Last week I spent two days in Washington, D.C. at world-renowned economist Art Laffer’s 50th Washington Conference. During this conference we were briefed by an array of congressmen, senators, former regulators and the current Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen. Topics ranged from expectations for the November election, to our nation’s debt, to NATO and the defense challenges we may face due to the economic situation in Europe.

I feel the information provided during the conference is not only of interest to our clients, but will help define future portfolio direction. Rather than go down the list of each speaker and his or her general comments, I will attempt to summarize the considerable volume of data and commentary presented.

Let me speak first regarding politics. Based upon what I heard from the Republican leadership, presently, public opinion is shifting to public judgment through thought and experience. They point to the Tea Party momentum and the polling data suggesting fear concerning the mounting deficits. They point to the reaction as fear, and not anger, as fear is considerably more sustainable and, most likely, will see a follow-through this November. While it will take 41 seats to move the majority in the House of Representatives back to the Republicans, all sides concede (both Republican and Democrat) that between 25 and 30 seats definitely will be gained in that direction. There were a number of pollsters and a few House leaders who felt as though 41 seats, and taking back the majority, was within reach. Only the vagaries of political winds will tell what that result will be in November.

What all conceded is that we are headed for unsustainable deficits. On both sides, statistics given told us that by 2019, we will have a $17 trillion outstanding debt, with annual debt service approaching $800 billion – assuming a 4.7% interest rate. Allow me to point out that at this time, that amount is more than we spend on defense – just the debt service on interest.

For our Democratic readers, you should know there was considerable energy on both sides around the fact that the spending boom’s most recent chapter began largely under the Bush Administration. Certainly history bears that out, although the last year of the Bush Administration was arguably a combination of spending increases and stimulus packages passed through during the financial crisis. However, undeniably, the Bush Administration did set in motion a trajectory of spending without vetoes that has carried the momentum through to this day. The present Republican leadership, many of which are new to the House and Senate over the last several years, is adamant that the Republicans must come clean on this matter and never stray away again. That was indeed the reason for their loss of House and Senate seats and as a viable alternative, the electorate. I was impressed by their candor and openness on this matter and feel that they may yet have an effective campaign this fall, if they are able to convince the American voter that they are the true fiscal conservatives.

The Senate is another matter, as seniority prevails there. There was a very frank discussion about the present Republican senior Senate leadership as being less than adequate to carry a conservative agenda into the future. Even gaining six of seven seats this fall may not be enough to make the Senate an effective fiscally conservative body. However, if enough seats are attained that share the desired fiscal restraint, I feel that the Senate could move into a position of being neutral to virtually all legislation. It would be 2012 before any major agenda could be advanced.

The dark cloud that kept arising out of all discussions – both Republican and Democrat – was the fear that neither party will have the political will to make the correct fiscal adjustments in time before the marketplace forces those decisions upon them. Witness Greece, Portugal, and now Spain. It was interesting to note that there was discussion about German guarantees on Greek debt. Essentially it would saddle the average German taxpayer, who is not allowed to retire until age 67, with the burdens of the Greek taxpayer who’s allowed to retire at age 55. Social change is in the wind in Europe.

Finally, we were briefed by the Chairman of the Joint Chiefs of Staff, Admiral Mullen. While I admit that when I noticed his name on our list of briefers, I was a bit curious. But Mullen went right to the heart of the matter.NATO, presently in our major theaters of military action, is a two-to-one partner, which means we are twice the amount of military force in those regions. However, NATO’s participation is significant, nonetheless. Should the economic situation in Europe continue to spread through to our NATO partners, it may very well limit their ability to maintain a significant force in that region, which would put the burden on the U.S. Quite simply, when your capability is reduced, then your vulnerability is increased. He made it very clear to us that this was well known to our enemies, and they continue to reorganize themselves into a more effective force. However, he still feels our present program can prevail, given time.

The Admiral was asked specifically about the Israeli-Iranian situation. His only comment on that situation was that it would not end well.

I believe the “take-away” from all of this information for Kanaly portfolios is this:

First, the upcoming November election is very important. It could very well move markets in one direction or another at that time. Kanaly will be considering its alternatives, as we move toward the November elections.

The present debt levels – regardless of the outcome in November – need to be closely monitored as they may very well be a force that will overwhelm political action – sooner than we think. Considerable attention is growing on both sides of the aisle, but with very minimal concrete plans or visions.

Several questions were asked about a material energy policy for this nation, given mounting threats and concerning the Admiral’s comments regarding the Iran-Israeli tensions. There was no clear vision given for a sustainable energy policy for the U.S. Again, we are left to market forces to force our hand in that regard. Ironically, we were meeting simultaneously with the tragic environmental oil spill off the coast of Louisiana. However, this is the type of event that drives myopic thinking, but which does not drive long-term solutions in that regard.

I am available to entertain any specific questions regarding what I learned at the conference. Speeches and briefings during the conference were delivered by several distinguished guests. Following is a list.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

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Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.