There's a bright side to the budget mess

It doesn't take a genius to realize that the public sector is a mess.

From Athens to Sacramento, years of negligence and self-deception are finally catching up with voters and politicians. However, while taxpayers and citizens who depend on government services are all likely to suffer as the books get balanced, the picture is much less bleak than it looks at first.

The main reason is that, as screwed up as sovereigns are, corporations are strong. This is a trend that's become especially clear since the 2008 financial crisis. Big companies--especially outside the financial sector--have demonstrated an amazing ability to prosper. They've cut costs and are once again earning profits at a near-record level despite barely hiring anyone.

For example, in the dark days of the crash more than two years years ago, who would have guessed that retailers would be the sector to lead us back from the abyss?

In the last three decades, companies have become better managed than ever before. The slash-and-burn, barbarians-at-the-gate culture of the 1980s forced businesses to streamline and justify themselves. It was a merciless, eat-or-be-eaten environment where businesses scrambled to cut the fat before the raiders cut it for them.

The lessons of that era were then internalized by business schools and are now proliferating across the globe with an entire generation of executives trained at U.S. universities. Add the power of technology, just-in-time inventory management, and free trade, and you've got an incredibly strong corporate culture.

The opposite is true in Washington, where events have conspired to produce apathy and waste. Thanks to a massive, multi-generational bull market for U.S. Treasuries that dates to the early 1980s, interest rates have steadily trended downward. Rather than imposing discipline, falling Treasury yields fostered a culture of irresponsibility and unaccountability.

The roots of the problem are many: Bretton Woods, globalization, commodity prices, American military might, crises in other countries. But the underlying result was that a river of money flowed into Washington, making it almost impossible for politicians to do anything but borrow and spend.

Interestingly, it appears that this trend was the reversal of an earlier process. Between about 1930 and 1980, it was companies that had grown bloated an inefficient, layered with extraneous lines of business and clogged with pensions and high fixed costs. That's why so much money could be made cutting fat more recently.

Government during that same period, on the other hand, was relatively efficient. (It may have been misguided but wasn't as wasteful.)

So where do we stand now? I believe that fortunes will be made as the market seeks a replacement for the U.S. dollar and Treasuries.

This has already been happening with precious metals and corporate bonds, which have been in a secular bull market since about 2005. Credit spreads for corporate debt have barely moved in the last month, according to Markit. But for sovereigns, they have blown out by 20-80 basis points.

Also remember the rise of stock options as currency in the dot-com bubble. While it might not happen again in Silicon Valley, something similar could unfold in other countries where the investing culture is younger.

The bottom line is that the spirit of capitalism is mightier than the mediocrity in government. Like an animal that adapts to a new ecosystem, we will evolve past this moment and emerge stronger than ever on the other side.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of July 20.)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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