Market Commentary

Weekly commentary on recent stock market action, with a particular focus on technical analysis.

September 28, 2016

Scott Wren, Senior Global Equity Strategist

Promises, Promises

  • The fiscal problems related to entitlement overpromising by politicians are likely a longer term issue but are starting to show up now in some states like Illinois.

What it may mean for investors

  • Over time, as is the current case in many European Union countries, entitlement overpromising often leads to higher taxes, lower economic growth and higher rates of unemployment.

Sure, we are deep into what has been a very contentious election season, but it is time for this strategist to comment on, and maybe even rant about, what I see as a major problem that both sides of the political aisle don’t dare address. Granted, this issue is likely a longer-term problem, but some states are grappling with the early stages now. The same issue is currently affecting a number of European Union (E.U.) economies and helps explain in large part why this bloc of countries virtually always has much lower growth and much higher unemployment than the United States. But one way to look at it is that Europe is just further down the road than the U.S., but the key is America is likely on that same road.

First some background to help clarify my views. This strategist hates to owe people money—for anything. This strategist buys only cars that he can pay for in cash. This strategist has spent the last 20-plus years drilling into his kids’ heads that they need to live within their means when they get out in the real world. (One is currently out in the real world and appears to have mostly taken this advice.) In other words, when it comes to money, this strategist is a fiscal conservative. Or as my better half would say, a tightwad.

The political class, however, is not fiscally conservative. Both sides of the aisle like to spend other people’s (the taxpayers’) money. They both like to make promises to the voting public. Some would argue these promises are made with the intention of receiving votes in return. I know this is not a novel news-flash kind of statement or concept. In fact, my guess is most readers of this weekly piece think much along the same lines.

The problem is these promises are made without regard to actuarial tables or mathematical realities. The area of entitlements at the federal, state, and local levels is where these promises become a real problem. Many government entitlements were initially established when the life expectancy of the average American was around 65 years. Now, obviously, life expectancies are much higher, but the level of entitlements has remained the same or, in some cases, has even been negotiated upward. As a person who grew up in the state of Illinois, this strategist thinks he has a pretty clear understanding of what overpromising can do to a government’s ability to keep the lights on and basic government services up and running. And since no politician wants to raise taxes high enough or cut entitlement promises deep enough to make actuarial or mathematical sense, the can just keeps getting kicked down the road. At some point, a crisis almost certainly will occur.

Entitlement overpromising by politicians eventually leads to higher taxes and lower economic growth, as is the current case in most E.U. countries. Taxes are higher, of course, because the money has to come from somewhere to make good on all the promises. Higher taxes means there is less money for businesses to reinvest and consumers to spend.

Beware of political entitlement promises. Realize that at some point they do have consequences. Just look at the fiscal situation in the Land of Lincoln.

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