Friday, June 29, 2012

Generalisimo Francisco Franco, Redux

     There are two big, unsustainable boosts flowing through to corporate profits these days. Both are measured in trillions of dollars. The first is the federal budget deficit, which has been over a trillion dollars for each of the past three years. The second is extraordinary central bank stimulus in the U.S. and Europe, including short-term interest rates at, essentially, zero.
     There are other lurking problems, like the underfunding of pension plans, particularly at the state and local level. And Washington has yet to figure out what to do with Fannie Mae and Freddie Mac, which really are the U.S. mortgage market, and which are still reliant on support by the U.S. Treasury.
     For a fundamentally-oriented investor like me, this feels odd. I lately have been wondering what the editor of a left-of-center newspaper in Spain must have felt at the time Francisco Franco took power in 1936. “Spain, led by a dictator? This is not Spain! Spain is a western democracy, not a dictatorship!”  That would have been right…long-term. But Franco was in power for nearly four decades, and there was no way to put out a newspaper like that during his reign. 
     One of the great challenges for investors is figuring how to deal with something that is not sustainable long-term, but that may not be going away any time soon.

ADDENDUM, in response to a comment from a friend:
     When I mention the "past three years" above, I do so only because it corresponds to the period of huge budget deficits incurred by the U.S. federal government. We have run these to try to to deal with the aftermath of the 2008 financial crisis. Spending went up, and tax revenue went down. It has nothing to do with who was president, in my mind, because I believe that any president, regardless of party or politics, would have presided over huge deficits.
     I try not to be partisan on this blog, or, really, anywhere, any more.