Defaults and Debt Ceiling—Out of Our Hands

Face it: The U.S. defaulting on its bills is out of our hands—as would be the resulting financial chaos if that happens.  

President Biden and congressional leaders met this week in Washington to discuss raising the amount of money the government can borrow and avert what would be the first U.S. government default. Things are getting real.  

The initial reports on the talks won’t calm investors, who had to read that their elected representatives made “little progress” on an issue with real pocketbook impact. Not what an anxious population needs.  

Republicans want spending cuts in exchange for raising the debt ceiling so the U.S. can borrow and pay bills. Democrats say they are grandstanding. Most of us are scratching our heads, wondering why these big brains can’t figure it out. 

Sadly, deal-makers see a bloody, high-stakes fight is in their best interests. Never mind that the rest of us want them to take care of it calmly and quietly. Spare us from hearing President Biden and House Speaker Kevin McCarthy cutting each other down.  

As the government nears the point where it can’t pay its debts, markets will be moving, whether there’s more brinksmanship, a deal or no deal.  

With the debate out of our hands, what we can control, besides the television remote, is how we respond with our investments. Do we pick up short-term bond ETFs? Maybe look longer term, past the debacle? Or do nothing?  

“This is a time to be positioned in a way that your max upside and downside are much smaller than what you would normally have,” said Rob Isbitts, co-founder of Sungarden Investment Publishing in Weston, Florida and an etf.com contributor. He said the current moment is good to consider long/inverse ETF pairs or "ETF arbitrage." 

With “high uncertainty, try to set yourself up to win either way,” he wrote in an email to etf.com.

Times like this illustrate the need to create portfolios built to withstand volatility. If you’re trying to find a strategy, some may say you’re too late. One financial advisor suggested timeless advice: having a good portfolio that's appropriate for your risk profile and overall situation. 

“Responding to current events is more likely to hurt an investor than to help,” Larry Luxenberg, founder of Lexington Avenue Capital Management in New City, New York, wrote in an email to etf.com. “You should do best by thinking long term and not reacting to short-term events no matter how scary.” 

Contact Ron Day at [email protected] or follow him on Twitter at @RonDayETF