Sequestration Advice and Explanation

I have the power of attorney for my Mom, and her financial dude just sent out an investment letter about what all this Sequestration stuff is all about.  I want to quote some of what he said as an explanation of what is going on and who will be complaining and raising the roof and why.

"I thought you would be interested in the following commentary from investment strategist Kate Warne.  She discusses the possible impact of sequestration, the automatic spending cuts that are scheduled to take effect March. 1.

WILL SEQUESTRATION CAUSE A RECESSION?

When Congress acted to avoid the fiscal cliff in early 2013, they merely delayed the implementation of automatic spending cuts - called sequestration - until March 1.   These cuts to defense and non-defense discretionary spending were designed to force Congres to agree to more targeted and appropriate spending cuts.  However, at this time it appears that little progress is being made to prevent these automatic cuts, although they could still be avoided at the last minute.

NO RECESSION LIKELY

The Congressional Budget Office (CBO) estimated the sequestion spending cuts will reduce economic growth in 2013 by 0.6% to 0.8%.  We believe the economy is on track to expand at about a 2% pace, so sequestration could reduce 2013 growth to around 1.2%.  In addition, these spending cuts don't all happen immediately, spreading the impact over time, and there's a lot of uncertainty about exactly how they will be implemented.

We anticipate you'll hear alot about high profile cuts in critical military and social programs.  Spending cuts are painful.  But we also know that the squeaky wheel gets the grease.  Everyone whose budget is cut has an incentive to 'squeak' as loudly as possible, in hopes of getting their spending restored in the future.  Without judging the specifics, critical defense and social programs aren't likely to be threatened long-term by these cuts.  In other words, it probably won't be as bad as each political party or the media would have you believe.

Spending cuts reduce short-term economic growth, but it appears the economy will keep chugging along at a slow pace this year even with reduced government spending.  There may even be a benefit.  Slower growth this year could produce a rebound in 2014, raising the pace of economic growth closer to 3% according to the CBO.

LOOKING TOWARD THE NEXT DEFICIT DEADLINE

Although the stock market could react negatively to spending cuts, it's likely the sequestration deadline will receive less attention than others on the horizon.  everyone's focus is likely to shift to March 27, the deadline for Congress to pass another funding bill.  Without another continuing resolution or broad spending agreement, there could be a partial federal government shutdown.  Many expect revisions to the sequestration cuts as part of any agreeement to extend funding for current government spending.  So even if sequestration occurs, some of the cuts could be in place for only a short time. 

RECOMMENDATIONS FOR INVESTORS

Over the past few years, investors have occasionally been surprised by the impact of politics on the financial markets.  Congress and other policymakers have repeatedly waited until the last minute to make necessary decisions--and in many cases have simply delayed important decisions.  As a result long-term investors have learned to pay less attention to these short-term triggers of potential market volatility." 

That's all I will quote as the rest is their opinion about how to invest.

I wanted to share this as an explanation about what all this sequestration is about.  The media likes to use "fall off the cliff" and "sequestration" terms to keep us on the edge of our seats, but they fail to actually tell us what that means.  Listening to an interview with Boehner last night, he said some pretty plain, down-to-earth things, and you could tell the interviewer was aghast that he would tell the Congress and President to quit sitting around bad mouthing everyone and not pass a budget in how many years now!!  He said to get up off your lazy butts and get the work done!!  That's what the Tea Party has been saying, and regular Americans who have to live within their means, have been saying.  Get to work, make a budget, stay within your means, and make the cuts that need to be made - such as foreign aid can STOP, giving money to the movie industry is wasted money, etc.  Let's make a budget to run the country, and not give to all those special intererests that have nothing to do with government.  We are in this pickle because each politician has wanted to bring home the bacon to their constituents and look good in the voters eyes, when in fact the voters want a budget and a balanced one at that. 

Well, I hope this explanation has been helpful in showing you what is about to happen in Washington DC and how it will impact our economy.  

I'd like to add one thing.  I've been invested in the stockmarket for over a decade and politics rarely causes a movement except for a day or too HOWEVER when USA was downgraded, my investments took a major nosedive:  over 33% lost in two days, and it didn't recover like in past years when Congress shenanigans caused movement.  But when we were downgraded because we have too much debt, that did impact the market and many people lost their retirements.  My Mom never lost anything as she stayed in guaranteed interest rate type investments, but she also doesn't get the big jumps when things are good like other type of investors get.  What I'm trying to say is that what Congress does on cuts and budgeting might not impact the pace of the economy much from day to day, but if we get another downgrade, which is rumored, that could impact investments.  So it is critical for the USA to start living within its means and quit being the Santa Clause to all the needy, the disenfranchised, the foreign countries, the world.  We need to attack how to get our debts paid off and start living in the black.

 It's the same with people.  Alot of people were living above their means, buying too expensive of houses before 2008.  When the recession hit, millions lost their homes, jobs, and credit scores plummeted to below 600.  All of a sudden those downgrades in credit scores kept millions of people from being able to buy a home.  Some were people who never had a home to lose, but were students in college running up loan debt.  They have been penalized because of those who did live outside their means.  Same here, if the government continues to run up debt, the downgrades will happen, and these will affect us more than any of their arguing, and political maneuvering.  We need for our representatives to put the pedal to the metal and sit down, make some cuts, and get the budget balanced.