U.S. President Barack Obama earlier today (Friday) addressed the nation about the debt-ceiling deadline, urging Congress to find a way "out of this mess" – something investors have made repeated pleas for.
The lack of progress on the debt-ceiling debate has angered many investors who find themselves in a frighteningly uncertain position.
"What's happening in Washington is appalling, disgusting, and disgraceful on so many levels; it effectively holds our money ‘hostage' until things settle down," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.
A time frame on when things may actually "settle down" is hard to gauge, because even if something is passed by Aug. 2, the debt-ceiling debacle won't be over.
"Washington is beginning to understand the seriousness, so that's a good thing," said Fitz-Gerald. "The bad thing is, even if they pass something, the debate is going to continue for months, if not another several years, because they don't have the political willpower to make the tough decisions."
This means a U.S. credit-rating downgrade is not off the table, regardless of what's decided by Tuesday's debt-ceiling deadline.
If the United States loses its top-tier AAA credit rating, hundreds of billions of dollars of pension-fund assets that can't be committed to anything less than AAA-rated investments will get slammed, and the mess will spill into the stock market.
"If we get a ratings downgrade, those pension funds have to realign all of their holdings," said Fitz-Gerald. "Potentially that craters the bond market then the stock market goes because everybody wants to raise cash and it becomes a self-feeding cycle that goes straight into the basement. So that's the real danger here – budget agreement or not."
This potential "haircut" – cut in value – of U.S. Treasury debt that would result from a rating downgrade has led many investors to search for more safe-haven investments. Investors who are fleeing U.S. Treasuries so far have turned to corporate bonds, cash, emerging-market stocks and gold, but many still haven't done enough haircut-proofing.
So as an investor, what should you do?
It's very late in the game, according to Fitz-Gerald, but not too late to add protection to your assets.
"All this political gamesmanship may be appalling, but it is a long way from over, so take a few minutes to be absolutely certain your protective stops are in place," said Fitz-Gerald. "Check out inverse funds that profit when the stuff hits the fan. Let the storm blow over, but be prepared to act because there's going to be a lot of companies – if we get the haircut – that go on sale."
Fitz-Gerald said a U.S. credit rating downgrade after the debt-ceiling deadline would create buying opportunities for investors who are prepared.
"That's the important thing: This political game is going to crater the markets, but none of the companies are going to change their earnings, so you've got the opportunity to go shopping on the cheap if we do get the haircut. Many of the companies themselves are still producing superb earnings, especially if they're the "glocals" that we've talked about so often (and which have produced higher profits for several quarters)."
With the Aug 2. debt-ceiling deadline only four days away, don't wait to haircut-proof your portfolio.
News and Related Story Links:
- Money Morning:
The Debt-Ceiling Debacle: Another Way Politicians Could Ruin America
- Money Morning:
Second-Quarter Earnings Prove "Glocal" Companies are the Best Investments
- Varney & Co.:
Markets Watching Debt Debate