10 Smart Investments to Hold in Case the U.S. Defaults
The odds that the U.S. will default on its debt on or after Aug. 2 increase each day. Some credit analysts now believe the chances are better than even that insolvency could become a reality. In the event of default, credit rating agencies like Standard & Poor's and Moody's will most likely downgrade the country's credit rating from AAA or Aaa, the highest ratings given to borrowers.
Worse still, even if a deal is reached, and the debt ceiling is raised for the short term, those agencies may still downgrade the nation if they view the legislation as simply "kicking the can down the road."
U.S. bonds have always been considered a safe haven for investors, and sovereign debt problems in Europe have caused international capital market investors to flee to U.S. paper. This has kept the interest rates the federal government has to pay very low, despite unprecedented levels of American borrowing. But that safe haven status could be ruined by a rating agency action.
24/7 Wall St. went hunting for investments that would be safe even in the event of a default. This doesn't mean they'll have high yields or that they are inexpensive -- just that they're unlikely to lose their value. Additionally, they are holdings individual investors can buy. Of course, asset managers could provide a fairly long list of low-volatility and low-return assets.
It's worth noting: The U.S. debt ceiling has been hit before and not raised immediately, and the issue didn't cause stock markets to collapse. In the fall of 1995, the debt ceiling was reached, but Congress didn't raise it until March 1996. In the interim, while the issuance of new debt was suspended, the Treasury took steps to raise funds to meet federal obligations which did not exceed the debt ceiling. In the event a deal is not achieved by Aug. 2, investors would be happy to see that period set the precedent for market reactions to this one: No one would feel they had to sell their stock holdings, or buy precious metals to maintain the value of their portfolios.
The predictions are so dire now, however, that fewer and fewer investors are willing to sit and hold their current portfolios. So where should you put your money?
1. Stocks with High Dividends and Cash Balances
AT&T (T), with a yield of 5.7%, will not default on its dividend obligations. Neither will General Electric (GE), which pays a yield of 3.1%. McDonald's not only pays a high dividend, it has bought back billions of dollars of its own shares in the last five years, which has had the effect of lifting the stock price. Each of these firms has significant cash on hand. Each has strong earnings. There are at least a dozen public companies that meet these criteria. None of these have any chance of default or a suspension of their dividend payouts.
2. Gold
The ability of the U.S. to raise money was once based on its massive gold holdings. That's not true any longer, but it does speak volumes about the perceived value of the precious metal. The trouble with gold as an investment is that the limited supply means that prices will rise as more people and institutions buy it as a "safe haven." That means the price will probably exceed its current all-time record. Gold has risen from $1,168 to $1,600 over the last year. A number of analysts believe the price will double again.
The risk of gold is that its worth will fall precipitously if there solutions are found for the debt conflict, the eurozone crisis in the and the slow global economy. The U.S. may solve its debt problems, but the other two economic issues putting upward pressure on gold's price are unlikely to improve anytime soon.
3. T-Bills
Treasury bills, as they are officially called, are a form of U.S. government debt, but one that the US will almost certainly never default on. The yield on T-bills is near zero, but some have maturities of as little as four weeks. The financial world knows how little risk is involved in holding T-bills, and will almost certainly not trade them lower. Another advantage of T-bills is that they can be bought at almost any bank branch.
4. Swiss Francs
The balance sheet of Switzerland is among the best in the world, which is why billions of dollars have already poured into the franc this year. This has sent its value up from $0.95 to $1.25 in a year, and from $1.15 just a month ago. Investors have to worry that the value of the franc could fall if the logjam over the American budget is solved. But once again, the solution to the US debt problem is not a solution to the world's financial and economic difficulties, nor the deficit problems in smaller E.U. nations. As long as those continue, the Swiss franc will remain attractive.
5. Triple-A Corporate Bonds
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Besides buying stock, there's another way for investors to seek the safety of the American companies with the strongest balance sheets. That alternative is to invest in the corporate debt of the last four US firms which still have AAA ratings of their own: Exxon Mobil (XOM), Johnson & Johnson (JNJ), Microsoft Corp. (MSFT) and Automatic Data Processing Inc. (ADP). Economic Data recently made the point that Microsoft's balance sheet is so solid that its borrowing costs are as low as those of the U.S. government, which means its payout to investors in those bonds is tiny. The analyst who made the observation wrote, "The company's $1 billion of 0.875 percent notes due in 2013 and $1.75 billion of 1.625 percent debt maturing in 2015 have the lowest interest rates of more than 3,500 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt." MSFT bonds have low yield, but are remarkably safe.
6. Silver
The devil's metal is attractive as an investment in the case of a government debt default for many of the same reasons that gold is. Additionally, it has the benefit of being the de facto currency on Wall Street in the extreme cases when paper currency can be devalued. Demand for silver is also high because it has more industrial uses than gold. Another benefit of silver is that its price, at $40 an ounce, puts it within the reach of many people who cannot afford gold at $1,600 an ounce. Central banks don't trade as much in silver as in gold because the market is small. It takes too much bulk weight of silver to add up to real value compared to gold.
7. Gold and Silver ETFs
Many investors will turn to exchange-traded funds and other exchange-traded products rather than trying to buy hard gold or silver assets. The reason is simple: Gold and silver have to be re-certified to be put back into the system, so middlemen take a cut when the physical metals are bought and sold. The two most common ETF proxies for gold are SPDR Gold Shares (GLD) and iShares Gold Trust (IAU). The SPDR product is highly liquid based on daily share volume and in total dollars traded. If there is a full breakdown in the economy, taking delivery of gold will be nearly impossible. ETFs remove that problem. The iShares Silver Trust (SLV) is by far the top ETF for the metal, and it now has a value of more than $12 billion. These ETFs are the easiest way for the public to move in and out of the precious metals. These products also have options that trade actively, allowing investors the ability to make projections for the most extreme cases or for hedging purposes.
8. Singapore Funds: iShares MSCI Singapore IndexFund (EWS)
Singapore may be one of the safest markets for U.S. investors who want international exposure in the event of trouble with U.S. debt. When we covered the nations with AAA ratings earlier this year, we noticed Singapore had one of the strongest ratings in the world. It is perhaps the most advanced economy of its kind, and this ETF is down less than 3% from its recent highs. The nation was not immune to the global recession and would not be immune to future recessions. However, its GDP did recover better than that of almost any other developed nation. The real problem for U.S. investors is that Singapore is small with a population of about 4.7 million, and its GDP is only about $292 billion. Amazingly, this ETF is now close to $1.9 billion in market capitalization.
9. Canadian Funds
CurrencyShares Canadian Dollar Trust (FXC) is the easiest investment for most U.S. citizens to make into a North American nation. Canada has an economy based upon hard assets, many of which will rise in value with commodities. Mining, minerals, oil and agriculture dominate. Canada is still the top trading partner of the U.S. The nation is also English-speaking for the most part, and its corporate law is very similar to that of America.
10. International Bond Funds
One stand-out international bond fund is the T. Rowe Price International Bond Fund (RPIBX). The average maturity is between 5 and 10 years, so it's not an international money-market fund. Its performance and its holdings could easily make it one of the more focused funds if U.S. investors decide to begin looking for safer opportunity outside U.S. stocks or government debt. It is a $5.6 billion fund with minimal U.S. exposure (4%) and has more than 56% of its weighting tied to the debt of Germany, Japan, the U.K., and France.
-- Jon Ogg and Douglas A. McIntyre
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