The Root System

Last week my beloved peach tree inexplicably toppled over, destroying what was certain to be a bountiful crop. It was a favorite hobby of mine, to spend hours pruning, thinning, fertilizing, and spraying the height-challenged tree in order to produce a couple bushels of scrumptious peaches in early July. Yet this year I goofed. My plan for growth was flawed in that I failed to diagnose an infestation of peach borer which was weakening the root system. Once the internal strength of the tree was compromised, the tree was doomed.

In an article in the June 6th edition of The Wall Street Journal, “Capital: Sequester Headlines Scarier Than Reality – So Far,” the closing paragraph was particularly apropos in the context of our ongoing economic struggles:

Virtually every Willingdon Views newsletter I’ve written over the past few years has focused somehow on this pivotal battle between an ever expanding government and a besieged private sector, and the subsequent impact on our economy, markets, and everyday life. Is there really anything else to write about that matters?

No there really isn’t. And although I would love to share insights on other important issues, my thoughts always return to this epic debate. It is simply impossible to ignore it, unless one never reads, watches TV, or surfs the Internet. We may want it to go away, but it never does. It makes me wonder if we are stuck with it forever?…

No, we aren’t and I know which side will win… The government leviathan will eventually die. The root system has been compromised and its demise is inevitable. Even if it grows larger under the current administration, it will become increasingly inefficient and ineffective. As we are witnessing nearly every day, isn’t it already too big to manage? All people, if given a choice, will choose freedom over tyranny. In other words, the American people will eventually decide that they want control over their own destiny and will demand less government intrusion. The shrinking process will be quite an event, will not be smooth, but it will happen, and I think the seeds of this major event have already been planted, fertilized by scandals, lack of accountability, spin doctors, and a pervasive lack of integrity in Washington.

Meanwhile, our economic struggles are likely to persist. Month to month, there will be ebbs and flows between economic acceleration and deceleration, with no clear sustainable trend. It will be frustrating for the markets as well. During periods of positive economic news, growth stocks are likely to lead. Conversely, when signs of slowing return, higher-yielding securities are likely to rally. A portfolio structured with the appropriate balance between growth and yield would be a prudent approach during these uncertain times.

Eventually, the entrepreneurial spirit inherent in the private sector will re-emerge to lead a new era of economic growth. There are already signs of this in emerging technologies related to fuel efficient cars, biotechnology, and energy exploration. Meanwhile, corporate America continues to generate higher earnings and record cash flow despite the slow growth environment. Moreover, corporations, in general, are increasing dividends faster than earnings are growing, which enhances shareholder value.

Someday I’ll plant a new peach tree. I’ll watch more closely for the insidious borer, and hopefully provide the tree what it really needs to make the root system strong. For if the foundation is strong, a bountiful crop will surely follow.