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The Sandy Spring Way

November Observations

November 1st, 2012 | By Beau Mercer

“[Last lines] From Thelma and Louise: [with a cliff in front of them and cops behind them]
Thelma Dickerson: OK, then listen; let’s not get caught. Louise Sawyer: What’re you talkin’ about?
Thelma Dickerson: Let’s keep goin’!
Louise Sawyer: What d’you mean?
Thelma Dickerson: Go.
Thelma Dickerson: [Thelma nods ahead of them]
Louise Sawyer: You sure?
Thelma Dickerson: Yeah

Whether we find ourselves staring over the cliff as Thelma and Louise did in 1991 is still very much in question, but the uncertainty for investors creates anxious moments. There are fiscal cliffs, earnings cliffs, revenue cliffs and political cliffs. We may surmise that driving off the cliff will find a past which is untenable and a future that doesn’t yet exist. The OBAMA-ROMNEY cliff is about yesterday’s economy and dated politics. Hopefully the 2016 Presidential dance between (possible) Hillary Clinton and Condoleezza Rice will creditably address inequality, unemployment, low income and the global economy but politics is not an Oprah Winfrey television show. No one should be surprised that in 2016 the Rust Belt may be rustier, the military may be involved in a conflagration in the Middle East, or Congress probably will be bickering over the cost of health care. Then is then and now is now!

For the fourth straight year (one under the Republicans and three under the Democrats) the Federal deficit topped a trillion dollars. The estimate for 2012 is $1.1 trillion dollars, down 200 billion from 2011. We cannot continue spending 31 cents for every dollar promised.

Sideshow Bob in the Simpsons once stated “… should do more thinkin’ and less whinin’.” Politicians start thinkin’! A recession is likely if Congress is unable to reach a compromise between now and January 2013. Recently, the cost of the inability to compromise was spelled out by the International Monetary Fund. The IMF warned that the change in tax policy will result in a hit to the United States economy of $650 billion, or a little more than 4% of GDP, at a time when the economy is likely growing at less than 2% a year. On October 25, 2012, “thinkin’ executives” of more than 80 large American corporations signed a statement calling for a debt reduction compromise that would include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.

Despite the distraction of the elections, the investment markets have concluded that 2012 is a year that didn’t occur. Expectations created little or no insight. The Euro did not implode. Greece was not unceremoniously dumped by the European Union. Israel did not attack Iran and the stock market climbed the ‘wall of worry’ by 12%. If history is an indicator, there is little likelihood that the stock market will react either positively or negatively to the outcome of the Presidential election. Certain investors are closely examining the work of prognosticators who claim to know which stocks will outperform if Mitt Romney sweeps to power, and which stocks will shine if Barack Obama is reelected. Prognostications however are short term and only deliver a dimly lit roadmap to the cliff. Remember Louise had nothing to lose.

“Nothing behind me, everything ahead of me, as is ever so on the road.”
—Jack Kerouac

—Fred