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Here's The One Safety Play
Every Investor Must Make
As of today, this disease is stronger, more active and deadlier than ever.
Make no mistake… like most diseases, it starts out slowly…
Yet it devours its victims at an ever-increasing rate… when life turns from hours into minutes, and minutes into seconds.
The disease has its roots in the halls of the U.S. Congress and the corridors of the White House.
It stems from an army of ineptitude: 535 members of Congress waving wooden swords at a president armed with paper bullets.
Together, they've created a make-believe world built on the quicksands of debt…
And they've delivered to the American people fiscal legislation, arguably the greatest immoral piece of bureaucratic expenditures ever created.
Instead of saving our country, it seals the fate of catastrophe.
Nothing could be more clear than the facts themselves:
- Nearly 8 out of 10 Americans just got a tax hike. (You probably noticed your paycheck just got smaller.) What's worse – we just got 41 times more tax hikes than spending cuts. So who's paying for the debt?
- Retirees, watch out. Taxes on dividends and capital gains just soared to 23.8%.
- Congress has blown through 77 debt ceilings. The last one burned through $14.2 trillion in new debt and slashed the Dow by 2152 points… many Americans lost 16% of their wealth.
- Ten-year treasuries are getting devastated as we speak, with investors scrambling to dump their dollar-denominated securities.
- Moody's just warned that America's AAA credit rating will be downgraded. It's a time bomb days away with dire consequences for your money.
Even famed economist Nouriel Roubini just announced that the country has to wake up to the "full extent of its fiscal nightmare."
Noted bond guru Jeffrey Gundlach says: "Kaboom. I don't believe you're going to get some kind of an early warning."
While our politicians have shown the judgment of a drunken teenager, the unfunded liabilities of our country have rocketed to $222 trillion dollars.
That's trillion with a "T."
The bottom line is this:
Soon there will be no more takers of our U.S. debt.
The Fed's out of bullets, and struggling Japan is the last big buyer.
Once the last buyer disappears… that's when the real crash will happen.
Stocks will tank and bonds will dip to nothing. Massive new tax hikes will be imposed. Entitlements will necessarily be cut to the bone.
It'll be an unprecedented era of American austerity.
In a minute we're going to show you the one safety play every investor must make. It's a way to keep your investments safe… and even turn this crisis in your favor.
But first here's what's happening and why…
Brace Yourself For Chaos
On February 15, the U.S. Treasury is committed to paying out $52 billion in bills.
Yet they'll only take in an estimated $9 billion in revenue.
That means the U.S. government won't have enough money to make payments on critical obligations like…tax refunds…federal salaries and benefits… soldiers pay…Medicare and Medicaid payments… and, especially alarming from a global standpoint, interest on our national debt.
According to Blinder a default would mean spending would immediately contract by 6% of GDP… and send the economy into a fast recession.
But that's just the beginning…
You see, if the U.S. defaults, the government's important credit rating will get hit with another downgrade. (Fitch ratings has already warned a downgrade is imminent.)
This would immediately send stock markets into a death spiral.
Expect higher borrowing costs for years to come, on everything from car loans to home loans. Bond rates would skyrocket. 401(k)s, IRAs, pensions would all get clobbered. Money Market funds are not legally allowed to hold defaulted collateral. This could send the cost of borrowing in short terms markets surging out of control.
The fact is a U.S. default would shake the foundation of the entire global financial system.
U.S. government debt will lose its status as the world's safest asset. Debt holders would no longer feel their investment is safe.
China alone holds more than a trillion dollars in U.S. debt. If they start dumping it en masse, red alarms will go off around the world. Every foreign country with U.S. debt would panic and follow suit.
The dollar would plummet… and we'd be looking at rapid inflation… even hyperinflation.
Peter Schiff, chief executive officer of Euro Pacific Capital, said "the minute we default, there would be a complete collapse in the bond market."
The Bipartisan Policy Center the "reality would be chaotic."
Haven't We Been Down This Road Before?
First established in 1917, the debt ceiling was meant to keep Congress in line by establishing a limit on the amount of money the U.S. federal government can borrow.
But here's the thing: The debt ceiling has been raised 74 times since 1962 – with 10 of those increases coming in the last 10 years alone.
In other words, raising the debt ceiling has been nothing more than a formality, something done consistently – and quietly – out of the public eye.
But that all changed in 2011.
That's when Congress refused to raise the debt ceiling without the Obama administration simultaneously making massive spending cuts.
When Obama refused to make the cuts, a nasty game of political chicken ensued, driving the U.S. to the brink of default.
It wasn't until the U.S. lost its Triple A Credit rating, the stock market collapsed by 644 points and Americans lost 16% of their wealth, that a government compromise was finally reached, and the debt ceiling was raised.
Now we're right back to where we started.
Only this time, the risks are many times worse. Markets are far more complicated, there is greater foreign investment in Treasury's, the U.S. debt is considerably higher, and. In other words, this time the risks are many times worse.
In fact, the U.S. actually reached its new $16.4 trillion debt limit on December 31st 2012.
So why haven't we defaulted already?
Because on January 1st, the U.S. Treasury immediately began tapping into approximately $201 billion of "Extraordinary Measures" funds to keep the government running.
"Extraordinary Measures" are legal financial maneuvers that let the Treasury Department raise additional cash to meet their obligations.
Unfortunately the "Extraordinary Measures" money is about to run out – and fast.
According to the Bipartisan Policy Center (BPC) the "as soon as" date is February 15th.
That's when "Extraordinary Measures"… emergency funds… and other last minute tricks for "buying more time" will no longer be on the table. And Congress will be forced to decide which bills to pay… and which will get left behind.
The Treasury will have no choice but to sort and choose from well over 100 million monthly payments.
Even if the Treasury funds its most critical obligations, like interest on debt, tax refunds, Medicare/Medicaid, Social Security benefits, military pay and unemployment insurance, it still leaves about $175 billion worth of programs unpaid, including federal salaries and Dept. of Education outlays.
Is There A Silver Bullet Solution?
If a debt ceiling agreement isn't reached, some analysts have suggested that President Obama could invoke the 14th Amendment to force Congress' hand.
The idea is that the amendment gives the President the right to unilaterally raise the debt ceiling, because the validity of U.S. debt cannot be called into question.
However, President Obama, a former constitutional lawyer, has rejected this idea. He has stated himself that "my lawyers are not persuaded that [the 14th Amendment] is a winning argument.
The $1 Trillion Coin
Hard to believe, but some analysts are suggesting the Treasury should mint a $1 trillion coin to help the U.S. avoid hitting the debt ceiling.
In theory, the Treasury secretary could deposit this coin in the Federal Reserve Bank and fund the government for as long as the trillion dollars last.
The idea has recently gained momentum, thanks mostly to an article written by Nobel Prize economist and NY Times columnist Paul Krugman. Krugman said a $1 trillion coin would allow us to "sidestep the debt ceiling – while doing no economic harm at all."
But most experts in Washington have been quick to dismiss such a scheme. And ultimately the $1 trillion coin idea is more of a political stunt than a reasonable solution to the debt ceiling problem.
A Last Minute Compromise?
If a default occurs, there is a chance the Treasury could make all of each day's payments together, once cash is available.
As the Bipartisan Policy Center explained, they "might wait until enough revenue is deposited to cover an entire day's payments and then make all of those payments at once.
For example, upon reaching February 15 it may take two days of revenues to make one day of payments. This would delay payments by one day on a rolling basis.
And that would mean the U.S. would meet its obligations… just not in a timely manner.
But the best chance for all of this to be avoided is if the two sides come together to reach an agreement.
Time is running out. As a result, investors should prepare for the likely extreme market volatility in the next few weeks. And even more importantly, for the economic catastrophe if an agreement isn't reached.
Here are few moves you should consider:
Cash In On Commodities
Most investors focus on commodities as an inflation hedge. That's only part of the story. The real story here is one of demand – and how the world will need to use more food, metal, oil and other such goods as global growth continues.
So even as many commodities touch all-time records today, keep in mind what demand will be – long-term – as global growth resumes and as more-recently industrialized markets as China, India, Vietnam and others step up their purchases.
Grab Global Dividends
If the U.S. government raises taxes (hey, it's got to pay off all that debt it's shoveled onto us somehow), it's going to create a literal "run for the borders" as more people, jobs and companies leave the U.S. market.
Look at the shares of big multinational corporations (MNCs) – especially those with juicy dividend payouts. Those companies have real businesses, real cash flow and real exposure to overseas markets that have a brighter outlook than their U.S. counterparts.
Plus, they have big armies of tax lawyers, who will figure out ways to take the big offshore profits that they earn back to the bottom line – creating the pools of cash needed to pay out as dividends.
The One Safety Play Every Investor Needs To Make Immediately
At this stage of the game, the U.S. stock-and-bond markets each face major risks – meaning that a sharp plunge into financial hell is a very real possibility.
So why not pick up shares in specialized "inverse funds" that actually profit from such possibilities. Studies show that 5% to 10% of investable assets in such choices not only provides meaningful diversification, but can help stabilize the income many investors rely on.
As their name implies, an inverse ETF is a specialized investment vehicle that moves opposite whatever security or index they're designed to track.
Inverse ETFs trade just like stocks on regular exchanges, which means that investors who want to use them don't have to have special accounts or approval from their brokers. And because they are priced in "real time" – just like regular stocks (and as opposed to conventional mutual funds) – investors who want to really fine tune their approach can literally monitor their exposure down to the minute or the tick if they wish.
Inverse funds can utilize a variety or combination of financial instruments – including options and futures – to achieve their objectives. And yet, their operation is almost completely invisible to the investor. That makes ETFs ideal for counter-balancing long positions in a diversified portfolio without having to worry about the intricacies of short selling, put options, liquidity, taxes or margin management.
Inverse funds also remove the element of market timing from the equation. And that's a very good thing, since the vast majority of investors – individual and professional alike – fail to keep pace with the market averages. In fact, in any given year, about three-quarters of all professional managers lag the performance of the Standard & Poor's 500 Index.
Our favorite hedging tool here at The Money Map Press is the Rydex Inverse S&P 500 Fund (RYURX). Not only does it help dampen the overall volatility of your portfolio, but it can produce some nice profits when everything else comes apart.
Positions like RYURX act as "insurance policies."
You may never need that insurance, and it may end up costing you more than you want to pay for it. But imagine if your house caught on fire and was destroyed. Imagine how tragic that would be. Now, imagine you had no insurance. How much worse would that be?
Spending a few bucks to insure your life would sure start to look worth it then. The market during this crisis presents the exact same proposition.
It's your money. Insure your future. It's always worth it.