:

1. What’s going on?

2. What can I do?

3. What should I do?

People are concerned; they are uncertain. What’s going on? What to do?

Before we expand on our sentiment, we would also point out that the new president jumped on the news about the increase in jobs in April. Out of a labor force of 150 million, 15 million are unemployed; 10 million are underemployed and 22 million are safely employed working for government. He did not mention any of those numbers. Nor did he mention that someone needs to be working in the private sector to earn the money to pay the taxes to support the 22 million government employees. In summary, a lot of people don’t have jobs. America needs many more workers in wealth creating jobs and many fewer in wealth consuming jobs. TheFundamentals has a modest reading recommendation for White House employees: any one of our essays on the topic of wealth creation.

Debt is the growing source of concern and uncertainty. Greece and several of its European friends are in the spotlight due to a lengthy stretch of fiscally promiscuous ways. These folks have bought into the unfortunate new thinking of recent US political leaders that “borrowings” were a legitimate revenue source. Sometimes, when one is not taught the fundamentals by “grown ups” or is susceptible to believing in short term solutions, the new thinking can be accepted as real thinking. At the top of this list of fools is RCheney who said something about deficits no longer mattering. When Cheney and Bush II took office, the debt of the US was $5.7 trillion. It had ballooned to $10.6 trillion when they left and Obama took over. That increase of $4.9 trillion means that on average, each month those two received a government paycheck, US debt rose $51 billion. That is $51,000,000,000.00 per month!

Markets do not like uncertainty. And we are getting triple doses of uncertainty from all over; but, significantly, from those who are supposed to be the “grown ups.” When the US president talks a good game but does the opposite, people notice. When he signs legislation that increases deficits, while talking about controlling deficits and debt, people notice. When he supports public employment while private employment plummets, people notice. When better, cheaper products are made outside the US, people notice. When US business would rather locate in places other than the US because of a positive environment elsewhere, people notice. When the largest US political subdivisions run massive deficits and avoid corrective action and do not issue accurate financial statements displaying their real financial condition, people notice. When the policy of the government is to misplace blame on others for government failures, people notice. When the leader, the president, treats business as an evil enterprise rather than the only wealth creating vehicle around, people notice. One last point. The US debt is now $12.9 trillion, an increase of $2.3 trillion on Obama’s watch. He has been in office for 15 months. Debt under his control is increasing at the rate of $154 billion per month; that is $154,000,000,000.00. That is exactly triple (as in 3X the pace) the horrible performance of Bush and Cheney. People notice. (Aside: We wonder what Obama will have to say about what the next president will be inheriting from him.)

The financial mess facing many of the worlds democracies is the consequence of spending more than received (deficits) which leads to the accumulation of growing obligations (debt) which, when not repaid, leads to either insolvency/default and or bankruptcy (destruction.) People notice.

The cure is not all that complicated. The cure is sacrifice and frugality. We appear to be at the talking stage of sacrifice and frugality now; not in the United States mind you, but at least where the lenders have left town or are charging a lot more for their loans. The longer the talking stage lasts, the longer the uncertainty lasts and it appears that we are in for a long talking stage period. There is no apparent likelihood of a leadership change here (US) soon, so that adds to the uncertainty. As the weak leaders engage in head fakes to talk about sacrifice and frugality, their remaining credibility wanes and uncertainty grows. People notice.

Better advice? Does anyone recall what Captain Chelsey B. Sullenberger III, a true grown up and true leader, told his passengers just before making an emergency landing in the Hudson River? “Brace for Impact.” Come to think of it, those three words may be good advice for Obama to pass along to the successor who inherits the huge mess he is creating.