Investors should be shoring up their portfolios now for the economic fallout of the US failing to raise the debt ceiling and defaulting on its financial responsibilities.
This is the stark warning from Nigel Green, chief executive and market expert of deVere Group, as critical negotiations on raising the debt ceiling have so far failed as White House talks ended with no agreement.
The US may default as soon as June 1, causing a global economic catastrophe, if the limit is not raised by Congress before then.
Green says: “We can’t overstate the significant, far-reaching impact a default would have on the US and global economies. It would likely be worse than the 2008 crash.
“As lawmakers on both sides of the aisle in Washington are standing firm on their respective positions in the debt ceiling argument, we believe that this will go right down to the wire.”
Democrats are demanding a “clean” increase without conditions to pay debts resulting from spending and tax cuts approved by Congress. Meanwhile, Republicans have said they will not authorise any additional borrowing without an agreement to cut spending.
The debt ceiling crisis is putting further pressure on the dollar. Diversification across asset class, sector and regions is investors’ best weapon to ride out choppy waters. But considering the tightening squeeze on the dollar, investors should perhaps particularly ensure that their portfolios are properly diversified in terms of currencies, in order to mitigate risk and seize opportunity during these times of heightened volatility.
Even if there is a last-minute agreement and a default is diverted, the drama will have eroded some of the global reserve currency’s credibility and reputation as a ‘safety asset’.
And even if it is resolved, driving at full speed closer and closer to the cliff edge is risky for markets. When it happened in 2011, it was the most turbulent week since 2008. Clearly, the debt ceiling saga is adding another layer of profound uncertainty within already jittery financial markets.
Following the release of US CPI(consumer price index)data on May 10th, Green says, “brace for a turbulent summer” with the US economy cooling quicker than had been anticipated. “We put this down largely to the Fed being too aggressive with their rate hikes.
He emphasized, “The failing Fed made another mistake with the latest interest rate hike, which could push the world’s largest economy not only into a short-term but a longer-term recession. Clearly, this would not only be a huge issue for the US, but the global economy too.”
Green added that investors should remain vigilant and not become complacent due to the potential of no more imminent hikes and/or the possibility of rate cuts, noting that it is “essential for investors to take good advice and realise in a fast-changing world the underlying importance of being in the right sectors at the right time.”
Nigel Green concludes: “We are three weeks away from a crisis that could undermine the role of the US at the centre of global finance and tip its economy into recession, negatively impacting economies the world over. Investors also would do well to work with an advisor to ensure their portfolios are best-positioned through robust diversification.”
