THE BLOG
09/07/2012 05:41 pm ET

Politics and Draghi Speaks

The silly season of politics is fully underway. Though it is not our habit to predict political outcomes, we are going on record with our belief that Barack Obama will accept his party's nomination for president of the United States. With the Republican Convention over and gone, the cycle of criticism and promise is moving into its next rabid stage. Both parties rail at problems, promise solutions, but proffer few details. These distractions from our substantial concerns about the national debt, unemployment, and the fiscal cliff provide certain respite but do little to remedy or curtail ongoing negative trends.

Among the many things from which markets have been blissfully distracted are Europe and its economic woes. European Central Bank President Mario Draghi has proposed a new bond-buying program that appears limitless. The plan is said to focus on maturities less than three years and to establish no limit on the amount of purchases. The intention is to keep borrowing costs low for European governments. This plan looks like the mother of all blank checks. Draghi has suggested that this level of control across member nations and their different bond markets is necessary to preserve the Euro. However, to maintain a neutral effect on the money supply (and mollify the plan's detractors), the plan calls for the simultaneous withdrawal of money from the economy as the ECB purchases bonds in a process called "sterilization."

Without delving deeper into the weedy details of terms and conditions for participation in this European plan, suffice it to say that several EU member countries are no closer to solving their individual and collective economic crises than they were a year ago. In fact, Europe's 'distract and defer' strategy has allowed many of these fiscal sores to fester and grow.

Europe's economic woes have serious consequences for the U.S. At a minimum, a diminished trading partner as we approach reduced government spending creates a formidable headwind to economic growth. At worst, the dissolution of the European monetary union could cause calamitous financial problems, the likes of which we saw following the failure of Lehman Brothers.

All good drama requires the audience to suspend disbelief and go along with fiction. So doing is often the only path to the happy ending. As the fall progresses we continue to look for companies that offer superior balance sheets, defensive businesses, and reasonable dividends. When playing musical chairs, it is unreasonable to be surprised when the music stops.