Last week we wrote that the debt ceiling has to be increased, and we received several email responses objecting to my liberal, free-spending position. (Little could be further from the truth.)
I am all for spending cuts, fiscal responsibility and living within our means. Not only am I supportive, but I have been preaching this gospel for many years.
However, the notion that the debt limit should be left in place in an effort to force difficult budget decisions by August 2 is both monochromatic and naïve.
Folks are horribly misguided in their understanding of what will happen when. Beginning on August 2, our ability to pay our bills comes down to only the funds available from daily receipts. Not only will we fall short by about 33 percent for the month, but ongoing receipts and payments will continue to be very lumpy and mismatched.
My friend Jay Powell has done a brilliant and very sobering day-by-day analysis of every line-item cost. The simple fact is that we as a country will risk going into default on our debt. The upcoming debt limit is nothing to be trifled with.
The final week of the 2nd quarter felt like the normal risk-on rally. It may be that the debt limit increase passes, and averages move a good deal higher again with a pretty good rally in banks and consumer discretionary names.
In spite of the risk pattern repeating and a similar feel, I think the current absence of QE should mean that the risk trade is off. Greece will ultimately default, and the collateral European banking maelstrom could be the sort of shock that carries an anemic recovery back into recession.
As I look to the next six months with the responsibility of stewarding other people's financial interests, I see exciting potential rewards if the world remains sunny and well. But the combined domestic and global risks are too great to go all-in.
Most importantly the U.S. consumer (who’s spending accounts for about 70 percent of GDP) is facing formidable challenges the likes of which we haven’t seen in decades. As the multi-year process of deleveraging continues, I'm staying defensive and holding on to my multi-national blue-chips with good dividends.
My family celebrated my grandmother's 103rd birthday last night. She had her hair done and bought a new dress. Amazing! She reminds all of us that there is a great deal more to life than the financial markets, and no matter how tough things seem, things heal and time marches on.
America will continue to grow over time and remain a formidable economic force. It just may not happen between commercial breaks.
Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.