Two weeks in and government is still shut down, the debt ceiling hasn’t been raised and our acid-tongued politicians continue their childish squabbling. (Apologies to any children offended by the comparison.) The rhetoric is thick with fear inducing terms. It’s all deadlines and defaults; free falls and global catastrophe; anecdotal evidence of woe; assertions failing to raise the debt ceiling would trigger “chaos.” One congressman said the debt ceiling is “a nuclear-tipped leverage point.” Some politicians claim stocks are wrongly placid, implying they know better than markets how to value future corporate earnings. (I have my doubts.) Confronted with all this, what’s an investor to do?
My advice: Don’t let the bozos in Washington hold your portfolio hostage. Turn them down and focus on your goals.
It’s understandable virulent rhetoric from our so-called leaders may give some investors pause. Politics often triggers heated emotions (hence why it’s impolite to discuss over dinner). And in this case, folks are already trying to affix blame or credit before the matter is resolved—and when both sides are roughly equivalently wrong. Maybe a politician you voted for is dialing up the rhetoric, too! Hard stuff to shun! But as an investor, it’s crucial to separate facts from fiction—to see through the smoke and figure out whether there is actually fire.
Case in point: The bipartisan effort to spin the definition of default on its head. Washington’s wonderful wordsmiths claim hitting the debt ceiling means the US will “Default on its obligations.” As we’ve written, default is a very specific thing: For the US government, it means only failure to pay interest or principal due a bondholder. And we’re not the only ones who think so. In a memo released last week, Fitch Ratings stated, “Fitch would only recognise a sovereign default event if the government failed to honour interest and/or principal payments on the due date of Treasury securities.” Fellow credit rater Moody’s wrote, “There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.” In a video addressing the issue, Standard and Poor’s said: “If the debt ceiling were not raised by the mid-October date when the stop gap measures used in recent months are expected to expire, the government will not be able to meet all of its obligations. If the government failed to service a debt obligation, we would change our rating to SD—Selective Default.” (Emphasis mine.) Even the credit ratings agencies get it! And, while I’ve had bones to pick with their ratings actions over the years, I’m confident they know default’s definition better than politicians—after all, ratings agencies are the official arbiters of bond issuer defaults.
Beyond semantics, there is ample legal precedent—if not a Constitutional requirement— for the Treasury to prioritize payments, and tax revenue greatly exceeds federal debt interest payments. Expiration of extraordinary measures—hitting the debt ceiling—simply doesn’t trigger default.
Why else should you approach politicians’ statements a wee bit skeptically? Because they’re professionals at arguing and finger pointing until the very last moment—and then cobbling together the miracle, bipartisan deal that saves the day. They’ll probably claim each side had to make big sacrifices, but lo, a deal emerged after hours of negotiating until nearly midnight. See the fiscal cliff and 2011 debt ceiling debates for two recent examples. Suffice it to say, they’re not anomalies.
Taking your cues from Washington about when to invest in stocks or get properly allocated is tantamount to allowing politicians steer your financial future—and I can think of few greater risks to your personal financial health. After all, this is an outfit known to spend $436 on a hammer, $640 on a toilet seat and $7,622 on a coffee maker. Medicare’s fee schedules—set by Congress—drive massive overages. Their more recent greatest misses include Solyndra, A123, Evergreen Solar and more. (Whatever your view of the merits of the government’s investing in energy that’s green, the dollar return on investment is red—not confidence inducing.) Heck, even when the government didn’t expect its money back, TARP’s bank bailouts wound up in the black. And then there is the little matter of the default both parties are failing to properly define. The collective financial literacy of politicians sure seems microscopic, so following their every move with your finances is heading down the wrong path. And take note: Politicians won’t be sounding an all clear. This merry band of popularity-seeking showboats has never found a crisis they didn’t like. (Then again, some studies allude to politicians’ behavior showing sociopathic tendencies.)
It is of course possible markets react emotionally to developments out of Washington. But the real key for investors is to overcome these emotions. Allocating with eyes on Washington and not toward your goals is an error. Forget what Speaker Boehner said, what President Obama did, how Pelosi looked, what story Ted Cruz is going to read and what stocks did today; think about what your financial future should look like—and don’t allow the Beltway blathering to hold your portfolio hostage.