How To Position Your Portfolio or Corporate Treasury Given the $33T US Debt

We often hear a lot these days about how the US is running out of money and then Congress acts to pass a last-minute interim measure. All they can seem to do are final-minute extensions that last only for a few weeks. Payments that need to be made include government salaries, approved expenditures, payments to the military and social security, and even payments to treasury bond holders globally.

The last one is particularly sensitive because a lot of foreign countries hold treasury bonds in their portfolios. To default on that would cause a massive loss of confidence in the US financial system and government.

Just to be clear, it is highly unlikely that the US will default on its obligations any time soon. That impasse will always be lifted at the last minute, or so it seems. Congress has had this difference of opinion on the budget for many years now.

The problem is that right now, the US debt is at around $33Tnot counting off-balance-sheet expenses such as those in the future for Medicare and Social Security. This debt represents around 125% of our GDP. But the debt keeps growing every day, so the debt-to-GDP ratio also keeps growing every day. Unfortunately, tax receipts and other revenues are not enough, so we just keep printing money on credit.

Look at it this way. If you keep ordering drinks from a bar and just signing chits, the bartender and the owner may allow you to sign off for several nights that you just pay at the end of the month. But if you’ve gone on for months without paying the tab, at some point, they’ll stop you from ordering any more drinks because your credit is no longer believable.

Similarly, what if other countries suddenly feel that you are just paying dollars that you print out of nowhere to pay for actual commodities, won’t they feel they are getting the short end of the stick? Recently, the BRICS (Brazil, Russia, India, China, and Saudi Arabia) have decided to move away from the USD for settling inter-country purchases and trade.

It seems that the US dollar is being hit on many fronts: loss of confidence by foreign governments, particularly the BRICS; overprinting of currency as measured by a high M2 supply to pay for debts has led to high inflation, although the Fed has managed to cut this down slightly; long-term loss of confidence in the banks and fractional reserve banking. All of these have to be dealt with separately.

Sure, there is a need to solve social ills and inequality. But do it the right way. Make sure all these programs are properly funded. We need to reduce our dependence on debt financing else the consequences for us may not turn out to be so good in the end.

So how do you prepare your portfolio or corporate treasury?

This is not financial advice, but you might want to consider hedging against the possible negative impact of a debt default or loss of confidence in the dollar by acquiring some assets that do not rely on debt, a future stream of cash flows, or promises of payment, like stocks and bonds. However, this is not to say at this point that you should totally avoid stocks or bonds. Just don’t have everything in those.

For example, stocks are valued based on a stream of expected future cash flows. If there is an expected long-term recession, because people have less money to spend and interest rates are higher, then the future value of those stocks will likely be less.

Of course, some stocks are less affected by recession than others. For example, defense-related stocks pump up during wars, while hospital and healthcare stocks generally chug along even during bad economic conditions. On the other hand, real-estate-related stocks and even real estate investment trusts (REITs) are affected negatively by higher interest rates because people avoid higher mortgages and developers cannot get loans at a rate that justifies the expected returns from the properties in the future.

While in the short term, the current high fixed-interest bonds are good, you should consider augmenting these with commodities or store-of-value assets like gold, silver, bitcoin and even crude oil.

Holding short-term US treasury bills is probably OK since these are in the neighborhood of 5%. Duration risk, or the risk of longer-term bonds losing value because newer long-term bonds are paying higher yields, is not as big. Right now, there seem to be fewer buyers for longer-term US treasury bonds, hence the government is forced to pay higher yields to attract them. Buy those at your own discretion.

In times of large global debt levels, try to always have something in your assets, whether individual portfolios or corporate treasuries, that are intrinsic assets and not only promissory debt instruments like bonds or those dependent on a stream of future cash flows like stocks.

This is not to say that a global debt default scenario is imminent. It is not. But always have something that acts independently of debt and future cash revenues.

There is no way you can be ready for any eventuality. But for the ones that you can foresee, at least you can prepare for those.