As investors, we do not put together successful investing lives by getting world events to happen that we desire. Rather, we put together successful investing lives by reacting intelligently to the events that do happen.
Although I personally regard it as a low probability event, the upcoming issue that is dominating the global financial newswaves is the prospect of a potential United States government default on its debt.
The real issue there is that the United States will not be able to pay interest rates on its debt to creditors (this means both foreign entities like China’s vast stockpile of US government debt, as well as American corporations and individual investors that held US bonds), and this will conceivably lead to: a (temporary) crash in the United States dollar as it loses its historical credibility to meet its debt obligations in all instances, the dollar loses its status as the reserve currency as part of a panic response, the price of oil ceases to be tied to the US dollar, US interest rates spike to adjust for the new risk, and the major components of the S&P 500 experience declines of at least 15%. Those are the unfortunate effects that could be on the table if the United States does default.
But what would be interesting about such a default is this: the heartache would be the result of procedural incompetence rather than substantive decay in the strength of the United States.
We would still have a $13 trillion economy, although the figure would fluctuate at the time. We would still have our advantage in terms of intellectual and infrastructure might in the technology field. We would still have a defense department that dwarfs the next ten nations combined. And most importantly, we would still live in a country with 300 relatively affluent people that can be taxed by the US Congress.
What is the implication of this? The effects of the default could likely provide one of the most buying opportunities in our lifetime. For those of you who wished you could be like John Templeton buying every major American stock during the Great Depression and WWII, this could be your chance. For those of you who wish you could be like the grandparent you wish you had who bought stocks during the height of U.S-Soviet hostilities during the Cold War, this could be your chance. For those of you who are just bummed that you did not get a chance to buy as much as you would have liked during The Great Recession of 2008-2009, this could be your chance.
Coca-Cola makes over $10 billion in all but two countries in the world. Procter & Gamble sells products in 398 out of 400 American homes. Johnson & Johnson and Nestle each have over two dozen brands that generate at $1 billion in annual sales. Regardless of what the United States government does in the coming week or two, those companies will still be around and generating profits for decades to come. This could be your chance to buy those companies at highly favorable prices—and there is nothing better than getting an excellent dividend company on your household’s balance sheet that you bought at a favorable price.
With that said, my guess is that preparing for this opportunity will ultimately turn out to be much ado about nothing. First of all, the deal about the political shutdown is mostly fluff and political theater—so many government workers are considered “essential” that the shutdown is not particularly deleterious to the country (sure, it sucks that we cannot visit some parks and national landmarks, but out grandparents that survived the Great Depression would mock us for complaining about the trivial inconveniences caused by the shutdown).
Second of all, there is no way that the Republicans and Democrats would not reach a deal to prevent a default. I know some people are bothered by the fact that we have not yet reached a deal, but it is the nature of negotiations to wait until the last minute to get a deal struck—reaching a deal at the “last minute” is a typical characteristic of high stakes negotiations.
And if they did not reach a deal within the deadline that is now about 100 hours away, there are still some short-term juggling maneuvers that could be orchestrated to avoid default on interest obligations (which could effectively buy us time through Thanksgiving or so). As we neared the point where a “true default” would occur, the financial markets would likely be so roiled that a deal would have to be reached. In fact, if major stock market indices had gone down 15-20% during the past week, it’s likely that a deal would have been struck this weekend.
My take-home lesson is this:
(1) A default is highly improbable, but there is still a 5% or so chance that makes it worth having cash on hand, ready to deploy
(2) If stock fall 20% or more, you should buy, buy, buy. This is all ultimately procedural rather than substantive. Excellent businesses could withstand the Great Depression and the rise of Germany—this is a cool-down lap compared to some of the 20th century events that General Mills, IBM, AT&T, and Colgate-Palmolive continued to pay dividends through.
Originally posted 2013-10-13 01:59:15.