Most of you know that I’m usually an optimistic person. I’ve written columns mocking people for suggesting that “it’s different this time.”
But between the nuclear meltdown potentially poisoning our seas, the U.S. government wasting its resources by shutting down online poker sites (and destroying thousands of jobs in the process) and now Standard & Poor’s cutting the United States’ sovereign debt outlook to negative, it’s enough to make a guy want to build a bunker in Vermont and not come out until the next decade.
My first reaction to the S&P announcement was: “Why should we even care what S&P has to say? These are the same clowns who completely missed the mortgage meltdown.”
But for whatever reason, their opinion does count, and we need to be very mindful that this debt situation has become very serious, very quickly.
United States AAA Rating in Jeopardy
S&P said that in comparison to other AAA-rated peers – because the United States has large and rising budget deficits and that the path to addressing this is not clear (emphasis added) – it’s lowering the outlook to negative from stable.
Additionally, S&P stated, “We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”
In other words, get your act together now, or we’ll cut your rating.
S&P concluded that there’s at least a one in three chance that the agency could lower the long-term rating in the next two years. A rating below AAA would be devastating to the U.S. economy and, as a result, the world’s. The cost to borrow money would soar, the faith in the United States would fall considerably and the blow to our national ego would be immense. If S&P downgraded U.S. debt by one notch, the rating would be below that of France and equal to Belgium’s.
Nothing against the Belgians. I have only the highest regard for our Flemish friends. But I’d like to think that America’s credit trustworthiness is on a higher level than that of a tiny European nation that hasn’t had a prominent place on the world stage in more than 50 years.
Hopefully, our elected officials will get the message that this is for real. This is not a drill. If Members of Congress can’t stop whining about their “good friends” on the other side of the aisle and work together in the next year to figure out a way to be more fiscally responsible, then the problems we had in 2008 and 2009 will seem small in comparison.
Entitlements: The Most Expensive Point of Congressional Contention
Perhaps the biggest point of contention between the two political parties and the most expensive is entitlements.
Representative Paul Ryan’s budget calls for the elimination of Medicare. Ryan does not have unanimous agreement within his own party on this measure, and so long as Democrats retain any power in Washington, Medicare will likely live on.
But what we do know is that healthcare – and the way it is paid for - is going to change in a big way over the next few years:
- Either President Obama’s plan will be enacted
- Or Republicans will take initiative.
What S&P has made very clear (and we knew already) is that the status quo won’t cut it anymore.
It’s too hard to say at this point which companies will be the winners and losers, as there will likely be some big shifts in the healthcare business. There are too many unknown variables including the shifting of political winds, which can change month by month.
But I do expect innovation to continue to be rewarded. Companies that create novel medicines will reap the benefits. Perhaps they’ll make a few million less under one system than another, but a new, safe and effective drug for cancer, Parkinson’s, or Alzheimer’s, will generate billions of dollars in revenue.
Small-Cap Healthcare and Biotech Sectors Over the Long Term
So over the long term, the small-cap healthcare sector, particularly biotech, should do just fine.
Companies like BioMarin (Nasdaq: BMRN), that make drugs for extremely rare diseases, Immunogen (Nasdaq: IMGN), whose breast cancer drug could be approved next year, or Vertex Pharmaceuticals (Nasdaq: VRTX), which should see its hepatitis C drug Telaprevir get FDA approval in late May, will all continue to be winners, assuming their therapeutics are approved and on the market in the near future.
Perhaps I’m being naïve, but the bunker in Vermont will not be built. I’m going to remain optimistic and believe that our elected officials will take this warning by S&P very seriously.
A perfect solution will be difficult to come by. But maybe if they work towards a plan that’s fiscally and morally responsible, an agreement can be made, S&P will raise its outlook back to stable and we’ll all have one less thing to worry about.
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