The Perfect Debt Storm

Congress has voted to spend 300 billion more. Adding this to the projected budget deficit, the Treasury is going to have to find about one trillion more to finance expenses. With the debt already at 20.6 trillion (www.usdebtclock.org), FY 2018 does not look very promising. If the Fed continues with QT (quantitative tightening) and goes ahead with three or four interest rate hikes and the trade deficit does not significantly diminish, which is unlikely, then adherents of the Doom and Gloom Club will wallow in “Schadenfreude”, which is a German word for taking pleasure in other people`s misfortunes.

         Several market observers have noted the grave implications of excessive indebtedness on the part of the federal government. Dollar weakness and higher inflation are to be expected along with higher interest yields on fixed income investments. Despite central bank meddling, bond markets still react to higher yields with lower prices for long-term paper. Ten-year Treasury notes are now close to yielding 3%, which means that more people have been selling rather than buying them.

         This Newsletter has espoused the proposition that bonds were a poor investment that should be avoided and that it would be prudent to short the dollar. The situation now threatens to become critical. In an environment where interest rates are rising, yields will increase, and that means that bond prices in the market will fall. At the same time rising bond yields will have an effect on the prices of equities, of which the recent correction is a reminder.

         It thus becomes extremely difficult for investors to manage portfolios under these conditions. China and Japan will probably not buy much new American paper, and it will be the Fed that comes to the rescue, thereby monetizing more American debt and practically suspending QT. This means that investors will have to be careful about when they move from equities into bonds. Given the high prices for equities even though some commentators find that stock prices are not excessive, investors would be advised to take profits and diversify into commodities like uranium, which has high northwards potential. The dollar will also probably weaken further as the debt crisis develops. Shorting the dollar with Forex diversification in euros, yen and renminbi and also acquiring physical gold are two strategies that will help investors to weather the storm. Seeking a safe haven is best done before the storm breaks.


Walter Snyder 


This Newsletter has been prepared by WWS Swiss Financial Consulting SA (the company). Even though every effort has been taken to ensure the accuracy of the content of the Newsletter, there is absolutely no guarantee that the information contained in it is correct, up-to-date, accurate or otherwise applicable. It is not intended as a solicitation, invitation or recommendation for the purchase or sale of any investment fund or product or security or financial instrument or to participate in any particular trading strategy or banking product in any jurisdiction. It is not to be distributed in any country or area where it is legally prohibited. No liability whatsoever is or will be assumed by the company for any damage, loss or negative result of any sort ensuing from following views expressed and contained in the Newsletter. Investors themselves assume the full risk for any decisions that they take (caveat emptor). The Newsletter may not be reproduced or published by anyone anywhere in any way or form without the express written permission of the company.


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