The stock market is up strongly this week on a second bailout plan for Greece, as well as investor optimism that the U.S. debt ceiling will be raised, at least temporarily.
Europe’s new plan for Greece appears to take a long-term approach and is not a stop-gap measure. Kudos to Europe. Unfortunately, I can’t say the same thing about the United States, which amazes me since the European Union is a hodge-podge of independent states that constantly fight with each other compared to an allegedly “unified” United States. The American people are no longer disappointed with the U.S. political process – they are actually disgusted by it.
What is wrong with the U.S.? The ideological polarization in this country is staggering and jeopardizes our long-term future.
Despite talk about a Senate “Gang of Six” plan to reduce the government budget deficit by $3.7 trillion over ten years, this plan is a mere outline. Nobody thinks it will be finalized in legislative form by the August 2nd deadline. The most likely scenario is a temporary, six-month raising of the debt ceiling with no long-term plan. As Senate Budget Committee Chairman Kent Conrad said yesterday (July 21st):
You know, I’ve always believed that there will be first a shorter-term extension. I would prefer one that’s perhaps six months in duration so that you start the process — you begin with a down payment, then you have time for the committees of Congress to come back with a floor package. That’s my own view of how this should work, and I think it’s more in tune with the realities of the magnitude of the task.
Start the process? I can’t believe that President Obama and Congress haven’t been working on a serious and long-term debt-reduction plan for months already.
This is an outrage.
The U.S. Debt Commission issued its report on the disastrous state of the country’s finances last December! President Obama completely ignored the report and Congress appears to have done the same. What in heaven’s name have the President and Congress been doing all this time? Nothing is the answer, other than making useless and divisive ideological pronouncements on the left (no entitlement spending cuts) and right (no tax increases) that get us nowhere. Of course, it is “stupid and naïve” to think that the solution will not require some of both, as Oklahoma Senator Tom Coburn said recently.
I think the powers-that-be behind the stock market are being too sanguine about a temporary debt-ceiling extension. Sure, the prospect of an immediate default will be eliminated, but the country’s long-term problems are just being kicked down the road – again.
Standard & Poor’s issued an important warning yesterday (July 21st) that has not been given sufficient attention by the stock market. The credit-rating agency warned that there is a 50-50 chance it will downgrade the U.S. credit rating to double-A as early as August even if a temporary debt ceiling extension occurs! The key is whether the U.S. government provides a “credible” plan for long-term deficit reduction. If such a plan is not forthcoming by August 2nd – which appears highly unlikely – S&P is prepared to downgrade U.S. sovereign debt.
Over the past year, Standard and Poor’s has grown increasingly pessimistic about the ability of Washington to solve the U.S. debt burden, even though the objective financial statistics haven’t changed much:
- October 2010: “We are keeping the rating at ‘AAA,’ with a stable outlook.”
- April 2011: “We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013.” Credit outlook changed from stable to negative.
- July 14, 2011: “We may lower the long-term rating on the U.S. by one or more notches into the ‘AA’ category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.” Placed on credit watch with negative implications.
- July 21, 2011: “If an agreement is reached to raise the debt ceiling but nothing meaningful is done in terms of deficit reduction, the U.S. would likely have its rating cut to the AA category.”
Although yesterday’s S&P warning sounds very similar to the one made on July 14th, I sense that yesterday’s warning ups the ante further. S&P will no longer be satisfied with a credible deficit-reduction deal in the “foreseeable future” but will require a deal by August 2nd. No excuses.
Bottom line: I’m getting ready for the unthinkable: the downgrading of U.S. sovereign debt. If it happens, I agree with Boston University economics professor Laurence Kotlikoff that the American people will be so disgusted with the “dangerous extremists” in both the Democratic and Republican parties that a third party will emerge.
It can’t come soon enough.
If a “credible” deficit-reduction plan is agreed to by Washington politicians, it will include tax increases, thus making tax-deferred investments – like MLPs — even more valuable. Roger and Elliott spend all of the waking hours studying the MLP industry. The recommended portfolios in their market-beating MLP investment advisory, MLP Profits, includes only the “best of the best” energy-based MLPs – those that keep raising their cash distributions. Roger recently wrote to subscribers that MLPs remain outstanding high-yield investments:
It’s still possible to buy high-quality MLPs yielding between 5 to 9 percent, and these companies are poised to grow those dividends anywhere from 5 to 10 percent.
Over the long term MLPs’ unit prices follow distributions higher. As a result, dividend growth for our favorites adds up to annual returns of 10 to 19 percent. That’s superior to almost anything else I can think of, particularly anything that’s tax-advantaged, as MLPs are.
To find out the specific names of the energy MLPs Roger and Elliott like best right now, give MLP Profits a try today!
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