July 25, 2011

We are hearing a lot lately from clients who are concerned about the possible ill effects on the markets of a looming federal default. While I hate to see clients having an anxious time or losing sleep, a heightened level of contact tells me things:

  1. What we hear from clients generally echoes what clients hear from the news media, and the amount of contact is in direct proportion to the level of hysteria (or euphoria, as the case may be). Google "federal default" and you'll get 234 million hits.
  2. For better or worse, investors pay attention and respond to the news media. It's usually for worse, because it's the job of the media to report yesterday's or today's news, not tomorrow's. Successful investing takes place by thinking about tomorrow.
  3. When a given financial topic takes on a life of its own, that often means the trend is played out, or nearly so, and the smart money should already be gone by then.

So it is with the debt ceiling talks and the fear of default. There are three reasons why I no longer fear a default.

  1. The stock market tends to be a leading indicator, and in the last 12 months the Dow is up roughly 25%.
  2. We have a date certain for the "end of the world": August 2nd is the supposed drop-dead date for default.
  3. There is near-universal sentiment that a default will be a huge disaster.

Think about the last big market drop, late 2008 through early 2009. The market had been weak (down 25%) for 12 months before the financial crisis really became a crisis in September 2008. That was a great example of the market as a leading indicator. The market headed down early, and spent a year pointing to the disaster before it happened. Not so today. And that whole "date certain" thing, please. When has any financial cataclysm ever been accurately predicted by any credible source? Leave dates certain to biblical scholars. Perhaps the best evidence that a default would be a yawn is the universe of Chicken Littles telling us how the sky will fall. Remember Y2K? Planes were going to fall from the sky, the power grid would cease to function, no water, no food, cows would refuse to give milk, whatever. It was a non-event preceded by a year's worth of hysteria about what a huge disaster it would be.

I still think default will be averted. But if it is not: yawn.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).