The Amazing Shrinking Budget Deficit

What Budget Deficit?

While no one was paying attention, the budget deficit has been rapidly disappearing. Despite the widespread hysteria, the budget deficit has plunged.

At its peak during the financial crisis, the deficit was $1.4 trillion, according to the U.S. Department of Treasury. In the last fiscal year, which ended on Sept. 30, 2013, the deficit was $680 billion.

No one seems to have current estimates for this fiscal year. But the results for the first three months of the fiscal year are simply astounding -- a further decline of 41 percent compared to last year.

At this pace -- and no one can guess whether it will continue -- the deficit would be about $400 billion. This level -- approaching 2.5 percent of GDP -- is something most economists consider easily sustainable.

Certainly the latest quarter contains special factors but then every quarter does. The most significant thing is that a big economy doesn't change course quickly and right now it's on course to shrink the budget deficit to insignificance.

That doesn't mean there are no problems with government debt, entitlement spending or lagging infrastructure.

But it does mean that all the overheated rhetoric about the budget deficit will need to find a new home.

The Bull Market Continues

An Encore Performance?

After the best year for the U.S. stock market in nearly two decades, what's left? 

Will investors be left with happy memories and thin gruel to look forward to?

Only a few months ago, most people were pessimistic. Congressional deadlock and a bleak five year period for the economy took their toll.

Now we've had a series of good economic reports. While it's not a totally rosy picture, the outlook is much improved over that of a few months ago.

The economic recovery is entering its fifth year and showing similarities to the great recovery of the 1990s. That recovery, too, was sluggish but set a record as the longest peacetime recovery in American history.

No two periods are the same but one lesson for investors is that the length of a recovery as well as the pace are of importance. Given that the Dow Jones Industrial Average is at a record level, can it keep appreciating?

The New Year is always a time for hope but we still need to be realistic. While it's unlikely that the stock market will top last year any time soon, it's impossible to predict when a bull market will end. All investors can do is enjoy the ride and try not to get shaken off early

Thinking Long Term

Keeping What You Make

We've all heard stories about lottery winners taking home prizes of millions of dollars and years later having nothing to show for it.

It happens with professional athletes, with people who inherit money or get big packages when they are downsized.

These dramatic situations highlight a common problem.  Some people don't understand personal finance. 

People may obsess about individual investments and fail to  think about the important questions that will determine whether they can accumulate enough money for retirement or bequests or their other goals.

People don't understand the logic of the financial markets and they don't think about what they are trying to accomplish.

They concentrate on the short term and squander one of the greatest assets any investor has: time. With time, your money, if pointed in the right direction, can accomplish wondrous things.

Optimism, too, is in short supply now. After the Great Recession, most people are pessimistic about their financial futures and their actions make that pessimism likely to be justified.

With trillions of dollars earning close to zero interest -- some invested at negative yields -- their investment rewards will indeed by bleak. As it likely will be for people darting in and out of the market at record speeds.

But for those who maintain their optimism and keep to the time-tested basics of proper asset allocations, broad diversification, attention to costs and sensitivity to taxes, there's no reason to fear the future.

Messing Up

Bad Memories

Memories of the Great Recession are still uppermost in most investors' minds.

While lately some signs of cheer, perhaps even euphoria, have appeared, the recent trauma still rules.

Most investors intuitively define risk as something bad happening. But the other side of the coin is missing out on something good and that can affect their long-term prospects just as much.

Investors like to wait for the all clear sign before taking risk. By the time sunny skies appear, the stock market often has moved on.

In the current bull market -- despite public perception it's now close to four years old -- some 20 percent of the total 120 percent move came in the first two weeks in mid-March 2009 and 80 percent came in the first six months when the world still looked totally bleak if not hopeless.

Much of the rest came recently while we were under the cloud of the looming fiscal cliff. There are lots of ways to mess up in investing. Trying to guess the direction of the market and being as nervous as a cat are two of them.

Too Much Pessimism?

Sunny Days Ahead?

Pessimism is pervasive. Many people believe the economic future is bleak.

Perversely, investment strategist Richard Bernstein believes that attitude augurs well for future stock market performance.

Historically, Bull markets --- great increases in stock prices -- have often begun in difficult times when people are most discouraged and predate economic recoveries. Bernstein, formerly the top strategist for Merrill Lynch, believes that the current widespread fears and disgust are sowing the seeds for the greatest bull market of his lifetime.

Speaking at an investment conference in Boston recently, Bernstein said he sees signs of improvement in the economy. For one, he said, total debt -- including government, mortgage, consumer and business debt -- has dropped at the fastest pace in modern U.S. history.

Housing is beginning to recover as is the job market. Stock market valuations, particularly compared to other asset classes such as bonds and commodities, are reasonable.

If Bernstein is correct, the stock market could potentially soar sometime in the next few years and the economy will follow. Prosperity may not be just around the corner but don't discount the possibility that good times lie ahead.

Approaching the Cliff

No Harm, No Foul

A current pressing topic for investors is what, if anything, to do about the "Fiscal Cliff."

I learned long ago that taking actions based on expectations about what Congress will do or even has done is often a losing proposition. Congress routinely acts in ways that puzzle even its top leaders. Legislation frequently is so complex that its true impact isn't apparent for years.

Nonetheless, there are times, as at present, when thinking about possible Congressional action could prompt one to take actions that will be beneficial  regardless of what Congress does. As always, taking action in your financial affairs requires analysis of your unique circumstances. You should not act because of the hysterical guidance from pundits.

When Congress last faced this type of situation, in the debt ceiling negotiations last year, the outcome and the market reaction surprised nearly everyone.  For now, make sure that if you take action, you're doing no harm to your long-term interests regardless of what emerges from Capitol Hill.

If what you plan results in improved portfolio diversification, better investments or a more thoughtful approach to your financial future, go ahead. But don't act impulsively and undo long-held plans only because of this short-term  struggle.