Investment Contrarians

Sequestration’s Here: What You Need to Know

By for Investment Contrarians |

What You Need to KnowThe day has arrived. Today will see the start of the much-anticipated $1.2-trillion decade-long budget cuts under the Sequestration Transparency Act of 2012 (394 pages if you want to read it), which represents America’s own austerity measures to cut the deficit. The proposed cuts will entail about $85.0 billion in annual budget cuts; and while it’s needed, given the runaway national debt of over $16.6 trillion, it will have a widespread impact on the state of the country and the economy, including program cuts, job losses, and chaos.

The cuts will have a negative impact on the country’s fragile economic recovery, but it’s something that is required; otherwise, it’s more of the same in the way of money printing and pumping up the national debt just to keep afloat and avoid a crash. If not for the significant fiscal and monetary policies that focused on pumping liquidity into the economy, I’m pretty sure the country would have fallen into a depression.

The nonpartisan Congressional Budget Office (CBO) estimates the automatic cuts to spending will reduce gross domestic product (GDP) growth by 0.6% this year and will result in the loss of 750,000 jobs. And while this is not what you want to see during these difficult economic times, the sequestration is needed; without it, the ballooning national debt will continue to spiral out of control, hurting future generations.

While I doubt the budgetary cuts will drive the country into another recession, I do feel there will be negative impacts across the board.

The question is: where will some of the budget cuts be made?

Defense will lose a big chunk of its budget, especially given the country’s pullout from Iraq. According to the Sequestration Transparency Act, the biggest cut will be to mandatory defense spending by 10% and defense discretionary funding by 9.4%. Yet the problem is that the world is full of risk and conflict, whether it’s in Syria, Iran, or North Korea. If tensions in these hot areas escalate, defense spending will likely need to be increased. Given this, I would be looking at avoiding companies that focus on defense contracts from the government, such as jet manufacturers, tank builders, or companies offering any other military assets.

Another area that I see cuts being made is “Obamacare” and the roughly $716 billion in cost reduction to Medicare. I expect there will be more cuts to come. The impact will be negative on some of the healthcare providers, especially those with government funding under Medicare.

The reality is that the national debt must be managed. A viable plan must be made between the two political parties in order to deal with the national debt now.

There will be unpopular decisions that will need to be made to save the country and stop the frivolous printing of money and the mounting national debt.

This national debt will take decades to pay off or even to reduce to a more manageable level, but viable plans must be put in place now, or our kids and their kids will suffer more.

Something drastic needs to be done regarding the national debt or the country’s financial strength will go down the toilet!

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