The following commentary appeared in the September issue of the Forbes Growth Investor, which was previously distributed to subscribers.
By Vahan Janjigian - The U.S. Department of the Treasury produces a document called "The Budget in Brief." Don’t take the word "brief" literally. The one for fiscal year 2009 runs 100 pages long, yet the word "deficit" is nowhere to be found. The one for fiscal 2010 is 124 pages in length. It mentions the "d" word just once, but only to let us know that transactions with the International Monetary Fund do not affect the deficit. Do the officials responsible for producing these documents think the deficit will disappear if they simply ignore it?
The budget deficit for fiscal 2009 is $1.6 trillion. The cumulative deficit for the next 10 years is expected to run around $9 trillion. The federal debt is currently $11.7 trillion, or about 90% of real GDP. Common sense dictates that something is wrong here. Despite its inability to keep its finances in order, the government insists on spending more taxpayer dollars on attempts to save certain favored industries. For example, it recently brought us the "cash for clunkers" program to help the automobile industry. Because it apparently thought that program was such a huge success, it is now considering doing something similar for appliance makers. It may sound like a bad joke, but "dollars for dishwashers" is really under consideration.
However, programs such as these are not likely to do much good over the long term. Obviously, if you have an old car or refrigerator you would like to replace, you are more likely to do so now if other taxpayers are going to pay part of the bill. Why would you not take a subsidy when it is being offered? Yet the bottom line is that what you buy today, you will not be buying tomorrow. Such government-subsidized programs simply bring future sales into the present. They do not increase demand over the long run.
The proof, as they say, is in the pudding. The Car Allowance Rebate System (the formal name for "cash for clunkers") went into effect on July 1, so it should be no surprise that personal spending went up slightly in July. Consequently, you could say the program worked as planned. Unfortunately, once we adjust the July numbers for spending on motor vehicles and parts, it turns out personal spending actually declined. Since the program expired on August 25, chances are we will see similar results when the personal spending figures for August are released at the end of September. However, the more important question is how spending holds up in September. Now that consumers have to foot the entire bill themselves, auto dealerships will likely look like ghost towns and personal spending will likely plunge.
Speaking of September, it is not a particularly good month for investors. While most investors fear October (due to the 23% one-day plunge in the Dow on October 19, 1987), the fact is that, on average, September is the worst month for investing in equities. Sam Stovall of Standard & Poor’s recently showed that since 1929 the average September decline in the S&P 500 was 1.3%. Furthermore, the index has fallen more often in September than in any other month. Although stocks have shown incredible resilience in recent months, given their robust gains since the market bottomed on March 9 of this year, and the fact that the economy is still struggling, a significant sell-off is long overdue.