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The Sandy Spring Way

July Observations

July 3rd, 2012 | By Beau Mercer

“Economic depression cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body-the producers and consumers themselves.” — Herbert Hoover

Former Federal Reserve Board Chairman Paul Volcker has said that the ATM machine is the only useful financial innovation of the past few decades. Just imagine however if you were a middle class Greek citizen and you approached your ATM machine in Athens, inserted your card, listened to the whirring and then received a message indicating that the machine was subject to the austerity program and you no longer had any cash. Greece has no cash! There is no magic to money supply when a country racks up billions of dollars of debt that it can’t repay without some help! The typical economy produces goods or provides services which are paid for creditable funds. When the consumer is ‘short’ on currency, he can borrow moneys; but, how much when there is no real ability to repay. If the economy or currency is controlled by an embattled organization and the deck is stacked by politicians, problems will arise. Somewhere along the line, the Greek magic disappeared. Nicholas Kristof wrote in the New York Times, “It’s stunning here in Athens to see many traffic lights not working, to see beggars pawing through garbage for food, to see blackened ruins of shops burned in rioting.” The situation is reminiscent of a poker game in which Greece was the known fish (unskilled player who’s likely to lose). Some of the players at the table knew before the game started that Greeks (and others) would not pay enough taxes to support a benefit focused society with a tourist dependent economy that ignored future costs. As a result, the European Union is playing a psychological game with Greece and no one can find a way to remove the fish from the table.

Senator Mitch McConnell commented recently: “We have a debt as big as our economy. We look a lot like Greece already. And it’s going to have to have a broad impact on every aspect of our society in order to get this problem under control.” McConnell, like an army of professional politicians, logically states the implications of the current approach to government but will not legislate a solution. The politicians have determined that the country has not reached the infamous Thelma and Louise cliff but they must be concerned by the sound of the engine. The situation reminds me of the Tom Petty song, You Wreck Me: “Tonight we ride, right or wrong; tonight we sail on a radio song; Rescue me, should I go down; if I stay too long in trouble town.”

The stock market has recovered from a May swoon, picking up nearly 6% from the closing lows in early June, driven in no small part by a greater than 10% gain in housing stocks, as measured by the SPDR Homebuilders ETF(XHB). The second half of 2012 is open for debate. There are a lot of moving parts to digest for looking ahead. Notice should be given to the likelihood that year-over-year earnings per share projections for the S&P 500 have been coming down steadily in the past month. We will need to take into account the fragile global economy, the contentious elections, and the JP Morgan trading loss, as we approach the second part of 2012. Despite the media created malaise, we still live in a land of opportunity. “Only in America can a guy from anywhere go to sleep a pauper and wake up a millionaire. Only in America can a kid without a cent get a break and maybe grow up to be President.” Jay and the Americans 1963.

Thank you for your good wishes.

– Fred