The President of the United States says that we “are not a deadbeat nation.” He states that the US must raise its debt limit to avoid another fiscal cliff situation. From the President’s point of view, Congress must pay for the bills that it has rung up. From the viewpoint of those who want to see US spending reduced at any cost, the upcoming vote to raise the debt ceiling is an ideal time to exact budget reduction promises in return for votes. From our viewpoint investing and the continuing fiscal cliff drama are intertwined. Prior to the recent vote to extend middle class tax breaks we wrote about fiscal cliff fight investment losses. The concern we voiced is that the uncertainty of the continuing fight on Capitol Hill deters long term investment. One of the keys to investing and the continuing fiscal cliff drama is how to do accurate fundamental analysis in search of investment profits. The other two issues are the need to reduce the gargantuan size of the federal budget and the need to retain stability of the social fabric of our nation. As the President noted in a recent press conference, the national debt is based on past spending and not future spending. The nation needs to pay its bills and we agree. The nation also needs to reduce spending and the issue here is just which programs and benefits need to be trimmed back. In the meantime, what does an investor do?
Fundamentals of Investing in Uncertain Times
The famous “blood in the streets” quote always comes up when the market is shaky. Just wait until things are really bad and then buy is the implication. However, sometimes it is not darkest before the dawn but darkest before a healthy stock becomes a penny stock and then goes into bankruptcy. There is a sense that many investment advisors promote that if you money is not working for you, you are losing out. However, cash is still cash and cash gives an investor the flexibility to invest where he wants and when he wants without waiting for a good price at which to sell a previous investment. In investing and the fiscal cliff drama, cash may be a good idea. Treasury bills were great a year or so ago and resulted in profitable investing. However, as uncertainty drives interest rates up the value of currently held treasuries and bonds falls. Likewise the value of high paying dividend stocks falls as interest rates rise. A concern voice by the White House is that playing with the debt ceiling may result in another US debt downgrade and higher rates. At that point money bearing interest in the bank trumps treasuries, bonds, and dividend stocks. What about inflation and the loss of purchasing of money in a bank account? With investing and the continuing fiscal cliff drama a slow loss of purchasing power due to a low level of inflation beats the heck out of substantial stock and bond losses due to higher interest rates and an economy plunged back into recession.