Farr: The ‘Viagra Effect’ of Monetary and Fiscal Policy

“In rare instances, men taking VIAGRA reported a sudden decrease or loss of vision. If you experience sudden decrease or loss of vision, stop taking VIAGRA and call a doctor right away."

I read things like the above and think, “there may be certain immediate benefits from taking Viagra, but you might go blind.”

There are real consequences to monetary and fiscal policy, and not all of them are immediate.

The effects of profligate government spending and profligate consumer borrowing remain with us. Globally, Europe’s ongoing car wreck, as successive economies break down, is evidence of

lingering issues related to the economic crisis that began here. In 2008, we wrote that the ripples of the US crisis would continue for years.

The complacent thinking that each of these economic crises will be handled in order and without significant consequence strikes us as absurd and irresponsible. European regulators continue

to take a reactive approachto Greece, Ireland, now Portugal, and very soon Spain. They are missing a crucial opportunity to take pre-emptive action whereby they can preserve their options.

We have been raising this alarm for several weeks. Greece, Ireland and Portugal are relatively manageable problems, but Spain is huge. Please, Mr. Trichet and Madam Merkel, have a double

espresso and wake up!

Domestically, we are not optimistic about the deficit commissiongetting the 14 votes required to bring their recommendations to Congress. In addition, it is looking more and more likely that

the Bush tax cuts will be extended across all income levels. These developments not only put pressure on near term budget deficits, but they also fail to address the problem of long-term

structural deficits.

Before the most recent problems resurfaced in Europe, we began to see longer-dated Treasury yields back up in response to the failure to address the budget deficits in the US. Since the

Irish crisis developed, however, money has poured back into Treasuries, bringing yields back down. It could be argued, therefore, that in the absence of renewed pressure in Europe, bond

yields would be materially higher right now.

We believe that, ultimately, Germany will succumb to pressure and agree to massive support for the suffering fringe European economies. Painful austerity measures will likely be implemented

across the continent, but some semblance of order will be restored to the sovereign debt markets in Europe. However, this means that investors may be less inclined to buy the relative safety

of US Treasuries. Therefore, we see longer-term bond yields rising and the yield curve steepening in the US next year. This will pose problems for the housing market (mortgage rates) and

the economic recovery at large.

The week of November 15th marked the end of 99 straight weeks of net inflows in bond funds. Individual investors are chronic worshipers at the alter of “what’s working now.” As stocks

flailed and bonds rallied, Fred and Ethel Everyman ran to the other side of the boat. If you consider the consequences or side effects of all of the above and higher rates in the future, you

will surely seek opportunity elsewhere.

We see opportunity in large-cap multinational companies, where balance sheets are generally in great shape in contrast to consumers and governments. Moreover, lprice-to-earnings ratios are

at historically average levels and dividends are pretty generous. This is a time where huge infusions of short-term government money distort normal readings of data. Focus on long-term

trends, valuations and policy issues. Don’t rush blindly to the other side of the boat. Average investors tend to race to whatever has already worked. Don’t get caught among their number.

Don’t lose heart; there is money to be made out there!

Today on CNBC's Closing Bell, an extended interview with the Prime Minister of Spain, Jose Luis Rodriguez Zapatero. The interview is scheduled for 3pm/et. And to stay current on all the news

out of Spain and throughout Europe bookmark CNBC's Europe News Page.

Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C.  Mr. Farr is a Contributor for CNBC television, and he is

quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.

Sign up for free newsletters and get more CNBC delivered to your inbox

Get this delivered to your inbox, and more info about our products and services.

© 2025 CNBC LLC. All Rights Reserved. A Division of NBCUniversal