In a thread that got deleted while I was composing a reply, @bjurasz asked what I thought was a good question that deserves and answer:
If we do default is ANYTHING worth holding?
If you are concerned about a US government default, the place to look is outside the US. Euro bonds should do well with the combo of a weakening dollar and the potential for rates on Eurobonds to fall (therefore raising the price of bonds) as money moves from dollar assets to Euro assets. Euro denominated stocks might have a similar result - money moving from dollar stocks to Euro stocks should drive up the price of those stocks. So an investor in the US would benefit from both the increase in the price of the bond or stock in Euros, plus benefit from the change in exchange rates as each Euro buys more US Dollars.
For those who like to take bigger risks, some investments in BRICS assets might make a bit of sense in the short term. While I believe there is roughly zero chance that some kind of BRICS currency is going to replace the dollar as reserve currency (the Euro would likely have the best shot at that) there’s an awful lot of talk about BRICS going on. A US default would feed that story quite well. I think the play would be to buy something (stocks, bonds) in one of the BRICS countries, then wait to see what happens. If a deal is reached to avoid default, get out. The gamble is on a default happening, so if it doesn’t there’s no winning. Cut losses. But if there is a default, the talk about BRICS replacing the dollar will fly hot and heavy and some money will likely flow in, driving up the price of assets. When that happens, take the money and run. And if it doesn’t happen within a few days of default, apparently people are smarter than I generally give them credit for, so again get out. This is a gamble on something fairly specific happening. If it doesn’t happen and isn’t going to happen, you go back to Kenny Rodgers’ wise advice: Know when to hold 'em, know when to fold 'em.
The Euro has a stronger chance of becoming the major global reserve currency in the next month.
We are also going to lose out to Europe in several key ways in manufacturing.
We are about to come in second in order to cut the budget and give away tax cuts to the rich.
We had been coming in second to China as long as the supply side econ hawks could do things to your nation to hurt our economy. So this is no surprise.
The safest holding is probably land. Supplies are limited. Land that produces a crop has value whatever happens. The crop can be priced in whatever currency is around. Or can be bartered in the most primitive economy.
But if course you need an army of associates to defend it from thieves.
The problem with buying land right now is the cost. Imagine two weeks from now it might cost less.
This “emergency” we are about to suffer wont last more than two weeks. The crisis is going to be blamed on austerity plans. As it should be. It is idiotic.
That is exactly the mentality that sets in when deflation is about, and that’s why the Fed always aims for positive inflation. With deflation everybody sits on their money waiting for a better deal - which eventually comes true, but only because the economy craters and large numbers of people are thrown out of work.
Too much inflation: not so good. Any amount of deflation: terrible.
Yes. It gets played out every time there is divided government and the time to deal with the debt ceiling rolls around.
Its more a matter of who falls harder - the US or the rest of the world. A bit of logic says that if people are selling US denominated instruments, they would reinvest the money in non-US instruments. So while everything might fall, my guess is that the US would fall further.
If you want to play this very risky game, you need to sell US instruments now while they’re up and buy stuff that might not fall as far. Then when you think that the US stuff has hit bottom, sell the non-US stuff and buy the US stuff back.
For folks living in the US, they need to have US dollars to spend on their lifestyle. So the goal is to find a way to get more US dollars. Selling the dollar when its high and buying it back when its down is one way to do that.
I should also note that I don’t actually believe there will be a default. I’m just trying to think about what to do if you thought a default was going to happen.
Without looking up specifics, I recall that the market spooked when R’s said “We’re at impasse and not going to move” and the DOW dropped something like 700 points the next day. They suddenly got religion and started moving, but overall the market dropped about 5% over the next month or so.
I also recall the price of gold dropped (don’t remember the explanation) and also the price of oil. Political critters decided they probably shouldn’t play dangerous games, but every few years there’s a new batch and they need to learn the same lessons over again.
Austerity is the fastest way to get to deflation.
BTW for the Millennials a few layoffs wont matter in the scheme of things. The deadwood as we called some people. But for the boomers this is a kiss of death if you own assets. If you are a boomer who does not own assets this is a kiss of life.
Prices on goods and services are inflated right now. It has passed in my mind is the goal to allow a higher level of costs for businesses and consumers? Or is the goal to reduce prices? Oil and NG have come down why not products and services?
Oh I do know deflation is much worse. But for who? Because two years later when the dust clears there are new winners. This is capitalism. No one plays for one day or one year. Unless they are not thinking.
At the risk of being “political” it is useful for investment purposes to notice that the only times “let’s not raise the debt limit as a bargaining chip” shows up to disturb our normal investment discussions is when one of the two political parties controls the HofR and the other the White House.
Not naming names.
If one thinks both will fall, but one is likely to fall harder…would it not be better to just sell now and not buy either till they declare themselves one way or the other?..and buy once the chaos begins
But I can see the alternative argument - if this does not pan out, the market may rip, and if one is at least on the non-US market, one could capture some part of the rally…
Investing is tough!!!
However, if I could rewrite my history as investor, I think I might do better in part 2 - At least I am thinking about “what if”