By Raghu Gullapalli, SmartStops.net contributor
If you are not aware of the all consuming political debate about the U.S debt ceiling that has consumed the country, then you’ve more than likely been living in a cave. Our distinguished representatives have debated the possibility of increasing the national debt and solving future deficit problems ad nauseum. Surprise, surprise we are no closer to a solution with four days to go to the deadline then we were four months ago. Unfortunately our bloviating leadership does not realize the tremendous real life consequences of this political drama.
Aside from the embarrassment of the possibility defaulting on our financial obligations as a country for the first time, there is the almost assured downgrade of our national credit rating. This downgrade may well cripple any chance of a recovery in our economy and will have cataclysmic affects in the worldwide equity markets. What does that mean for investors? Any fond memories of 2008?
For traders like me, that would involve shorting the financials, industrials, the dollar index or anything with interest rate exposure and hedging myself by buying gold, oil and going long the iPath S&P 500 VIX Short-Term Futures ETN (VXX). But for the average investor, Financial Armageddon: Part Deux.
SmartStops comment: Investing in today’s 21st century markets demands dynamic, intelligent risk management. Economic impacts to governmental policies and published economic numbers are fluid. No longer is it sufficient to just allocate amongst your holdings based on beta.
July 25, 2011
As negotiations on a debt-ceiling deal broke down again over the weekend and leaders of both parties now plan to unveil their own debt ceiling plans, Mohamed El-Erian, co-CEO of PIMCO—the world’s largest bond fund manager—is warning that even with a debit limit deal in hand, the United States’ AAA rating is still at risk
El-Erian (left) said in a blog posting for The Huffington Post that while he believed the nation’s leadership would “stumble into a short-term compromise over the next few days—one that raises the debt ceiling and avoids a debt default” more importantly such a plan “leaves the AAA rating extremely vulnerable and does little to lift the damaging clouds hanging over the U.S. economy.”
A debt deal, he said, “will come down to the wire,” however, “the resolution will likely be temporary, and the damage will be real and long-lasting—both of which render an already worrisome situation even more difficult going forward. Indeed, by illustrating so vividly to the whole world what is ailing America, the weekend’s political theatrics should make us all worry even more about the world’s largest economy.”
El-Erian went on to say that America’s “already-fragile economic psyche and its global standing have taken a material hit. Forget about ‘animal spirits’ for now.” Instead, he wrote, “worry even more about an economy that is already having tremendous difficulty sustaining an acceptable growth momentum, and that already suffers from an unemployment crisis that is increasingly protracted in nature. Analysts will now scramble to again revise down their projections for growth, and up those for unemployment.”
Second, he warned. “The debt and deficit issues that are at the root of the debt ceiling drama are, unfortunately, a small part of a much larger set of structural impediments to employment, investment and wealth creation.” The housing sector is still languishing, he continued, “credit intermediation is uneven, infrastructure investment is lagging, job skill mismatches are increasing, and income and wealth inequalities are worsening.”