McCall’s Call: Debt Ceiling Reality Check

July 29, 2011

Don’t let the new catchphrase 'debt ceiling' catch you the wrong way.

 

Uncertainty and fear that the debt ceiling issue is creating has spread from Main Street to Wall Street. Just look at the markets.

Matthew D. McCallStocks in the U.S. and abroad have been trading with a lot of volatility, as investors fret over how quickly politicians in Washington, D.C. can come to some agreement on how much more the U.S. should be allowed to borrow and how it will address its gaping budget deficit.

What’s hanging in the balance is a possible default as soon as Aug. 2 and also the loss of the U.S.’ “AAA” credit rating that has been a given in financial markets for so long. Scary stuff—if you let it get to you.

As with most high-stakes negotiations, the odds of a deal before the 11th hour are low, and therefore investors need to be prepared for more short-term fluctuations, while also keeping the longer term in sharp focus.

With that in mind, I thought I’d lay out a few basic ideas to help investors get through these strange times without making costly mistakes.

Short-Term Vs. Long-Term

While daily volatility has increased in equities, never forget that the U.S. debt issue is a long-term problem. It’s not the end of the world, but we will be dealing with this for years. So think it through.

A deal will almost certainly get done before a default occurs, and therefore I really can’t see any catastrophic sell-offs.

However, raising the debt ceiling doesn’t solve the spending problems in Washington, which, in the end, is what much of the debate and disagreement going on right now in D.C. is all about.

Eventually, inevitably, the government will have to deal with the loads of money it owes as well as the simple reality that expenses are outstripping revenue.

So, while the market’s recent downward movement suggests that plenty of investors are focused on short-term developments regarding the debt, I refuse to reallocate a portfolio based on current events.

One of my steadfast investment rules is: “Don’t make long-term investment decisions based on short-term events.” The negotiations surrounding the current debt ceiling is a “right-now” issue, and investors must not overreact and make rash and emotional decisions.

Gold And Currencies

With the debt issue in the U.S. and unsettling news regarding defaults and downgrades in the eurozone, it makes perfect sense that gold reached an all-time high again this week.

Investors are looking at gold as an alternative currency. That’s the No. 1 reason it’s rallying.

After all, the U.S. Dollar Index is currently near a low for the year and investors are bearish on the euro, given all the debt-related anxieties centered on Greece and other countries in southern Europe.

Such nagging doubts almost always point investors toward gold and other precious metals.

 

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