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The Debt-Ceiling Debacle: Three Investments to Make Before Washington Disfigures Your Portfolio

One night at dinner a few years back, my Dad, Greg Fitz-Gerald, explained exactly why the "tax-takers" in Washington think that recoveries, bailouts, negotiations and stimulus packages are a good idea – while the taxpayers believe just the opposite.

"When you rob Peter to pay Paul, Paul generally thinks this is a good idea," he said.

When we look at the debt-ceiling debacle that's unfolding in Washington, you can see exactly what my Dad was saying. That's why I'm not going to mince words here: The debt debate is a complete sham and an utter disgrace. A costly reckoning is headed our way.

The country can't avoid the fallout.

But you can.

In fact, I'm going to show you three moves that will help you dodge the worst of the damage – and perhaps even profit.

Appalled and Disgusted

That our tax-taking leaders would play political chicken with our national wealth and our future is appalling and disgusting.

The sad thing is "they" could fix this in a New York minute if they really wanted to. It wouldn't be pretty nor would it be the "best solution," but it would be a start – especially when it comes to the bond markets, which are blithely going about their business.

Evidently somebody has forgotten to tell the traders who run this $3 trillion party that their world is about to change. The very notion that we should have stability flies in the face of everything we know about the political incompetence that now threatens it.

Moreover, Lipper Inc. notes that bond market inflows are about $4.46 billion a week – and that's just the taxable stuff. There's another $99 billion worth of two-year notes on the block this week, and they're all likely to be purchased by investors seeking "safe-haven" investments.

In an era of trillion-dollar liabilities, I find it incredibly ironic that anyone would seek safety in the U.S. dollar, let alone in U.S. government paper. Yet, that's exactly what's happening.

I usually refer to situations like these as processes of limited choice. But in reality it's more like one choice: taking our medicine now, or taking it later. Kicking the can down the road will not help.

The way I see things, there are no longer any really good choices. In fact, the only logical choice is for all of us – and especially the U.S. government – to stop living beyond our means.

When we (the taxpaying citizens) spend money, we buy goods and services. When the government spends the money that it's collected from us, it buys votes.

In the weeks and months to come, we're going to find out for sure exactly whose spending is better for the economy. But I'll make a prediction: It isn't the government's.

Unfortunately, fixing this requires change. And change isn't something that any of us – our leaders included – have been particularly good at … at least not short of a crisis that forces change.

But that's very much the world we live in. We want for our political fixes to be quick and easy.
If the nice man or woman on Capitol Hill wants to vote in such a way that we feel no pain, we're all over it. Never mind that we'll actually have to pay for this someday.

The problem is one that I have addressed time and again, and this is what's at the core of the debt debate right now: Political fixes cannot by their very nature be quick and easy.

That's especially true when they are long-cycle, which means they've taken years to form and will take years to work their way out of the system either by chance, design, growth, or some combination of all three.

We don't need our own version of a Greek vacation: Is anybody in Washington listening?

Three Steps Toward Debt-Ceiling Security

Given this rather dour outlook, the best thing you can do is to protect yourself, and those in your household. To do that, I'm suggesting three moves that are worth making in advance of the Aug. 2 debt-ceiling deadline.

You need to:

  • Hedge Your Bets: If Washington blows it, U.S. Treasuries will suffer, with the long end of the curve getting whacked hardest. The Rydex Inverse Government Long Bond Strategy Fund (NYSE: RYJUX) will profit as that happens, and can be used in conjunction with existing portfolios as a hedge.
  • Go For The Gold: Metals – especially gold – will take on new significance if fiat currencies fail, and the SPDR Gold Trust ETF (NYSE: GLD) is a good way to capitalize on the surge that we'll see. But be leery of overstaying your welcome. If failure at the negotiating table or a default appears imminent, this could shoot for the moon; but if an agreement is reached, gold could fall faster than Representative Weiner.
  • Get Some Kicks From the VIX: The iPath S&P 500 VIX Mid-Term Futures ETN (NYSE: VZZB) is truly a day trader's choice that may be best immediately preceding the deadline – but certainly not much longer than that. Prices reset daily, making tracking a problem.
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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. K Marchbanks | July 27, 2011

    It appears we conservative minded hard working folks just preach to each other. We don't seem to get through to the liberal minded slackers. I say let it the debt increase as quickly as possible. Let's party on with the ignorant buggers. Get it over with so we can get on with life. Let's all quit our jobs and collect unemployment and take food stamps. The outcome will be the same. Just faster. In the meantime take your cash and buy beer.

  2. Abraham Haslam | July 27, 2011

    Gold & silver! Almost inflation proof

  3. LITM | July 27, 2011

    Thie "chicken" drama will end soon. The choices seem 1. if debt ceiling is raised, the stock market will rise and 2. if the debt ceiling is unchanged, the market will fall and then after a fortnight resume climbing to a higher What will change overall will be the dollar exchange rate vis-a-vis other currencies, commodities will climb higher.

    This of course is my view and I am planning accordingly with keeping Minimum currency, 70% canadian mutual funds,15% stocks U.S., 15% Canadian stocks.

  4. David Casciano | July 27, 2011

    Keith, your insights imo are spot on.My only question/concern is why would you recommend an etf which is an unallocated pooled account were it to be problematic with physical delivery,the prospectus says it can settle the contracts/trust in fiat us dollars???What happened to the reserve primary fund can easily happen with slv or gld.See who the custodians are for these etf's.There are allocated nonpooled funds/etfs which are much safer and still have liquidity.Thank you for your writings.

  5. Rick Burka | July 27, 2011

    What if a great % of your dollars are tied up in a company retirement plan with only mutual funds to relay on? What can we do before to protect those of us in this situation. thanks for your comments. I read this site everyday.
    Rick

  6. GrandestR000 | July 27, 2011

    All the politicians have succeeded in doing is driving out real investment toward safe havens. Now the real dithering begins on gold (and Swiss francs and other "havens"). I've been trying to figure the coming trend for gold for some time, and while it's fairly easy to read the fundamentals – at the moment – the technicals are sparking off mixed messages. Been using this to get a grip – I am recommending this small, stellar analysis company: http://tinyurl.com/3wvd2mz

  7. John Standifird | July 27, 2011

    On the one hand, the liberals say they want to control spending, but on the other hand, they want to raise the debt ceiling. That's like a household that has run up outlandish debt, understands (or claims to understand the problem) yet, wants one more night on the town, via the credit card. Have they lost all rationality?

  8. kelly cranston | July 27, 2011

    Ronald Reagan raised the debt ceiling 18 times and George W. Bush 7 times. all with no argument from anyone. Don't blame one party when both are at fault. Conservatives love military spending as much as liberals love social spending, and neither are in the mood to take cuts to their babies and neither are willing to pay for them. So guess how we ended up in this mess.

  9. b ward | July 28, 2011

    I believe that Congress needs to immediately make changes in aid (money) to foreign countries. For instance countries that are rich from oil such as Dubai, Baharain, Qatar, Saudi Arabia, etc. are also getting money from the USA. Maybe they should return the favor BUT CERTAINLY SHOULD NOT GET MORE FROM USA.

  10. William | July 28, 2011

    Problem solved. Sale all the Gold in Ft. Knox. Price paid less than $32 ounce, nice profit.
    I have no idea how much gold we ( USA ) have, maybe its all gone?

  11. BC Murphree | July 29, 2011

    "Liberal-minded slackers"? "Tax-taking leaders"?? Who the heck do you think created the deficit we're now having to deal with? George W. Bush came into office on a sizeable surplus and promptly threw it about like confetti. Don't want a deficit? Then don't expect to run a country while giving yourself tax cuts. Interesting that those who most decry the deficit seem to have the shortest memories about its origin and the biggest avoidance of paying the taxes that are necessary to keep us operating without excessive debt.

    • Doyle | August 11, 2011

      Bush ran up 3 trillion in 8 years Comrade Obama ran up 4.5 trillion in 2.5 years and is on pace to be at about 15 trillion over 8 years. I know your liberal mind cant stand the truth but it looks to me like obama is spending at approximately 5 times bush's level. Pull your head out of the sand and listen to FOX or talk radio where you can get the truth!!!!!!!

  12. John C. Bonser | July 30, 2011

    I never have been a fan of government or most other bonds. I recall in the 1980s investors bringing in AAA government bonds worth fifty cents of the dollar.

  13. Rudolph Kriegler | July 30, 2011

    You write "When the government spends money that it's (you probably mean IT HAS) collected from us, it buys votes". I am sorry, but that is complete nonsense, and it puts YOUR CTEDIBILITY IN QUESTION.

    The government pays debt an borrowed money, pays for Social Security and Medicare, pays for America's military strength, pays for homeland security, pays for considerable amount of infrastructure, pays for a lot of research and education, all of which have been mandated by congressional decisions years earlier, without knowing which party would be in power when the payments are actually going to be made. So whose votes is the government paying right now, in your opinion?

    You find it "ironic" that people buy Treasuries these days. To me, this simply says that people, and even the almighty 'market', believe that the Country is going to be OK in the long run. Why the obsession with the rating agencies, ones that rated mortgage backed 'securities' so high? What right do S&P, Moody's or Fitch have to degrade, not the near term economic outlook which is not so good, but the creditworthiness of the largest economic power in the world?

  14. Betty Bunnell | July 30, 2011

    The games the politicians are playing is disgusting. Our nation's troubled economy will be in greater jeapordy without the debt cieling being raised, and a government default. Congress has become disfunctional, and the Tea Party could care less if this nation loses its AAA credit rating and defaults. There naivite' and stubborness will not only bring the Republican party down, but the entire nation, and the world economy, as well. The rest of the world is probably mocking the U.S. right now, as to the political posturing, and lack of cooperation to compromise and come to an agreement to save this nation. It's not about what's best for the people in this country, but what is in the best interests of the politicians. America will never be the same nation it was 10 years ago, if this default comes to pass.

  15. topeka | August 7, 2011

    @kelly cranston

    brilliant analysis…. one side compromises and the other never does and that makes them equal?

    Obviously you have never tried to negotiate with someone who had absolute power to screw you, and your only option was to minimize your losses…. or lose in the most advantageous manner.

  16. topeka | August 7, 2011

    @Betty Bunnell

    so demanding adult behavior is naive? Obviously you have a conflict of interest blinding you to reason. Why are you so naive and stubborn you demand that so many of us pay for your party? The nation has already defaulted in so many ways it's hard to count them all. The only question now is how can ordinary people regain what the Federal government and its minions have stolen with the least amount of suffering for the planet.

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