business
& a rofessional
>> news analysis
Local investors and advisers
assess the debt-ceiling circus.
Jackie Headapohl
Managing Editor
R
epublican and Democratic leaders
announced late Sunday that they
had reached an accord likely to
pass both houses of Congress to raise the
debt ceiling and cut the deficit. President
Barack Obama signed the bill Tuesday,
Aug. 2, the deadline that had to be met
for the United States to avoid potentially
defaulting on its obligations.
The first part of the agreement cuts
about $1 trillion in spending over the
next 10 years and raises the debt ceiling
through the end of 2012. The second part
of the agreement establishes a bipartisan
committee of Congress to report back
by November with a proposal to further
reduce the deficit by $1.4 trillion or more,
which would then be put before the entire
Congress for an up-or-down vote. If a
deal isn't reached in November, a series
of automatic (and painful) spending cuts
and tax increases sets in.
The deal begins to "lift the cloud of debt
and the cloud of uncertainty that hangs
over our economy:' said Obama on Sunday
night.
Averting A Downgrade?
Despite the deal, the country is still at
risk of seeing its AAA credit rating down-
graded, according to Lyle Wolberg, part-
ner at Southfield-based Telemus Capital
Partners. Such a downgrade wouldn't be
catastrophic to the economy, he added,
but business owners are likely to see their
borrowing costs go up
and commercial banks
would likely decrease
lending, ultimately slow-
ing job creation.
"The big concern
is that Congress isn't
addressing the long-
Lyle Wolberg
term problems with the
deficit:' Wolberg said.
The two-part deal punts the problem
of long-term debt solution to late in the
year, when Americans can expect to see
the Republican and Democratic wrangling
of the past few weeks revisited, according
to Rick Bloom, partner at Bloom Asset
Management in Farmington Hills.
Waiting to the 11th hour to reach an
agreement made the
U.S., which is supposed
to be an "island of stabil-
ity" in the world market,
look like a "banana
republic:' Bloom added.
"I wouldn't be sur-
prised to see a credit
downgrade he said.
Rick Bloom
"It depends on whether
there were enough cuts made to satisfy the
bond-rating agencies:"
But if Congress and the president had
been unable to make a deal by Aug. 2, Wall
Street would have seen a temporary sell-
off, said Bloom, who is advising his clients
to take a long-term approach to investing.
"We go through speed bumps, but we'll get
through it."
Wolberg is giving his clients the same
advice, but warning those clients who plan
on needing their money within the next
six to 12 months to beware. "If you'll need
your money for a bar mitzvah, wedding or
a major trip, then you shouldn't be in the
market right now;' Wolberg said. "There's a
risk of volatility in the short term."
Lionel Margolick,
chairman of the
Margolick Financial
Group in Farmington
Hills, also sees the threat
of a credit downgrade as
a real possibility "When
that happens, interest
rates go up and the value
Lionel
Margolick
of the dollar goes down','
he said.
Tighter Money?
Higher interest rates will make it dif-
ficult for families to get home loans, and
a devalued dollar means less purchasing
power for Americans, according to Norm
Pappas, president and founder of Pappas
Financial in Farmington Hills.
Pappas said he doesn't
believe the deal reached
will truly solve the fis-
cal problems facing
the country. "There is
a difference between a
`deal' and a 'solution.
This is not the end:' said
Norm Pappas
Pappas. "They've just
kicked the problem on
down the road."
Pappas and his colleagues believe the
U.S. needed to see $10 trillion — not just
$1 trillion to $3 trillion in cuts — for the
country to de-leverage itself from its debts
and get back on firm fiscal footing. "The
U.S. needs to be on a diet:' he said. "This
deal is akin to altering our pants."
Pappas is counseling his clients to con-
sider alternative investments that keep
pace with inflation and taxation, such
as oil, gas and gold, until the nation gets
passed deleveraging. He's also advising cli-
ents to invest where there is low volatility.
"Stay out of the S & P 500',' he said.
No Help For Jobs
One underlying problem in the economy
is continued high unemployment. In fact,
higher borrowing costs to business will
make them less likely to hire. "We're not
going to have a recovery without job cre-
ation',' Margolick said.
Bloom said that nothing he's seen in
the framework agreement announced
on Sunday would help to create jobs.
"Unemployment is the root of the problem:'
he said. "We need to get people working.
All in all, financial experts agree that the
entire debt debate consuming the nation's
capitol has been a fiasco. "It's as if politics
are overriding rationality:' Margolick said.
Expect more of the same come
November when the bipartisan commis-
sion comes up against its deadline to cut
more from the federal deficit. 1
Head to our Facebook page to weigh in on the
agreement reached by politicians to raise the
debt ceiling.
August 4 2011
27