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The Sandy Spring Way

August Observations

August 3rd, 2012 | By Beau Mercer

“I worry that the person who thought up MUZAK may be thinking up something else” –Lily Tomlin

Everyone knows the story of the infamous McDonald’s hot coffee lawsuit.[1] A lady bought coffee at a McDonald’s drive-through, spilled some on herself and was burned. She sued McDonald’s and with the help of a clever attorney, managed to convince a jury that it was all McDonald’s fault for not providing adequate warning that hot coffee is HOT. What responsibility did the McDonald’s consumer have for the misunderstanding? Ignorance may not be a defense when so much is at stake. What responsibility does the President or Congress have for the budget deficit? In 2001, the Congressional Budget Office projected federal budget surpluses of $5.6 trillion for 2002-11. Instead we got $6.1 trillion in deficits — a swing of $11.7 trillion. Who or what caused the change? President George W. Bush’s tax cuts for “the rich”? The Iraq and Afghanistan wars? The Medicare drug benefit? President Obama’s “stimulus”? Is there a clever politician who can convince taxpayers that they must contribute additional tax dollars to fund the deficit? Just as the clever attorney in the McDonald’s case convinced a jury that his client deserved to be awarded damages, politicians need to “tell a story to the American people that gives them a sense of unity and purpose and optimism” (President Obama with Charlie Rose). The blame game currently being played by politicians of all stripes does not have a ‘winner’ and there will be no jury award.

A year ago markets entered the most tumultuous period since 2008. On August 5, 2011, S&P downgraded US credit rating because of the inability of policy makers to craft a long term deficit reduction plan. Not surprisingly policy makers have not heard the wake-up call and a looming fiscal cliff continues as a significant source of market volatility. In early 2013, the ‘award’ includes $200 billion in spending cuts and $500 billion in tax increases that are in place if the two parties cannot reach a compromise. In fact, Goldman Sachs and the Congressional Budget Office have both published reports which project greater unemployment beginning in the first quarter of 2013 if a compromise is not legislated. The Washington Post recently wrote of the unemployment effect of sequestration notices on defense contractors and others. Obviously the political dysfunction has influenced corporate and consumer behavior as evidenced by sluggish second quarter economic growth. At present the economy cannot generate enough new jobs to bring down the unemployment rate. There has been improvement in housing and consumer balance sheets which has aided the stock market. The Dow Jones Industrial Average is up 14% from August 5, 2011. The stock market is likely to be volatile in the next six months, as it was in 2010 and 2011. These risk-on/risk-off periods are driven by positive economic reports or comments made by government policy makers that result in investor optimism. But soon thereafter, investors are reminded of the debt problems we face. March on! “Times a changin.”

“If you put the Federal Government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.” – Milton Friedman

—Fred

[1] Liebeck v. McDonald’s Restaurants, August 18, 1994