Debt ceiling implications for personal finance
October 8, 2013 8:07 PM Subscribe
As the debt ceiling looms, financial markets are a bit down. How do we capitalize on this? Buy low, yes, but what sectors? What will suffer the most if the ceiling is reached? What will hold its value better? What could see a rise out of the ashes, so to speak?
Personally, I cashed out every holding I have because I do not trust Republicans to NOT destroy the US economy to prove a point.
Sectors I'd avoid were I staying in would be anything with massive government spending or support, which would mainly eliminate major stuff like defense, transportation, and that sort of thing but could also influence medicine and biotech (all that research and NHS money being eliminated) as well as real estate and construction (HUD backs something like 30% of US mortgages). I'd also stay out of index funds since the big indexes like DJIA and Nasdaq will inevitably go through the floor should the economy tank and consumer stuff like retail since the collapse of the US economy will obviously mean less people buying things over Christmas.
Now keeping in mind I'm not an investment advisor and definitely not YOUR investment advisor, where I'd be looking is where the money is going to flee in the event of a US economic collapse. Europe? China? I don't know, but that's where I'd be looking.
posted by Ghostride The Whip at 8:56 PM on October 8, 2013
Sectors I'd avoid were I staying in would be anything with massive government spending or support, which would mainly eliminate major stuff like defense, transportation, and that sort of thing but could also influence medicine and biotech (all that research and NHS money being eliminated) as well as real estate and construction (HUD backs something like 30% of US mortgages). I'd also stay out of index funds since the big indexes like DJIA and Nasdaq will inevitably go through the floor should the economy tank and consumer stuff like retail since the collapse of the US economy will obviously mean less people buying things over Christmas.
Now keeping in mind I'm not an investment advisor and definitely not YOUR investment advisor, where I'd be looking is where the money is going to flee in the event of a US economic collapse. Europe? China? I don't know, but that's where I'd be looking.
posted by Ghostride The Whip at 8:56 PM on October 8, 2013
the short answer is, you can't, and any suggestions to the contrary are irresponsible, because 1) nobody knows whether we will run up against the debt ceiling, and 2) the theory of efficient markets suggests that all scenarios have been already discounted, more or less perfectly.
so you forecast a default, and envision a mad max scenario, smith & wesson ought to be a buy, right? you buy 1000 shares of s&w (at a slightly higher price, because this has already occured to other traders), congress and the president make a deal at 11:59:59, and bwoop, you take an instant 10-15 percent haircut. it's a casino, and the bigger players have better access to current information than you do. you can't win.
what you can do is defensive banking. when bad shit looks to be going down (the october, 1987 market crash, 9/11) you can take money out of the bank, put it in a mayonnaise jar and bury it under the rhododendron in your back yard until things cool off.
posted by bruce at 9:22 PM on October 8, 2013 [2 favorites]
so you forecast a default, and envision a mad max scenario, smith & wesson ought to be a buy, right? you buy 1000 shares of s&w (at a slightly higher price, because this has already occured to other traders), congress and the president make a deal at 11:59:59, and bwoop, you take an instant 10-15 percent haircut. it's a casino, and the bigger players have better access to current information than you do. you can't win.
what you can do is defensive banking. when bad shit looks to be going down (the october, 1987 market crash, 9/11) you can take money out of the bank, put it in a mayonnaise jar and bury it under the rhododendron in your back yard until things cool off.
posted by bruce at 9:22 PM on October 8, 2013 [2 favorites]
so you forecast a default, and envision a mad max scenario, smith & wesson ought to be a buy, right? you buy 1000 shares of s&w (at a slightly higher price, because this has already occured to other traders), congress and the president make a deal at 11:59:59, and bwoop, you take an instant 10-15 percent haircut. it's a casino, and the bigger players have better access to current information than you do. you can't win.
even more so you should be buying smith and wesson's products not their stock in this scenario. Survivalblog (I am NOT going to hotlink that craziness) is the place to explore that rabbithole.
I have diversified my retirement accounts in some different index funds and bonds and the rest is either online savings or on hand cash. I am not going to change for ephemeral reasons. If it does all come crashing down, well, the short term value of my 401k isn't really going to matter in the fight for survival is it? and if it doesn't a sane, long term, low cost index fund is the only proven winner for amateurs like myself (and warren buffet also). So, in short, just ride it out, not much we can do (except encourage your congressmen as your conscious dictates).
posted by bartonlong at 9:47 PM on October 8, 2013 [2 favorites]
even more so you should be buying smith and wesson's products not their stock in this scenario. Survivalblog (I am NOT going to hotlink that craziness) is the place to explore that rabbithole.
I have diversified my retirement accounts in some different index funds and bonds and the rest is either online savings or on hand cash. I am not going to change for ephemeral reasons. If it does all come crashing down, well, the short term value of my 401k isn't really going to matter in the fight for survival is it? and if it doesn't a sane, long term, low cost index fund is the only proven winner for amateurs like myself (and warren buffet also). So, in short, just ride it out, not much we can do (except encourage your congressmen as your conscious dictates).
posted by bartonlong at 9:47 PM on October 8, 2013 [2 favorites]
you're probably not gonna out-think them on it.
Or out-time them on it, because oh are they going to get their trades in before you, even if you're jacked into the wires and prepared to run a trading strategy.
If you are the kind of person who invests in individual companies (which, y'know, is considered not the best thing) and you have had your eye on one or two but consider them either overpriced right now or on the money, then you could conceivably put in a limit order at a price that you consider a discount. But you should do this with money that you have set aside and are willing to see vanish.
Otherwise, the fact that you're asking here implies that the only winning move is not to play.
posted by holgate at 9:49 PM on October 8, 2013
Or out-time them on it, because oh are they going to get their trades in before you, even if you're jacked into the wires and prepared to run a trading strategy.
If you are the kind of person who invests in individual companies (which, y'know, is considered not the best thing) and you have had your eye on one or two but consider them either overpriced right now or on the money, then you could conceivably put in a limit order at a price that you consider a discount. But you should do this with money that you have set aside and are willing to see vanish.
Otherwise, the fact that you're asking here implies that the only winning move is not to play.
posted by holgate at 9:49 PM on October 8, 2013
I think that this is a reasonable and straightforward question, which people are choosing not to answer. Even if you believe in the efficient markets hypothesis (hah), there is a genuine risk that the US Government will properly default, and some stocks will be extremely badly affected by this were it to occur. So there is a risk premium for buying these stocks now, that will continue to increase over the next week. If you continue to hold these stocks in a few months you will have done your dough (as well as being in the middle of a general US recession, so those S&W stocks may be a good buy). But if you’re prepared to gamble then you will be rewarded as they rebound. It’s a pretty straightforward question.
I don’t have the answer, not being from the US. I would imagine the first cabs off the rank would be bond holders, who would be nervous. Merchant banks. Financial sector.
And holgate, there is no particular mystique about share trading. It's mostly a front put up by brokers to maintain their business.
posted by wilful at 10:22 PM on October 8, 2013 [4 favorites]
I don’t have the answer, not being from the US. I would imagine the first cabs off the rank would be bond holders, who would be nervous. Merchant banks. Financial sector.
And holgate, there is no particular mystique about share trading. It's mostly a front put up by brokers to maintain their business.
posted by wilful at 10:22 PM on October 8, 2013 [4 favorites]
But see, the issue is the term. Sure, there will be immediately impacted stocks that will go down. But then, if the stalemate gets resolved in 2 days, that will have a different effect than if it take 4 weeks. Additionally, any particular deal may have some varying level of influence.
Even perception that a deal, however imperfect, has been made can buoy things back, given the horrible climate in Washington.
What you are really looking for is buying options and trading options without actually buying the stock. Simply because this will be a bubble, one way or the other. It is doubtful anything is going to skyrocket and stay going up (that's the old 'buy gold!' marketing ploy). So you are looking at targeting a specific window of time in the future and making a bet.
Options allow you to go long or go short, callable with a premium. So if you bet wrong, you lose your bet. Bet right, you sell the option while you're in the money. Options cost less than actual stock to buy, though betting wrong usually leaves you with nothing of value whereas the stock would have some nominal value and may eventually regain its value lost.
You can also option on an index, and so target a broad industry or sector, or even commodity (like goal, oil, steel, etc)
All that being said - I'm not a financial adviser - I pay for one, and I don't delve into this kind of investing. I work with traders and they're always talking about this option bet and that option bet they made.
As for bond holders being the first sectors to suffer - may not be true, as the government could always decide to not fund something like Social Security to prevent defaulting. In which case, a whole different sector would probably see a big smack in the head.
posted by rich at 3:46 AM on October 9, 2013
Even perception that a deal, however imperfect, has been made can buoy things back, given the horrible climate in Washington.
What you are really looking for is buying options and trading options without actually buying the stock. Simply because this will be a bubble, one way or the other. It is doubtful anything is going to skyrocket and stay going up (that's the old 'buy gold!' marketing ploy). So you are looking at targeting a specific window of time in the future and making a bet.
Options allow you to go long or go short, callable with a premium. So if you bet wrong, you lose your bet. Bet right, you sell the option while you're in the money. Options cost less than actual stock to buy, though betting wrong usually leaves you with nothing of value whereas the stock would have some nominal value and may eventually regain its value lost.
You can also option on an index, and so target a broad industry or sector, or even commodity (like goal, oil, steel, etc)
All that being said - I'm not a financial adviser - I pay for one, and I don't delve into this kind of investing. I work with traders and they're always talking about this option bet and that option bet they made.
As for bond holders being the first sectors to suffer - may not be true, as the government could always decide to not fund something like Social Security to prevent defaulting. In which case, a whole different sector would probably see a big smack in the head.
posted by rich at 3:46 AM on October 9, 2013
so are there options on bonds, or can you "short" bonds (t-bills) ? All other market things aside, wouldn't gov't bonds be the ones that take the biggest hit ?
posted by k5.user at 8:09 AM on October 9, 2013
posted by k5.user at 8:09 AM on October 9, 2013
rich mentioned options (against the big ones like QQQ), there's also things like VXX (for VIX) up 20% in the past five days, also optionable.
This is not financial advice, this is a gambling suggestion.
posted by Brian Puccio at 8:47 AM on October 9, 2013
This is not financial advice, this is a gambling suggestion.
posted by Brian Puccio at 8:47 AM on October 9, 2013
I think that this is a reasonable and straightforward question, which people are choosing not to answer. Even if you believe in the efficient markets hypothesis (hah), there is a genuine risk that the US Government will properly default, and some stocks will be extremely badly affected by this were it to occur.
The problem is that nobody is able to consistently predict large market changes based on upcoming events like this above what would be expected by random chance. For example, Guru Grades tracks pretty much every major market prediction pundit and the average prediction accuracy for a simple up/down prediction is under the 50% that you would expect from random guesses.
It's not as if everyone in the financial markets is unaware of the possibility of financial crisis from the debt ceiling fight. The market "prices in" this kind of possibility, and the prices shift based on probability that the bad event will occur. For example, if congress managed to pass a bill that resolved the crisis and the president signed it tomorrow, the overall stock market would probably rebound by some amount. So if you knew for some reason that it was very likely to be resolved tomorrow when everyone else thought that it wasn't, you could potentially make a lot of money (although it would probably be illegal insider trading). But that's the whole point, you don't know any secret information that everyone else doesn't know, so you don't have any better idea of what the correct price of things are than anyone else does. The best you can do is gamble. If you bet on the crisis going one way or another and are right, you'll probably make money. But in the long term making bets like that, you're going to lose.
posted by burnmp3s at 9:12 AM on October 9, 2013
The problem is that nobody is able to consistently predict large market changes based on upcoming events like this above what would be expected by random chance. For example, Guru Grades tracks pretty much every major market prediction pundit and the average prediction accuracy for a simple up/down prediction is under the 50% that you would expect from random guesses.
It's not as if everyone in the financial markets is unaware of the possibility of financial crisis from the debt ceiling fight. The market "prices in" this kind of possibility, and the prices shift based on probability that the bad event will occur. For example, if congress managed to pass a bill that resolved the crisis and the president signed it tomorrow, the overall stock market would probably rebound by some amount. So if you knew for some reason that it was very likely to be resolved tomorrow when everyone else thought that it wasn't, you could potentially make a lot of money (although it would probably be illegal insider trading). But that's the whole point, you don't know any secret information that everyone else doesn't know, so you don't have any better idea of what the correct price of things are than anyone else does. The best you can do is gamble. If you bet on the crisis going one way or another and are right, you'll probably make money. But in the long term making bets like that, you're going to lose.
posted by burnmp3s at 9:12 AM on October 9, 2013
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posted by contraption at 8:27 PM on October 8, 2013 [10 favorites]