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Are the Yanks stupid?

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by Peter Switzer

The Dow Jones index was down 234 points at one stage overnight. The big question for anyone who wants to build or at least preserve their wealth is, can we really trust the Yanks to not stuff up the world economy and send us all to the poor house?

The bears out there have pointed to the mountain of debt the US is carrying, and added to the challenges the Europeans have with their debtor PIIGS nations — Portugal, Ireland, Italy, Greece and Spain — it all looks like a ticking time bomb that could blow up the global economy and financial markets.

US austerity program

Just like how the EU has to manage its debt problems to ensure global stock markets can rebound this year, over the next few years the Yanks will have to face up to their own austerity program.

Right now the US Congress is arguing over the country’s fiscal deficit and whether they will agree to lifting the debt ceiling to permit the Obama administration to borrow more to prevent a US default situation. This has to be sorted out by early August and it comes as QE2 ends in late June. Making matters worse, the US economy is slowing down, raising the spectre of a double dip recession and this is another reason why Wall Street is worried now.

Don’t forget US companies

My talks with some of the best brains in the finance world in this country make me think the Americans will navigate through this mess. Malcolm Wood, head of investment strategy at Morgan Stanley Smith Barney, is backing the Yanks and sees a stock market rebound in the second half of this year. UBS’s George Boubouras is singing from the same hymnbook, as is Shane Oliver of AMP, Craig James of CommSec and just about every smart guy and gal I know.

These people are punting that the Yanks are not dopes and will manage their way out of their economic quagmire. They might have a government debt problem but they have some of the best company names in the world — Apple, IBM, FedEx, Chevron, Amazon, Microsoft and don’t forget a little company called Google!

There are those who preach caution and that markets will have to be restrained because of the US’s eventual austerity, but China and the likes of India will keep the global economy ticking over with reasonable growth rates.

Some people will say that these smarties missed the GFC but the sub-prime’s problems and their links to derivative products were not identified by the credit agencies and so the economic earthquake came from left field.

Muddle through

The debt challenges are known-knowns as Donald Rumsfeld might call them, and so the threats out there are more manageable. They are still worried and will rely on sensible decisions by governments, regulators and business leaders, but I think the Yanks and others around the world will get it right, eventually, and we will muddle through this rough patch.

If I didn’t believe this, I would be telling all my clients at Switzer Financial Planning to go to fixed deposits. And I’m not doing that, I can assure you.

Regular readers know I tipped this correction but as I have said before, this is a buying opportunity where great companies look like value, especially for the long-term investor.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, June 24, 2011

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