As Government Losses Mount, Should You Run for the Hills?

Fiscal woes should worry investors.

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Rob Russell
Rob Russell

A recent report from the non-partisan Government Accountability Office has received very little attention in the media, even though I believe it outlines financial atrocities committed at many different levels.

This document spells out perfectly, and in fine detail, how the federal government and its agencies are far, far beyond bankruptcy.

With the S&P 500 and Dow near their all-time highs, people are finally starting to feel pretty good about their investment situation. Economic reports are streaming in, with some frequency, to paint a picture of an economy that is continuing to recover and also unconcerned with inflation. Leave it to me to add a dash of reality to all of this unfounded euphoria. Better yet, don't blame me; point the finger at the ultra-realistic GAO, the real stock market party crashers.

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Gary Markstein/Creators Syndicate

The latest GAO report for fiscal 2011 and 2012 summarizes the difficult facts quite well; so well, in fact that if the government was held to remotely the same standards that a private company is, it would make Lehman Brothers, Bear Sterns, or WorldCom look like profitable empires. Here's a few of the exciting highlights:

  • The Pension Benefit Guaranty Corp. that "guarantees" U.S. company pensions has liabilities exceeded its assets by about $34 billion.
  • The U.S. Postal Service reached its borrowing limit of $15 billion and reported a net loss of almost $16 billion.
  • Fannie Mae & Freddie Mac reported about $85 billion in valuation losses.
  • Social Security and Medicare are short about $27.2 trillion to meet future obligations.
  • The Troubled Asset Relief Program reported net of about $23 billion in valuation losses, mostly related to the automotive industry
  • The federal debt-to-GDP ratio has approached 73 percent.
  • While this is just a taste of our fiscal situation it certainly indicates a trend, one that could prove to be a profitable trade. Think of it this way: Say you have one of the most credit-worthy companies in the world, but they are producing negative cash-flow every year, their outstanding debt equals 73 percent of their total production, and their future pension and healthcare obligations to their retirees far exceeds the asset value of the company. Would you invest?

    Now, say this company could create their product out of thin air—it costs them virtually nothing, an assembly line that never stopped, never shut down, that kept producing more and more of this product that everyone used, but the company kept losing more and more money every year, adding to their debt burden because of promises to retirees and the "less fortunate." Would you buy this company's debt? Maybe you have. Many bond, balanced, and income funds hold large amounts of potentially toxic U.S. government debt.

    I think one of the smartest things an intelligent investor can do right now is to take inventory of their holdings. Analyze as best you can, the types of bonds that are in your mutual fund portfolios. U.S. treasury bonds, Fannie Mae, Freddie Mac, etc. could all become financially cancerous to your investment health as the choke hold from debt, losses, and irresponsible spending begins to eclipse a brighter future for government and government agency bonds.

    Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to The Wall Street Journal, SmartMoney, & FOX Business.