How to handle your money during this artificial, man-made crisis

What’s a struggling (and angry) investor to do, in the face of a government shutdown and threatened default? An artificial financial crisis (not based on fundamentals) cooked up entirely for political gain.

Prior to the shutdown, the economy was gathering steam — more jobs, higher profits, more homebuilding, low interest rates, low inflation, higher stock prices, and higher business and consumer spending. Now that the GOP is randomly dropping bombs on American businesses, incomes, pre-schools, and transportation systems, growth will slow, along with the jobs and tax revenues that would otherwise have been produced. If Congress actually drives us over a cliff, stocks and the value of the dollar could collapse and interest rates soar. Rates on short-term Treasuries have jumped already, and the dollar is down.

If the debt ceiling isn’t raised, Obama has some flexibility to pay the government’s bills for a very short time. The market might waiver and wait for a couple of days, hoping that the grown-ups will finally take charge. But you never know.

The reigning Tea Party wing of the GOP doesn’t care if the economy sinks. They believe that their base will blame Obama because it happened on his watch. The GOP will then run against the “Democrat recession,” even though the GOP manufactured the downturn out of thin air.

If the GOP comes to its senses, stocks and the dollar will almost certainly spike up. Still, that won’t last if the deal is only temporary. As long as one political faction thinks that the government shutdown is “fun” (as one ignorant Congressman said) and that defaults on Treasury debt don’t matter, investors can’t make decisions with confidence.

At the moment, the best advice is probably to do nothing. You might take a tip from global investors, who clearly believe that the U.S. won’t default. Interest rates are up a hair on 10-year Treasuries but, as of this writing, the market is pretty calm.

If individual investors sell everything and hide in zero percent bank accounts, and the global investors are right, you’ll have sold at a low. By the time you reinvest, prices will be up.

The shutdown is already tamping down business — we don’t know for how long. Unemployment is up, spending is down, new mortgages can’t go through until the FHA reopens, and business transactions that need government stamps are frozen. Trade is also suffering as ships pile up in port, waiting for federal inspectors to return to their jobs. GDP growth will be slower than otherwise would have been the case. But the pro-growth, low-interest-rate policy of the Federal Reserve will almost certainly continue, to offset some of the damage the shutdown continues to inflict on American workers.

Whatever happens, this crisis — a purely artificial one, manufactured entirely for political gain — should remind you of fundamentals. For safety and comfort, you need savings on hand. (Maybe a crisis will be manufactured again.) You need stocks for long-term growth, but should make sure that the percentage in stocks is suitable for someone your age. And you need diversification into international stock funds — the markets in Europe are rising up and look like good value. Also consider international bond funds invested in the debt of stable foreign governments. They’re picking up some investors leaving the Treasury market.

Because this crisis is artificial (unlike the financial collapse in 2008), I’m assuming that any plunge in the markets can recover quickly. But something else to build into our thinking is that the power of those attacking government stability is stronger than anyone might have thought.

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6 comments
Roger // 10/15/2013 at 8:03 am

On the NBC news last night Suze Orman suggested to sell all your bonds funds. Is this flawed thinking? I would like to maintain the what I have.

Thanks

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Jane // 10/21/2013 at 11:49 am

See the article I wrote on the value of keeping bonds funds. It’s under the Investing tab on my Home page. Called “Why Should Anybody Buy Bonds?”

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Melanie Tayler // 10/15/2013 at 10:18 am

Excellent article. Thanks for writing. I always enjoy reading your stuff. I appreciate you taking the time to educate us and I appreciate your expertise. Thank you.

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kathleen Cush // 10/16/2013 at 11:48 am

thaaaank you

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Greg Head // 10/16/2013 at 1:28 pm

Jane:
First, let me say that I blame both political parties, not just Republicans and the Tea Party, for the artificial crisis and government’s inability to solve basic fiscal problems.
Your commentary is one sided, makes assertions that you cannot prove and may be completely false, e.g. “they don’t care if the economy tanks”. In essence, this is an attack on character, not a well deserved policy criticism.

More jobs – yes. Most are part-time and low paying. Higher profits – yes. Labor expenses are lower (lower median income for the middle class) and interest expenses are lower because of artificially low interest rates created by the Fed. These are the two drivers of increased profits. Stock market up – yes. Most economist see it as an asset bubble due to artificially low interest rates created by the Fed. It disproportionately benefits the rich. Home prices – increased due to artificially low interest rates too. While the economy may be gathering steam, it is anything but healthy.

Then, there is the imminent threat that rising government debt will retard future economic growth. Yet, our government – both parties – don’t address that problem. The Senate has not passed a budget for about 5 years; the Senate voted 99 to 0 against one of the President’s budgets when it brought to a vote (most are not even brought to the floor for a vote); the President’s budget projected approximately 22 trillion dollar debt over the planning horizon (if interest rates increase, a much larger percentages of tax dollars must be allocated to service the debt); the President has not been serious about entitlement reform (not in his budget) which is required due to statistical facts. The new health care law does not do what it promised: family costs will not decrease, and you may not be able keep your doctor and health plan. Labor unions that once supported it are calling it a disaster because they haven’t got their exemption like Congress and other special interests. The President has been in office for nearly 5 years. By not addressing fiscal issues via his budget and proposed legislation, the President has not provided the necessary level of leadership required to solve these looming fiscal problems. Even the recommendations of the very bi-partisan commissions he appointed (Bowles-Simpson are not in any Presidential budget or proposed legislation.

There is also the President’s vote against raising the debt limit when he was a senator and his statement that the need to increase the debt limit was “due to a lack of presidential leadership” and it was “immoral” to leave additional debt to our children.

Politics – yes. Both parties – of course. All of them making promises to constituents that, in turn, elect them.

While the President has done some good things, overall I am very disappointed in his lack of leadership, and there are a lot of facts that suggest the problem is bi-partisan, not just Republican and Tea Party.

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Mike Hammett // 10/17/2013 at 10:45 am

I think this manufactured economic crisis demonstrates the fragility of our democratic system. Otherwise, how can a small (but very vocal) minority hold such power over Congress and threaten U.S. default? Although they lost at the voting booth, the Tea Party attempted to rewrite law by force by shutting down government and threatening default.

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