It is amazing how brilliant our Founding Fathers were when they established our Constitution over 200 years ago.  They balanced ruling by dictatorship against majority rules by creating three equal, but separate, branches of government.  What is occurring now in Washington is the system contemplated by our Founding Fathers at work.

     The Founding Fathers structured our government to avoid ruling from extremes.  The system worked in 2006 when the Democrats took over the House of Representatives.  President Bush was pushing for the privatization of Social Security.  The people of the United States voted in a House that opposed such an idea.  The same thing is happening with Obamacare.  Before the Obamacare bill was passed, Ted Kennedy passed away and his Massachusetts Senate seat went to a Republican – Scott Brown.  Brown’s win in the Senate essentially stopped Obamacare and gave the Republicans the ability to filibuster the bill.  That is why the bill went in as a “tax” bill – it can be changed in later years with a simple majority vote and cannot be filibustered. 

     In 2010, the Republicans took over the House of Representatives primarily on the platform of stopping Obamacare.  Whether we like it or not, the Founding Fathers devised the system we have today to require both sides to negotiate before a final resolution is reached – just like Tip O’Neil and Ronald Reagan and Bill Clinton and Newt Gingrich all had to do.  At this time, unfortunately, there doesn’t appear to be any negotiations taking place which will likely result in the government shutting down tonight.  

     The taxes levied by Obamacare to pay for the new health care programs went into effect immediately and the revenue generated from those taxes, coupled with a better economy and savings generated from the sequester, has reduced our deficit to under a trillion dollars for the first time in six years.  Starting next year, however, the subsidies necessary to implement Obamacare for those making under certain threshold amounts will be paid by the government.  As a result, the temporary reprieve in our deficit is more than likely over.  Adding this new entitlement program at a time when both Social Security and Medicare are facing decades of financial problems – as baby boomers continue to retire – will only add to our long-term debt problems.    If you think this shut down is big, this will seem like a game of “Tiddlywinks” a few years down the road if the government continues to spend like it is now and has for the past decade.  

What does this mean for your portfolio?

        As the last few days indicate, the risk of a government shutdown weighs on the stock market.  We expect the next few days or weeks to be volatile with a downward bias.  Longer-term, the greatest risk is inflation with government spending accelerating and an accommodative Federal Reserve that buys bonds to cover spending.    That is why having a portion of your portfolio in assets that protect you from higher inflation is important at this time.

Sincerely,

Your THOR Team