July 31, 2011 -- Anne Doremus of Hanson and Doremus Investment Management joins Darren Perron and Susie Steimle to discuss the default issue.
Good morning, everyone, I'm Darren Perron.
I'm Susie Steimle. Our news maker, Anne Doremus, a financial planner. We'll discuss national debt talks, what they mean for Vermonters and how you can protect your wallet.
Also, neighbors in the news, Vermonters compete to be the best bagpipers. Fruit for your face? A woman's local skin treatment giving pups a place to play, and Keagan Harsha tries to fly. All coming up.
First, our news maker. She is Anne Doremus, a financial planner at Hanson and Doremus, she has an NBA from Dartmouth, working in the investment business for 20 years, also her undergrad from UVM in economics, and thank you so much for being with us today. We really appreciate the time.
So first of all, talking about these debt talks, we see count down clocks on all these different networks like the world is ending. Are we scaring people? Are we sensationalizing or is the fear real?
I think the problem is that as a nation and certainly this generation of investors, we've never been in the situation before, and financial markets hate above all us uncertainty and that's what we've got. We're really not sure what's going to happen in the event that they do not pass the debt extension, or the other concern is whether or not the u.s. Treasury securities get downgraded from triple-a status to double-a.
What would you say of all of these concerns is the biggest issue before us?
I think that -- again, the fact that people don't know exactly what is going to happen, the likely outcome certainly is more volatility in the financial markets. That's never a reassuring thing for investors, the possibility of higher interest rates, and the economic hit that would result from that, and, you know, in an economy that is trying to recover from very difficult recession.
Talking about these higher interest rates, we expect to see them, possibly mortgage rates, student loans, credit cards. Who is going to be affected?
Well, i think it is anybody -- if treasury securities in fact, you know, if there is a default or downgraded, that will result in higher interest rates, in order to entice borrowers to accept those securities, you have to pay them more if their credit worthiness is declined. So anybody who is holding those securities will be impacted. That's a broad swath of the investing public. Everything interest banks to individual investors, and of course foreign investors as well, who hold U.S. Treasuries. Those securities are the bench mark rate for a lot of other borrowing costs as well, whether they be mortgages, a variety of other corporate bonds. That kind of thing.
How does that trickle down to the individual? The story is so nationwide and we see such a far-reaching impact in the global market and national -- global market. How does it affect someone sitting at home?
If they are paying a mortgage, an adjustable rate mortgage, next time it goes to reset, they could see their rate certainly go up more than it would have before. Credit card rates could certainly go up. You mentioned, you know, student loan rates across the wide spectrum. So, you know, interest rates are a little bit like the blood in a body, it is what keeps the economy moving. So, you know, you need to make sure that that inexpensive and available, credit is widely available, the more expensive it becomes, the more difficult it becomes for the economy at large.
And you said you spend your day advising different individuals and organizations on how to balance their budgets, all different economic issues that your clients are facing. Are you seeing panic? More concern among your clients?
Not panic. Generally not fan -- panic. Up until now i would say that the financial markets have not been taking this terribly seriously. I think the consensus has been that they will in fact arrive at a last-minute compromise. Of course the closer we get to Tuesday, the less certain that becomes. And i think the more concerned our investors, individuals have become as a result of that panic would be too strong a word, but increased concern.
And speaker john Boehner's plan is not really received the support it needs. Jay Carney is saying even if it does pass the house, it won't get through the senate. Do you think that there even will be a compromise by august 2nd?
I personally do. But the longer this goes on, the less confident i become in that outlook. You know, i think that the consequences of a default are, a, unknown, and certainly not positive. And i can't imagine that, you know, the president or members of the house would want to be the people who are on watch when that occurred. So i remain hopeful that they will reach a compromise, despite the fact that they have not made much progress to date.
If -- even if there is a compromise by august 2nd, has enough negativity been swirling around this issue that a positive outlook is -- outcome is still possible?
Well, certainly more positive than where we stand today. I think that what has occurred is, you know, that sense that our political system and government can function in a clear and rationale way, that conclusion has certainly been impaired, and, you know, not just to those of us in the united states, but around the world. You know, i think that that what's going on in Washington has not been able to produce any kind of confidence in the investing public at large.
Do you think the confidence has suffered more at an international level, or more so with maybe voters at home and people that are looking up to our government for answers and aren't really seeing it?
Hard to know. I think everybody remains a little astounded.
Certainly. If there is no compromise, what would you suggest people do to prepare for august 2nd in this impending deadline?
Well, you know, i think that, as i said, i think the possibility of not coming to a compromise is low, but it certainly is out there, they are human beings, they are fallible. This could be an example of that. We are not advocating and i don't believe people should panic. That said, there may be some circumstances that warrant a change in people's investment strategy or approach, and i would include in that if you need to get access to funds for your regular course of, you know, paying bills or whatever, and you're planning on raising cash for those purposes in the next couple of months, this is probably a better time to do it, before Tuesday than after Tuesday. So, you know, raising liquidity, raising cash, because you need to do that is, you know, makes sense. The other scenario i would support is if you are simply having trouble sleeping at night. Everybody has a different risk tolerance, and periods of crisis and uncertainty, you know, make that -- everybody's tipping point more obvious, and while i do not suggest bailing out, i do think everybody has to be comfortable with their investment strategy, that mix between stocks, bonds and cash, their asset classes, and, you know, if you're having trouble sleeping, that may be a clue that you need to rethink things.
And the Dow fell 1.1% Friday, the economy is looking bleak, i guess, at best at this point. Should people be losing faith in the stock market?
Well, the stock market has always been volatile, and, you know, i think that we've had a particularly interesting couple-year run here. But, you know, it normally has fairly large swings, and people forget that. Over long periods of time, and by that i would say 5 to 10-year periods of time, it does produce and has historically, not so much the last 10 years, but over longer periods of time, has produced higher rates of return than many other asset classes, but that comes with volatility. I have no reason to believe that that's changed longer term. I think the expect returns from stocks may be somewhat more muted as a result of more muted economic growth prospects here in the united states, but i have no reason to believe that the asset class itself is not capable of producing returns that are consistent with perhaps slightly lower than their long-term averages.
Working with investments on a day-to-day basis, seeing the economy turn over, you've experienced the recession, has there ever been -- was there a point you were more concerned for the economic future, or this it for you personally?
Good question. I think for those of us who are in the financial markets, the 2008-09 financial -- I'll call it a collapse, it was pretty significant, was really, certainly, as concerning. You know, if we all look back at that time period, there were points when really the stability of the U.S. Financial system really was called into question. So i think i was probably more concerned at that point than i am today, which is not to minimize the events.
Also some concern with this incident that of a resurgence in a recession, even if there is an answer on august 2nd, does that cancel that possibility?
I think that the economy's growth trajectory is partly driven by what is going on in Washington at the moment, but that's not the only thing. There are a number of other issues that are of restrained growth, certainly housing situation, higher interest rates will not help that. The unemployment situation, and higher interest rates will not help that, either. But whether they pass the debt limit on Tuesday is not the only issue, which is factoring into the economy's outlook at the moment.
As a small business owner in Vermont, how does this atmosphere of anxiety have an effect on their decision to take out a loan in the future, or today or next Tuesday, for example? What do you think the small business owners, i guess, perspective should be in reaction to the debt crisis
well, i think certainly concerning, because what is going on is having an impact on consumer confidence and business confidential, and, you know, consumers in this country drive about two-thirds of economic growth. If your customers are sitting back and saying, you know, gee, i don't really know what's going on, i am going to hold off on my spending until we get a little more certainty, that's been going on, again, this doesn't help that. It pushes them in more in that direction. If i was running a bigs, i would not at all -- running a business, i wouldn't be surprised if my customers were pulling in their horns a little bit. As a business owner, that's my big concern, how are my customers reacting.
Talking again about interest rates, mortgages, credit card limits, student loans, again, who is the most affected? Is it equal across the board?
You know, i think a general increase in interest rates is going to hit everybody as a borrower. So it would be hard to determine.
And should we be preparing in different ways? How should a student, for example, maybe not following this story as closely as I'm sure the families with mortgages are. What advice would you give to them?
I think, you know, look at your balance sheet, assets and liabilities, and prepare for contingencies. You know, if you are a student, you don't have a lot of, generally, a lot of financial flexibility, but if you are in an adjustable rate situation, whether you are a homeowner or student borrower, think about what are the range of possible outcomes, how much could my rate adjust over what period of time, and how am i going to prepare myself for it. Just taking a little bit of a forward-looking approach to the situation, realizing the possibility of higher rates are possibly higher than they were certainly six weeks ago or six months ago.
What sort of an impact do you expect to see on the United States' credit rating come Tuesday if there is some sort of a default? And you were saying before that we won't necessarily default right away; is that correct?
That's the thought. From what i understand, it has some flexibility, but the U.S. Government raises 60% of what it spend in tax revenue. 40 cents of every dollar is borrowed. They can only do that for so long. I don't anticipate -- it makes sense that yao anticipate -- i don't an tiggs peyton Tuesday there is an immediate -- anticipate on Tuesday there is an immediate default. They have to wait for the interest to come due and decide that's not what they are going to pay first and let other things go. If Tuesday comes and goes, i think you'll see more scrambling, you know, and a little bit more, you know, anxiety when they figure out what is going to get paid when, but that game can only be played for so long.
And at what point would you say this is a dire situation? When would the credit rating really fail, or really struggle at some point, when would we see that actually drop to a significant point that would make a difference?
The rating agencies, whether Moody's or standard and Poor's or Fitch are looking for a number of things.
Certainly the debt extension is one of them. But that's not really the key item that they are interested in. What they want to see is the federal government come together with a plan, a set of compromises that will address the structural deficit that we're operating under for the long term, and that's going to involve sufficient, either on the revenue side or on the expense side, you know, they've thrown a lot of numbers around, but they are going to want to see a sufficient number of cuts in entitlement spending or whatever the components are. Enough of a cutback in spending to warrant them not cutting the credit rating. So that's what they are going to be looking for, is the details of the plan that comes forth, exactly what is involved, how much support is there, is it likely to be executed, you know, they are going to have to see the details of anything that comes out and then they'll make their judgment on that.
On Tuesday, even if there is some sort of a compromise, certainly won't be the end of this discussion. How long will we be seeing the repercussions from this debt crisis?
Well, i think it depends on what the compromise is reached and when, but you know, i would not be surprised to see if there is a decrease in the credit rating, we lose our triple-a status and that does result in higher interest rates, you know, that could be for some time. The u.s. Treasuries are considered to be their risk-free rate of return in the global economy, and i think part of what has been going on is that they will no longer be considered completely risk-free.
And we've been talking so much throughout this scenario about the blame game. What is your take on that? Is there going to be an end to it? Certainly seems to be an impending deadline, coming up, when do you think this needs to just stop?
Because it certainly hasn't yet.
Yeah. Yeah. I mean, i think it should have stopped a long time ago, but this is politics, and politics is usual in Washington. I don't think you'll see the finger-pointing go away anytime soon.
All right. Ann e Doremus, thank you so much.