The Importance of Predictability or, Just Tell Us What the Rules Are
Long-term objectives typically require long-term solutions, which in turn, require a degree of predictability. Here at Sigma, we are primarily concerned with providing long-term investment results that are consistent with our clients’ long-term financial goals. We do not attempt to achieve investment objectives through short-term market maneuvering. We seek to provide a degree of certainty, within a framework that recognizes that markets are prone to near-term fluctuations.
It would seem reasonable to expect that our elected officials would seek the same general approach to the nation’s financial affairs. But no, what we have is endless infighting and brinksmanship over relatively minor, short-term issues with virtually no real clarity going forward. This accomplishes almost nothing and creates uncertainty.
Most of us recognize that the primary issue facing government is the widening gap between spending and revenues. Entitlements, mainly social security and health care, continue to appropriate larger portions of the budget and, absent some action, can be expected to continue to claim increasing percentages of total government expenditures. At the same time, there is little or no discussion of practical solutions to the long-term revenue issues.
A framework for a solution is not rocket science. Clearly, there has to be some, gradual slowing in the rate of growth for entitlement spending. This doesn’t have to be sudden. A modest, long-term ratcheting down of the rate of growth, combined with a more coherent tax policy that provides for modest, predictable, long-term increases in revenues, should set a course that will, over time, narrow the gap between spending and revenues.
Dramatic moves in the middle of a relatively fragile economic recovery are not necessary or desirable. A comprehensive, gradual approach can get the federal budget where it needs to be, without too much material impact in the near-term.
There are significant advantages to a long-term, well-articulated plan. Investment decisions for individual portfolios and business capital programs require a framework for long-term planning. In our opinion the details are probably less important than the certainty. Humans are very adaptive, particularly if everyone has a clear understanding of the rules and some level of confidence that the general plan is likely to be sustained over time.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA