● This week, the eurozone was finally knocked off the financial front pages. Now there’s a bigger problem than Greece on the horizon. The big question for the week ahead is: will the US go bust?
With only days to go until the government bumps against its self-imposed debt ceiling (Tuesday 2 August is officially D-Day) investors are finally wondering what would happen if the world’s biggest debtor simply refused to pay its debts.
After all, more than half the world’s AAA-rated securities are issued by the US government. If they suddenly became junk it would throw the financial system into chaos. As Jeremy Batstone-Carr of Charles Stanley points out: “US bills and bonds pay coupons on the 15th and final day of each month”.
High Frequency Economics estimates that roughly $540bn is paid out every fortnight. If those payments stopped, says Batstone-Carr, “the world’s financial system faces losses equivalent to those experienced in the wake of Lehman Bros’ failure in September 2008” – twice a month!
But that’s not going to happen, reckons John Stepek. “Even with the stock markets tumbling around us, I just can’t get worried about this US debt ceiling business. Why? Because it’s a tawdry little pantomime.”
Politicians in the US are focused on next year’s election. They want to gain as much political capital from this situation as they possibly can. “So it’s all about goodies and baddies. The winner is the party who can persuade the majority of the audience – the voters – that the other party are the baddies. But beyond all the noise, the impact of this fight will be very short-term.”
John isn’t worried about the potential loss of America’s AAA-rating either. The problem with subprime and eurozone debt is that the holders suddenly realized they were holding something completely toxic, and were left with no idea of the value.
This is different. A US Treasury, is “not an unknown quantity. And while the world’s biggest economy is certainly not at its strongest, it is not going to turn around and stiff its creditors in any meaningful sense in the next six months”.
● So how can you profit? Make a watch-list of quality stocks that you want to buy and take advantage if there is a big drop in the market. You know we like defensives – my colleague David Stevenson tipped a controversial one yesterday.
And hold on to gold. Yes, assuming they sort out the debt ceiling it’s likely to fall back as the dollar rallies. But sorting out an artificial debt ceiling, and actually fixing the US’s long-term debt problem are two entirely separate things.
● Of course, that raises another question: When will it be time to sell your gold? MoneyWeek editor-in-chief Merryn Somerset Webb spelled out the dilemma on her blog this week. Anyone who listened to our advice to buy gold roughly ten years ago, would have done very well. It’s gone up from $250 an ounce to $1,600 today.
But as a result, “now you are all asking us when gold’s bull run will end. And telling you when gold will be expensive is a lot harder than telling you it was cheap back in 2002”.
The basic answer is that (assuming we don’t go back to a gold standard, which Merryn also contemplates), gold’s bull market will be over when “monetary and fiscal authorities finally grasp the nettle and start protecting rather than actively working to debase the purchasing power of their currencies – ie when real interest rates turn positive and keep rising from there”.
But “given the lousy GDP growth rates in the UK and US, along with the ongoing implosion in the eurozone”, that day seems far off.
So until then it makes sense to hold gold. Especially as “you aren’t getting a real return from any other kinds of money… and both the bond and equity markets are pretty scary places to be”.
As usual, the blog drew plenty of interest and comment from readers. Roland doubts that gold will “tumble like it did in the Eighties”. Hasn’t it by now “restored its position in the world’s consciousness as a credible store of value after years of being forgotten as a barbarous relic?”
Andrew agrees. Pointing out that: “The USD money supply has, in my view already passed the point of no return and yet more QE3 is on the horizon. It is too late ever to get the US budget balanced or reduce the need for the US Treasury to borrow”. When this happens, gold, “whose value can’t be debauched”, will become the ultimate safe haven.
Not everyone agreed though. Both Alex and Bob reckon that “gold bugs” tend to be too “obsessed” with the yellow metal. This means “they will never sell it, and will watch it peak and fall back down 50%”, says Bob. Have your say here.
And if you are tempted to invest in the yellow metal, our resident gold expert Dominic Frisby’s latest gold report is still available. As well as looking at the best ways to buy gold, it’s packed with his best tips on the miners to buy now.
● With all these unwanted surprises in the market, you have to be very nimble to take advantage. Or at least, that’s one way to look at it.
Stephen Bland on the other hand, who writes The Dividend Letter, would beg to differ. It’s fair to say that Stephen couldn’t care less about the latest news stories. He’s not worrying about the European crisis, the US crisis, or any other sort of crisis.
He just looks for big, safe, blue-chips paying out high yields. You buy a nice, diversified portfolio of these. Then you sit on them.
That’s it. It’s simple, it’s effective, and it means you can sleep at night while everyone else is tearing their hair out. Find out more about Stephen’s newsletter here.
● Here’s something you should watch over the weekend when you get a moment – it could save you a lot of grief in the future. In his latest video tutorial, MoneyWeek deputy editor Tim Bennett looks at the lessons that investors can learn from the high-profile collapse of care homes operator Southern Cross: Ten red flags Southern Cross investors missed.
It’s a really useful examination of the sorts of red flags that investors need to watch out for on a balance sheet. If you’d been paying attention, there were plenty of signs early on that the company was potentially heading for trouble. It’s well worth watching: avoiding this sort of pile-up when you invest is just as important as picking the big winners.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.
Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• Ruth Jackson
• James McKeigue
• David Stevenson
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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