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Investors Don’t Get Stung by the U.S. Government Shutdown Debate

Stock-Markets / US Debt Apr 07, 2011 - 08:39 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: U.S. Treasury Secretary Timothy Geithner is once again worried that we're going to hit our debt ceiling (this time by May 16), and the resultant debate has once again brought our government to the brink of a "shutdown."

I don't know why: The entire debt ceiling concept - as well as the investor fear, political-posturing, self-aggrandizing behavior and government-shutdown debates this budget limit repeatedly spawns - is a joke, albeit it a very bad one.

Unfortunately, the speed at which headlines are crossing my desk suggests that the entire affair will turn into yet another Capitol Hill debacle - this one with additional consequences for an already battered Main Street.

But I've got four recommendations that will help you sidestep the government shutdown/debt ceiling fallout, and perhaps even bolster your retirement holdings along the way.

Government Shutdown Debate/Debt Ceiling Debacle
As things stood at press time yesterday (Wednesday), federal-government operations were funded through midnight Friday. So if our elected leaders in Congress can't put together some kind of spending-measure agreement that President Barack Obama can sign between now and the weekend, some government operations will be suspended early Saturday.

About 800,000 federal employees would be "furloughed" in such a shutdown - roughly the same number as in 1995, when a similar impasse froze the government for seven days.

At the center of this latest inside-the-Beltway debacle is the so-called "debt ceiling."

First established in 1917, the budget 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.

Seems that somebody just doesn't know how to live within his means.

According to the Center for a Responsible Federal Budget, the limit in 1917 was a mere $11.5 billion. Today it's $14.294 trillion.

Right now, we're hearing all sorts of rhetoric from politicians who want us to believe that they're down in the trenches slugging it out in an effort to force opposing party members to accept major budgetary spending cuts ahead of a deadline that would force the entire U.S. government to "shut down."

What a load of hooey.

First and foremost, according to the latest reports, our Capitol Hill combatants are duking it out over a targeted $33 billion in proposed outlays - or roughly 0.23% of the budget.

Here's a headline for you: That's little more than a rounding error.

While our lawmakers would have us believe that this is just a budgetary squabble, that's not the case at all. Don't let them fool you: The real issue here is one of financial management.

A Look Ahead
The nation running up against its debt ceiling is a lot like an individual consumer running up against the limit on a credit card. When that occurs, you either have to stop spending, or get a credit-limit increase.

As for alternatives, there really aren't a lot. The U.S. government could:

•Raise taxes to cover the $738 billion to $1 trillion that experts estimate will be required to get us to Sept. 30, which is when the fiscal year ends.
•Reduce spending by the same amount.
•Default on its debt.

Here's how I see things playing out.
Defaulting is unthinkable (even Treasury Secretary Geithner agrees with me on that point). That doesn't mean it can't happen. But it's a fair bet that our leaders still believe they can end the impasse, avert a shutdown and eradicate the debt-ceiling-fueled default fears with just a bit more of their trademark political meddling.

That leaves the other two options: Raising taxes or cutting spending - neither of which is particularly palatable from a political standpoint. In fact, neither option is particularly attractive to Main Street, either, since the American middle class would bear the brunt of both.

Based on where we are at press time, my guess is that our leaders will move at the last minute to pass a short-term, "stopgap" measure that's designed to buy time while they "debate" longer-term solutions.

And that, my friends, is the real danger.

When I consider the implications of a government shutdown, part of me can't help but think that it might actually be a good thing to give some of our elected "leaders" a bit of a "time out." Let's force them to sit out on the National Mall - away from the Capitol building, where they can't inflict any additional damage on our nation's economy. In fact, given the damage that they've already inflicted - which includes piling on so much debt that our kids' kids' kids will still be paying it down - maybe each of these folks should be forced to wear an old-fashioned "dunce cap," too.

If I sound a bit "exorcised" (a $10 word for really ticked off), you'll have to forgive me.

We all know that Wall Streeters are once again poised to rake in record bonuses - even as America's Main Streeters continue to struggle. Unemployment remains chronically high, wages are flattening out and the real estate market is likely to remain trashed for another decade. So every time I think about how our friends on Capitol Hill continue to approve all sorts of entitlements, financial favors and earmarks, I find that I'm clenching my jaws.

And if I think about all of this - and the years of economic challenges these leaders helped create for this country - when I happen to be gazing upon one, or both, of my two young sons, I find that I'm clenching my fists, too.

Four Moves to Make Now
Modern-day Washington has never displayed the kind of intestinal fortitude it would take to make the kinds of changes that we really need - in other words, real financial reform - because those who are elected to office don't have the guts to essentially fall on their own swords and risk not being re-elected. That means that the current government shutdown saga won't have a healthy outcome - such as a reinventing of government, a slashing of waste, a reduction in spending, or at least a redeployment of that spending into non-pork-barrel measures that will create stable, long-term growth.

The final solution to the debt-ceiling debate will just be more debt. Congress will raise the debt ceiling, so that the game can continue, under its present set of rules.

As bad as that sounds, there is a silver lining - because chaos tends to produce real opportunity. Here are four investing moves that could pay off big:

•Take Some "TIPS:" Any delay on budgetary fixes will necessitate more spending and more handouts because our leaders will want to make up the "difference" by simply handing out free money. By their very nature, such moves are inflationary. The numbers that pretend to show that inflation is as "under control" as ever are "cooked," but eventually - be it by design or default - even the "favored" inflation indicators (including the "core" rate of the consumer price index, or CPI) are going to rocket. Treasury Inflation Protected Securities (TIPS) are bonds whose yields are tied to the rate of inflation - specifically the CPI. When inflation really blooms, those yields will have to be adjusted, as well, taking these specialized investment vehicles higher in the process.

•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.

•Hope for the Best/Prepare for the Worst: 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.

[Editor's Note: Money Morning's Keith Fitz-Gerald is one of the world's leading experts on global investing. His insight for investors on topics like the U.S. government debt ceiling has made him regularly sought out for media interviews and asked to speak at top financial conferences around the world.

Fitz-Gerald is also one of three financial experts who recently helped develop a strategy for individual investors to bring in the big money - the billions of dollars Wall Street tries to keep for itself.

And we're willing to share that secret strategy with you.

To find out more about this strategy - and read more analyses like this one from our worldwide team of global-investing experts - please just click here for a report from our monthly affiliate, The Money Map Report. You'll never regret it.]

Source :

Money Morning/The Money Map Report

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