10/29/2013 06:05 pm ET

Damn It Janet

Between deficit spending and dollars created on the Fed's balance sheet, we estimate $8 trillion has been infused into the U.S. economy over the past five years. U.S. GDP has averaged about $15 trillion per year for the period. This stimulus on steroids has increased GDP at about a 2 percent pace. This is precious little bang for an enormous amount of bucks. Keep in mind too that the deficit bucks are borrowed and will have to be paid back. If the deficit bucks are not paid back, the government will have to refinance this debt. We have avoided recession today, but what happens when interest rates increase? Government payments to bondholders would increase and crowd out other spending. At best we look for a prolonged, tepid recovery.

The government shutdown is another drag on GDP growth. There is the actual fraction-of-a-point headwind caused by the shutdown itself, but there is also a greater issue of eroding consumer confidence.

Faithful readers may remember our refrigerator lesson. Economists presume rational behavior from consumers. If a consumer is able and desires to buy a new refrigerator, and you tell him energy costs are on the rise and the economy is weakening, he will buy an economical, energy efficient refrigerator. If you tell him the energy prices are falling and that the economy is improving, he will buy a more expensive box with ice and water dispensers. But, if you tell him energy prices and the economy will be dramatically different in a year, but you can't tell him in which direction, he will not buy a refrigerator. He will wait. When the consumer waits, the economy stalls.

Politicians are fighting venomously. They seem non-plussed by any and all consequences save political. Recent years have shown that Washington's progress, such as it has been, has centered on moments of crisis and peril. We are not at crisis point yet, but the risk of default, unheard of and still unlikely, is increasing.

Ben Bernanke has done more than a decent job avoiding a meltdown of the financial system and orchestrating his best strategy toward recovery. It hasn't worked completely, but we give him well above average marks. Janet Yellen is the president's nominee for Fed Chairman. She will be the first woman to Chair the Federal Reserve. She is bright, talented and experienced, but she has tendencies toward doing more to support the economy rather than less. She will likely keep the $85 billion in monthly bond purchase in place awhile longer and will be slow to taper the amount.

Curing a crisis of debt and too-big banks by creating more debt and even bigger banks defies logic.

Sooner or later, we have to face the consequences of hyper fiscal and monetary policies. Sooner or later our elected leaders will take decisive action. As we wring our hands, we remember that markets have withstood unthinkable events over the past ten or twenty years. Unless the world actually ends this time, the shares of well-managed companies with strong balance sheets, revenue and earnings growth, will likely plod higher over time. When markets move in volatile ways, Warren Buffet does not panic and look for the door, he looks to buy more. We are defensive and patient managers, and will look to add opportunistically if the weather gets worse. Our portfolios are filled with just the kinds of companies we like. Take a deep breath. This too shall pass. Please call us if we can help you.