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The US Debt Pendulum

The unfortunate reality in investing is that many investors typically spot a trend when it is nearing its end. A case in point may be playing out right now with the US dollar. Back in the 90s when the Canadian dollar was worth 63 cents US, it seemed like every investment expert was advising investors to shift their weighting to US securities. The reasoning, which one would suppose was built on many years of study and experience in the financial industry, was that the Canadian dollar had weakened for many years and would therefore continue to weaken for many more. What happened of course is that the Looney began a steady climb upward and is now above par.

Many of the same people who poured money into the US market when the Greenback was at an all-time high are today underweighting the US now that it is near an all-time low. If history does not exactly repeat itself in investing, then it most definitely rhymes. The stock market and economy have always behaved like a pendulum swinging from euphoria to despair, but typically settling around a more or less stable equilibrium over time. Perhaps the reason why we continue to have such swings is that so many people seem to have trouble believing the pendulum will ever change direction.

In the early 1990s, when Canada was saddled with debt and deficits on an almost Mediterranean scale, its currency was understandably at an all-time low. The debt situation was so bad that even a left leaning Liberal government was forced to take dramatic spending cuts and by the latter part of the decade was running large surpluses. The same thing is now happening in the United States. Debts have been increased to such an extent that it has become impossible to ignore. It has gotten to the point where left leaning people like President Obama are talking of spending cuts and arch conservatives like Tom Coburn are now open to discussing tax increases.

Assuming the US does not elect Donald Trump or try to do for Libya what it has done for Iraq, it should start to get its fiscal house back in order over the next few years. Later this decade you may start to hear talk of paying off the national debt. At that point they will probably increase spending, cut taxes, and the pendulum will switch direction once again.