7/27/2011 3:26 PM ET|
Save yourself from US debt disaster
Politicians say they're committed to making sure the US doesn't default on its debt, but their actions haven't inspired much confidence. Here's how investors can prepare for the worst.
We're into the third year of the economic recovery, and stocks are stuck again. The Standard & Poor's 500 Index ($INX) is trading at levels it reached in February; it's been skidding sideways since.
The past five months have brought a series of potential financial disasters. We've seen Arab revolutions, Japanese calamities, a Portuguese bailout, a second Greek bailout, $115 oil, $1,600 gold, and no fewer than two round-trip stock sell-offs of more than 7%.
And now, there's the U.S. debt-ceiling mess -- which is really two issues snarled into a rat's nest of competing ideologies and hard choices. There is the long-term federal deficit/debt problem. And there is the short-term problem of raising the Treasury's borrowing limit by Aug. 2. Failure to do the latter would set off a chain reaction that might have the U.S. defaulting on its debt.
Last week, in "Debt cure is going to hurt," I looked at the likelihood that a deal will lead to years of inflation designed to shrink the nation's debt, similar to strategies used in the past. So far this week, a deal remains elusive, and the probability of default has gone from "no way" to at least possible.
So it's time to look at ways to protect your portfolio from a debt deadlock -- without losing a lot if Congress and the White House manage to do the right thing after all.
The doomsday scenario
Of course, everyone in Washington still swears they want to avoid a U.S. debt default, because the alternative is so dire. Inaction could also shut down parts of the government and lead to a credit downgrade for the U.S.
And all this could also mean a repeat of the kind of panic seen the last time we faced a big financial policy crisis and made poor choices. That, of course, was in late 2008 after House Republicans initially torpedoed a bank bailout and the Bush administration let Lehman Brothers collapse. Congress eventually OK'd a bailout, but the mishandling of that crisis is part of what made the Great Recession so painful.
For investors, the fallout was severe. From the time the extent of the financial mess became clear in late 2008 through the bottom of March 2009, the market lost roughly half its value. Our 401ks and IRAs crumbled. Yes, the market has made most of that back, but we're still struggling with 9%-plus unemployment and halting growth. Trust me, we don't want to go through something like that again. Not with the economy already vulnerable.
But where there was once promise of bipartisan compromise and a $4 trillion budget deal worked out by President Barack Obama and House Speaker John Boehner, R-Ohio, we now see political squabbling and a hardening of positions. Investors are understandably nervous that Washington is playing political games with our fragile economy.
Can the Democrats and Republicans come together to tackle the deficit and raise the debt ceiling, current bluster aside? No one really knows. And that's what makes the situation so scary. We're flying in the dark here.
Preparing for the worst
So what can the average investor do to prepare for the doomsday?
Getting ready is not impossible, but it means using the right strategy in a market where volatility is high and diversification offers less and less protection from market ups and downs. It's about finding new ways to protect your wealth.
That's no longer as simple as moving from stocks to cash, or buying gold. Cash holdings will be slowly eroded by low interest rates and higher inflation, while gold is vulnerable to swings in the dollar and is extremely sensitive to policy outcomes. There also appear to be signs of froth in the gold market -- it might already have gone too high. And as I discussed last week, bonds, another usual refuge, seem ready for a multidecade period of underperformance relative to stocks.
What you need to do, then, is stay focused on the strongest stocks rather than just hiding, while avoiding the weakest and reducing your overall exposure to the market. Here's how I'd go about it.
VIDEO ON MSN MONEY
And yet, day after day, most Americans, including 80% of the people on this post, still blindly believe in "Capitalism, free enterprise, free trade, small business creates jobs, rich people create jobs, keep blaming the govt.", and other such nonsense. On one hand, they will blame Corporate CEOs for outsourcing jobs to China, and with the other they will say "Govt. should not regulate business", that "those who blame CEOs are "Socialists". "no one is entitled to a job", etc.
You capitalists deserve what you get. No jobs and financial disaster. Good thing that all this is taking place.
Sounds like Will Rogers' advice on buying stocks...
"Buy a (strong) stock and wait for it to go up. If it doesn't go up, don't buy it."
Smiling Beaver (surprised they allowed you to get away with this, maybe they just don't get it),
I'm cleaning and oiling my 3 rifles right now.
So called default is a minor thing. The real problem is INFLATION, stop inflation and people will take care of other problems. Big brother in Washington is telling everyone how to run their life.
Talk the last few days about Norway, there is another side to the story. I worked there one summer on a job with many engineers, the young well educated people wanted out of Norway. Young people wanted help getting out, I helped three young people move to the US, and they have done great in America. Their problem in Norway was, tax took everything young people made. Life for most people was not all that sweet. Ever story has two sides
. America is a great county, nothing else in this world like it. Try to keep it free of Washington..
Second. Now he states that it's the governments fault for how it handled the crash of 2008, and that it should have bailed out the system faster. I still can't figure out how such a great system that represents the bastion of Capitalism, is the stalwart of free enterprise, is on the up and up of honesty and integrity is in need of a bailout every 20 years, and crashes like the clock work of a cheap watch every 7 years. Maybe, just maybe there is something wrong with the system itself as in greed that over inflates every dollar into a million Voodoo dollars, and then spends it right away before anyone is the wiser. Maybe there is something wrong in a system that will destroy a perfectly good company just because it didn't make a record quarterly profit, so now it's time to slash and burn it after selling off it's assets to make a quick dishonest buck. How long will it take for Wall Street to re-learn basic Economics 101, and that is, the more employees that a nation has equals the more consumers that a nation has, equals the more investors that a nation has, equals more growth. But then again that makes too much sense, and of course most people these days will not invest in a system that specializes in the looting of honest investments.
Who's in charge?. If these politicians allow this fiasco to continue and we default, the guy in charge gets the blame. Obama can kiss his reelection good-by if this happens.
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