You are probably fairly anxious about what the boys and girls in D.C. are doing these days. After all, if they don’t find a solution to our debt/spending/tax impasse, the United States may run out of money. The fear is that our government will default on our debt. What should you do? Should you be selling all your investments now?
First, let’s all agree that in order to make smart decisions, you have to use your logic rather than your emotions. So let’s look at this issue from a logical standpoint. Let’s leave the shrill accusations and finger pointing to someone else.
The world considers U.S. treasury investments as the safest investments available. If the U.S. government doesn’t make scheduled payments on them, debt rating agencies will slam our credit rating. Investors all over the world will dump our bonds and catapult interest rates (eventually). It won’t be pretty for us. Think about what happened to Greece.
It won’t be pretty for the kids in D.C. It won’t be pretty for the world. It will stink. It will make it difficult for ANYONE to get reelected – Democrat or Republican. Regardless of who actually is at fault, there will be enough blame to go around and sink everyone in D.C.
Keep in mind that the debt payments make up about 12% of federal revenue, so the government will have the money to make those debt payments even if the debt ceiling isn’t raised. Given the truly ugly consequences of not making those payments, the odds of the government defaulting on our debt are low. Remember, it will be up to the Administration to decide which bills get paid and which don’t. It won’t be a decision for Congress. And I don’t think any President wants to be remembered as the first one to default on American debt.
So personally, I don’t think the chances of default are high. Of course I could be wrong, but it doesn’t add up for me.
And the markets don’t think there will be a default either. We can see that in investor behavior over the last several weeks. Rather than witness huge declines, the market has been stable for the most part. And last week witnessed nice increases in the major indexes. In short, the market thinks the kids in D.C. will get it together.
Want more evidence? Look at interest rates and bond prices. Continued low interest rates and high bond prices signal low expectations for default. If investors did think the bonds were going to default, they’d sell now. That would drive rates higher and prices lower. We’re not seeing that happen…at least not yet.
I’m not suggesting you become complacent. The market could shift. If so, it would be smart to take action. And if a deal isn’t reached, the market could react poorly. That’s because uncertainty will increase, as will the chances of entering into another recession.
The question remains, what should you do with your money now?
Well I can tell you what I’m doing with my money now. Nothing different. It’s well known that more money has been lost anticipating catastrophe than during the catastrophe itself. Don’t misunderstand me. I am not spending my mornings on the golf course and my afternoons by the pool. I never do.
I am very concerned about what’s happening right now and I do not believe in “buy-and-hold.” But I strongly suggest you allow the market to tell you what to do. I believe there are market timing strategies that work. You can watch the market and follow its lead.
This strategy will not help you sell at the top or buy at the bottom. Indeed, such an approach will absolutely lead you to take action imperfectly. But you can still follow the market – albeit a little late – and act decisively to help avoid catastrophic investment results.
I’m not an economist, but I can see plenty of evidence to support rising interest rates (because of gargantuan deficit spending), and I see contrary signals as well. Economic conditions also support stable interest rates (high unemployment and anemic GDP growth). Do you know how things are going to play out and when? I don’t.
My suggestion is to be very clear on your long-term objectives and implement an investment strategy that will help you achieve those goals without suffering short-term catastrophic results. Times are unsettling. It is dangerous to ignore current realities. But it is equally dangerous to try to anticipate the market. Rather than try to predict how the market will behave over the coming weeks, let the market tell you what to do.
Are you doing anything different with your investments now? Why or why not?