There are two certainties regarding the current U.S. debt-ceiling crisis and its potential implications for the global economy, financial markets, and investors: (1) no one can predict the future with any certainty; and (2) just about everyone has an opinion anyway.
In that simple respect, the current crisis, along with all of the fear and emotion surrounding it, is not much different than countless other financial crises – or potential crises – that we have faced in the past and will face in the future. As with all such periods of uncertainty, the debt-ceiling crisis represents a call for financial advisors to offer the one thing that most individual investors simply cannot provide for themselves: an objective, experienced and unemotional perspective, unclouded by fear and based instead upon the investor’s short-term and long-term goals.
For the 76th time since March, 1962, and for the 12th time in the past decade, Congress is debating the question of whether it should raise the statutory limit (currently $16.7 trillion) on borrowing by the U.S. government. Technically, the limit was breached in May, but the Treasury Department has since utilized “extraordinary measures” to continue borrowing and avoid any defaults on its obligations to service the national debt as well as pay for other programs such as Social Security and Medicare. Nevertheless, the Treasury projects that by Oct. 17th, the government no longer will be able to satisfy all of its financial obligations unless the debt ceiling is raised.
Given the acrimonious climate in Washington, it would appear that there is an increased risk that, unlike previous times the matter has been considered by Congress, the debt ceiling will not be raised. Yet, because the consequences of such a failure to act could be severe, it seems likely that a compromise will be reached, whether by Oct. 17th or not.
Some have suggested a parade of financial calamities that could result from a failure to raise the debt ceiling:
- Higher short-term and long-term interest rates, not only for U.S. debt obligations but also for mortgages and consumer loans;
- A declining dollar, potentially leading not only to inflation but also to renewed concerns about its status as the world’s reserve currency;
- Liquidity issues and forced sales of Treasuries sparked by fear-induced withdrawals from money-market funds and a lack of viable “safe-haven” investments;
- Declines in the global equity markets;
- An uncoordinated reduction in U.S. fiscal spending; and
- Consequent setbacks to the global recovery, potentially leading to another global recession.
Casting aside the charged rhetoric, however, the above may not represent the most likely outcomes. Referring back to the debt-ceiling crisis of 2011, the dollar actually strengthened, while Treasuries remained a preferred safe haven and Treasury yields declined.
WHAT TO DO
Investors surely are looking to their financial advisors for insight as to how best to deal with the current crisis and should consider tactical moves within their asset allocation if they seek or require a shorter-term perspective, potentially including the following:
- Shortening the duration of bond portfolios;
- Increasing exposure to unconstrained bond strategies;
- Making allocations to international government bonds;
- Incorporating an allocation to non-traditional investments that are less correlated to the equity markets; and
- Insuring that short-term cash obligations have been considered and addressed.
Yet, for those investors who have a longer-term perspective, the best advice that can be offered is the simple advice they should have been receiving from the start: remain diversified; stay focused on long-term goals; and avoid big moves based solely on political theater and shorter-term phenomena. Investors who have followed this plain but sage advice have been rewarded time and time again.
Michael Nathanson is president and CEO of The Colony Group.