The downgrade of the U.S. credit, which Fitch Ratings has been warning about since January of this year, may be days away from occurring. Just moments ago, Fitch put the world on high alert, by formally announcing a "Ratings Watch Negative" on the U.S. According to Fitch, in a press release from Oct. 10, 2013:
"Even a short-lived default that did not impair the long-term capacity of the U.S. government to service its obligations would call into question the effectiveness of the country's political institutions in ensuring that sovereign debt obligations are honoured in a timely manner. This means that if the U.S. sovereign IDR were lowered to 'RD', it would be unlikely to return to 'AAA' in the short to medium term."
The long and the short of the government shutdown, the $16+ trillion debt, the potential Fitch downgrade and the Debt Ceiling crisis is unfortunately rather simple. It is causing our economy to stall out, right in the middle of what was already a rather weak recovery. First quarter GDP growth was only 1.1 percent -- barely breathing, and downward revisions of 2013 GDP growth, from Fitch Ratings and others, have fallen to just 1.6 percent GDP growth.
The damage of a drawn-out government shutdown will show up in the fourth quarter, the only question is how much. Some economists say it will reduce GDP growth by a fraction of a percent. Others, like Christine LaGarde, the managing director of the International Monetary Fund, say we are at risk of a recession. As Paul Krugman pointed out in his blog, "Rebels Without a Clue, "The Clinton-era shutdowns took place against the background of a booming economy. Today we have a weak economy, with falling government spending one main cause of that weakness."
Here it is Oct. 15, 2013, and it is shocking that we are only 48 hours away from a default. Coming this close to another financial disaster should wake Americans up from the complacent slumber we've been in for the last four years, which has been partially caused by the wonderful recovery of stocks since the Great Recession. Another recession will weigh heavily on U.S. stocks, many of which are enjoying their all-time high share prices.
Here is an Emergency Checklist for you to ensure that you are safe and protected from the Hangover of the 2013 Congressional Octoberfest.
1. Take Charge.
2. Have a Family Plan.
3. Don't Open the Door to Strangers.
5. Energy Backup.
6. Safe House.
7. Short and Sweet.
8. Money Under the Mattress?
9. Life Lines. (Connect With Friends Across the Pond.)
10. Gold, Silver, a Gallon of Gas and Water.
And here are the details.
1. Take Charge. Know what you own. Get at least a percentage equal to your age safe now. Know what safe is. Adopt Modern Portfolio Theory and annual rebalancing as a strategy, instead of Buy and Hold. Make it a priority to know exactly what you own in all of your accounts - 401ks, IRAs, health savings accounts, savings, CDs, annuities, life insurance and retirement plans and to educate yourself on what the safest, most tax protected plan is for you at this time in your life. Read the Stocks and What's Safe sections of The ABCs of Money for a detailed explanation of how my Modern Portfolio Theory-based system works. (People who used this simple system earned gains during the Great Recession.) If you want to make sure this gets done immediately, learn more about my Investor Edu Retreat, scheduled for Nov. 16-18, 2013 in Santa Monica, California. Call 310-430-2397 to learn more.
2. Have a Family Plan. Banks aren't lending to anyone these days. 1/3 of the real estate being purchased is from cash buyers. Where is all of that cash coming from? Some is from hedge funds, however, more and more families are coming together to purchase hard assets. Seniors: Why should your well-paid daughter pay high rent to strangers, when you can purchase a home, charge her a reasonable rent (with a lease option), earn a good/steady yield and have a secured investment? Be sure that you have a tax-savvy estate plan and will as well.
3. Don't Open the Door to Strangers. Beware of the slick sales pitches of strangers. Over the last decade, investors have been burned on the Apocalypse portfolio, on real estate, on gold coins, stocks, insurance, annuities and bonds. Badly. Paper assets are under pressure, real estate is difficult to finance and gold coins are often marked up far above their true value. There is no substitute for learning how all of these assets relate to one another -- for getting the ABCs of Investing that we all should have received in high school. Until you do, chances are that you are making everyone else rich, except yourself.
4. Flashlights. So, where do you turn for wisdom in these volatile economic times? You must grade your guru by performance, not by how much you see him on TV or how many Ivy League degrees he has. Many people, without even knowing it, are relying upon commission-based salesmen, who are trained to sell you this or that product, rather than honest experts. Learn how to interview your financial team like your life depends upon it, because your lifestyle does.
5. Energy Backup. Energy prices are going up. One of the best investments anyone can make in today's world is to invest in energy efficiency and sustainability. The ROI can be more than $7.500 a year, and the upgrade improves the sale price of your home in the bargain. Learn more in my article, "Save $7,500 on Energy." Energy upgrades are currently the safest investments, with the highest yield.
6. Safe House. Get safe and know what safe is. Bonds and bond funds are vulnerable to capital loss today, and have already begun losing money. Annuities and life insurance are not as safe as you think. On the other hand, health savings accounts can cut your insurance bill in half, while offering the protection you need. Income-producing hard assets, like income property, are still the most opportune investments in many U.S. markets, based upon record-low interest rates and property prices, with a strong rental market.
7. Short and Sweet. Examine your bond (fixed income) portfolio to make sure that the terms are short and the credit-worthiness is high. Go light on bond funds for at least the next 18 months, unless you have a sound strategy and understand the risks. Read my article, "Don't Get Crushed in the Bond Exodus," for 10 Do's and Don'ts.
8. Money Under the Mattress? When inflation kicks in, it will cost a lot more to buy, and to finance, everything. There is still a fire sale going on for many outstanding hard assets -- from real estate, to cars, to jewelry and art. These have a chance of increasing in value in the years to come, unlike those dollars under your mattress, which are likely to decline in spending power. And financing, if you can get it, is at record-low interest rates.
9. Life Lines. Get to know why New Chips are safer than Blue Chips, and why Korea, Australia and Chile are low-debt, high-growth countries that offer an element of diversification and potential upside to your portfolio.
10. Gold, Silver, a Gallon of Gas and Water. Gold and silver prices have become highly correlated with confidence in the markets. When the Dow drops, gold glows; when investors swoon over Wall Street, they fall out of love with the metal. Going all in on gold, or being hard-sold into semi-numismatic coins has burned the smirk off of gold bugs who were sure we were entering the Apocalypse. Since the Great Recession, stocks have been the best game in town, with the NASDAQ earning 30 percent annualized. I'm bullish on gold, particularly gold miners, due to the current economic crisis and the oversold nature of this asset. But going all in could be devastating if the Debt Ceiling is raised (even temporarily) and another Relief Rally occurs. The bottom line is diversification, not jumping all in or all out, and trying to time things.
As a final reminder, here is where we are today. "Without a debt limit increase, our government will -- in a matter of days -- not have the resources it needs to make good on its commitments," Secretary of the Treasury Jack Lew, in an Op-Ed from USA Today, on Oct. 4, 2013.
Click to read Secretary Lew's full testimony on Oct. 10, 2013 before the Senate Finance Committee.