U.S Defaults on Debt – Time to head for the hills?
I’ve been receiving a lot of questions like the one below:
Marc, hi, as with most, I am concerned that the equity market will take a large hit if the dopes in Washington don't handle this debt ceiling crisis quickly. What are your plans if the 8/2 arrives and there is no deal in place?
My response:
Don't get me wrong here - I'm not saying the government is incapable of making really bad decisions. But your question interjects a market reaction that would seem a logical result of such. I could write for hours on previous events when the market did exactly the opposite of what logic would dictate, but in this case the present works well enough.
This conundrum didn't start today, or last week, or even last month. Does suspense build as the clock ticks closer? Sure. Just like in the movies where the hero is trying to disable a bomb before it goes off with 1 minute left on the timer. Regardless, the DOW is within 200 points of its high since 2008.
Could the market plummet without timely resolution? Yep. Could it do something else? Yep. Could “the dopes” work this out making this concern futile? Yep.
Keep in mind the media LOVES a story like this. Just like the writer of the bomb movie, the bloodier the potential ultimate disaster, the more captivated the viewer becomes. So first let me point out this isn't a terrorist/bomb movie, yet it's painted to gain the same attraction from viewers. And this is done for one reason and one reason only. The more consumer attraction, the higher the advertising revenue the outlet can demand.
I’m not vilifying anyone by saying this; it is merely a result of the evolution of journalism economics. Over the last year investors have capitulated over Libya, Egypt, Greece, Japan, our own economy, etc., all with believable doomsday scenarios attached.
Remember the bird flu pandemic? Reports speculated on deaths in the 100s of millions. Yet the market went up. If you Google this now you’ll find numerous articles noting people were more affected by the H1N1 vaccine than by being exposed to the flu.
Back to current events: unlike the bomb timer, the date for passing a debt ceiling is an arbitrary deadline, as most deadlines are for any politician or government agency. That said, this should come as no surprise: There have been many times the government hasn't met a deadline. Yet no bomb has actually exploded and the world hasn't ended.
Second, let me relay what we are doing not only to defend our positions, but to maximize our opportunity should the market collapse for this or any other reason. We are properly allocated to commodities such as precious metals, energy, foreign currencies, and foodstuffs that historically increase in value when equities falter.
We are also heavily diversified in global markets. Less than 8% of our most aggressive portfolio is allocated to S&P 500 companies. If big U.S. companies’ stock prices take a hit, that doesn’t mean the other 41 markets we are invested in will suffer the same fate.
And for our fixed (bond) allocation we focus on short-term instruments, also globally diversified on the corporate and government issued levels. This buffers us from rising rates and other economic or corporate risk that WILL occur.
In short, we positioned for this years ago, without having to know what “this” would be. This strategy has worked time and again – through numerous crises over the last 30 years including the dot.com bubble and recent financial crisis.
If anything happens in the next few weeks other than eruption of the bomb that ends the world as we know it, we will survive through and prosper from it, just as we have through previous disasters.
Below is a link to a telling article concerning our recent situation and what to expect, or not, should things slide worse. Take from this letter and article 2 things: we don’t know how prices of anything will be affected – and we are positioned in the best possible way for that fact.
http://finance.yahoo.com/news/Preparing-for-worst-as-apf-745849065.html?x=0&sec=topStories&pos=1&asset=&ccode=
I welcome questions and comments.
Warmly,
Becker
www.marcbecker.tv
