March 21, 2012
As investors, we usually think of political risk relative to international investing - e.g. will Brazil honor contracts or will China steal our technology? But there are more dimensions to political risk these days.
Today, House Republicans released their 2013 budget. Now, I don't know what Vegas would say, but I'm confident that the chances of the budget becoming law are akin to flying pigs. However, this budget proposal does remind me of the political battle that is likely to take place later on this year.
If you think the gridlock over the payroll tax extension was frustrating, just wait until the much larger Bush tax cuts are about to expire again. If you thought the Joint Select Committee on Deficit Reduction's results were embarrassing, just wait until the harsh medicine of its failure is on our doorstep. If you thought these debates were poisonous and only resulted in kicking the can down the road, just wait until we do it all again, all at once, during a Presidential election year.
In August of 2011 Standard & Poor's downgraded the U.S. credit rating not because our national credit card was maxed out quite yet, but rather because of S&P's lack of faith in our policymaker's ability to constructively work together to find solutions for our long-term debt trajectory. Whether or not that credit rating mattered is up for debate, but it's hard to disagree with S&P's conclusions about Congress.
We could, and should, be leaders in the world with regard to fiscal responsibility in government, but that is unlikely with our current crop of representatives. Now that the congressional pipeline is full of critical and controversial fiscal matters, it's advisable to consider the political risk in our own country - something we're neither used to nor likely to be happy about doing.
Brennan R. Redmond, CFA Vice President
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).