While everybody is talking about Covid, the US is facing another crisis.
It is running out of money.
For a while now, the US has been spending more than it earns through taxes and other ways.
To finance this spending, the US government borrows money. As of now, the total public debt is about $28.5 trillion. It’s at all-time high levels.
And the US has about as much debt as it is allowed to borrow. In other words, it reached a “debt ceiling.”
If it can’t borrow more, it won’t be able to pay its existing creditors.
That’s called a default. And it would have devastating consequences.
What Would a Default Look Like?
You don’t want to dwell on it too much.
The Covid recovery is still fragile, and the US economy can’t handle anything like a default on its debt.
A default would trigger a crisis of confidence.
The US dollar would drop relative to other currencies.
The value of the US debt would also fall.
It would most likely trigger a stock market crash…
The shockwaves would travel through the whole global financial system.
In other words, it would be worse than the crisis of 2008–2009.
Will It Happen?
Don’t listen to mainstream media.
They try to sell this problem as a serious debate.
But it’s very, very unlikely that anything bad will happen.
We don’t expect the US to default.
There are a lot of political reasons for that. The country is barely managing the Covid fallout… it doesn’t need another shock to its economy.
If the Republicans block the debt ceiling adjustment, they will be blamed for the imminent recession.
They might never recover from that blow.
And they won’t find it great PR to be blamed for the deepest crisis in history.
So, even though there’s a lot at stake… this situation, in our opinion, could only go one way.
The debt ceiling will likely be raised, and the US government will continue spending.
How to Play It
Which brings us to the most important question…
Knowing that the debt ceiling is approaching and that it will likely be increased, how should you position your portfolio to profit?
There are several things to consider.
First, going into the volatile final weeks of the debt ceiling debates, investors might prefer to buy bonds.
As a result, bond prices could go up, especially for the ultra-safe Treasurys.
Second, on the currencies side, the US dollar could lose some of its value.
We aren’t expecting that the US will default… but there’s no 100% guarantee that everything will go smoothly.
And when there’s volatility in the US, the country’s currency suffers.
That situation could be good for an asset that a lot of investors perceive as “anti-dollar:” gold.
Gold normally acts as a “safe haven” when broad markets are turbulent.
It could happen again.
Another alternative asset has emerged over the past several years: bitcoin.
We aren’t going to get into the details of how bitcoin works… but it’s worth mentioning that bitcoin doesn’t move along with the stock market. Which means that it could potentially provide some protection if there’s volatility in the general stock market.
As far as stocks go, in the past, they moved in all sorts of ways when the debt ceiling was approached.
Buying stocks to hedge against a potential crisis doesn’t appear to make much sense, except for some “defensive” names. Those are the companies that tend to do well when the economy is weak. Like dollar stores, whose profits increase when people start saving on everything and buying cheaper alternatives.
Overall, however, having a diversified portfolio is always helpful.
Between US-based and international equities, bonds, gold, cryptocurrency, and other assets, a portfolio should do well regardless of what happens.
Diversification would take care of the “protection” side of your portfolio, in our opinion.
Profiting from your investments is a different game. Being diversified isn’t quite enough.
But playing the trends that are unfolding globally is a good idea.
Electric vehicles, for example, are a major trend that is happening right now.
And Rivian, an electric vehicle maker, has filed for an initial public offering in late August, seeking a valuation of $80 billion.
Such a rich valuation tells us that the market is hungry for anything EV. Investors should take note.
Thank you for your loyal readership,
The Financial Star team