Once again we can thank Washington for trying their best to snatch recession from the jaws of recovery.  The looming sequestration will put the brakes on an already fragile economic recovery, thanks in part to misdirected focus, terrible management skills and inflated egos.

 The Big Picture  

The March 1st deadline is quickly approaching and Congress spent last week in recess.  This is the Mad Magazine “what, me worry?” method of governing which is growing mighty stale.  In fact, government can be likened to electricity; taken for granted when working properly, sorely missed when the power goes out.  Mostly an inconvenience when it lasts just a few hours, long-term and costly damage results from an extended outage.  

Across the board budget cuts will affect national defense and security, air travel and services for the vulnerable.  Sequestration means cuts in disaster relief and first responder ranks, delays in disability and unemployment checks, reduced access to our national parks and monuments and, of course, fewer jobs.  And that’s just for starters.  

Hopefully, cooler heads will prevail and, once again, we will pull back from the brink at the very last minute.  The upside of this exercise is that the worries over sequestration prompted the much-awaited market correction, with the S&P finally posting its first losing week of the year.  

I, Investor  

That correction took equity index prices down to near-term support, which held.  The Dow Jones Industrial Average managed to close above the psychologically important 14,000 level, and is up 6.84% year-to-date.  While the S&P 500 index experienced its first weekly loss of the year, it remains above 1500 and is better by 6.27% since the end of 2012.  The NASDAQ has weathered storms from tech giants Apple and Dell and is holding on to year-to-date gains of 4.71%.  

Federal Reserve Bank policy remains easy; with short-term interest rates at virtually zero and a bond buying program that remains controversial but intact.  That easy policy has failed to spark inflation, with January’s consumer price index unchanged and 2013 cost of living increase of just 1.7%.  

Corporations are acting as if they are bullish on the economy.  Merger and acquisition (M&A) activity has picked up dramatically, as have stock buyback programs and dividend hikes.  Shareholders have been clamoring for companies to do something with all the cash that has been stockpiled.  Reuter’s estimates corporations are sitting on as much as $5 trillion dollars.   

Returning cash to shareholders via dividends and propping up the price of their stock with buyback programs are near-term solutions.  M&A activity is also a plus, growing a company via acquisitions.  But what is needed is organic growth – a shift out of low-risk, low-yield investments and into more aggressive investments that lead to job creation.  

No jobs, no consumer spending, no economic recovery.  For those consumers with jobs, already straining under the burden of higher payroll taxes and gasoline prices, sequestration just adds another layer of weight, dragging down consumption and the economy.  Will Washington come back from recess and deal with the issues at hand or, like Tennyson’s Charge of the Light Brigade, continue this suicide mission?  We’ll know this week.

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