The Valor Blog.
Investment News and Views, Direct from Our Team.

Default???

Will the US default on its debt?

What will happen if it does?

These are questions that should not be required to be asked. There is no reason that the US should default on its debt. This is purely a political crisis turning into a potential nightmare.

It is fascinating that the Asian share markets are rising to 5 month highs with what is happening in the US. If the US defaults, the effects will be felt around the globe. The Asian housing and debt bubbles (including Australia) which are currently brewing are the main driver in the short term for Asia. We believe that they are unsustainable as debt is growing at rates well above income growth. In Australia, there is a reasonable chance that GNP actually falls in the coming years due to the slowing mining boom and retiring baby boomers and yet most punters believe that 5% and above mortgage debt growth is sustainable. Rationality will prevail, although the timing is uncertain.

We believe that it is very likely that one party will cave in and agree to a deal at the last minute. If not, then brace yourselves.

Our clients are well positioned with significant cash holdings to take advantage of the situation if it evolves that the two political parties don’t flinch and default.

For those that are leveraged in these markets, whether overpriced property or margin loans, I suggest taking up a religion. We are entering a dangerous period where it is not a zero probability of depression like economics returning very quickly.

Our core scenario is that disaster will be averted, but unfortunately the 100 year storm seems to come round a little more often than every 100 years. It is humans who have their hands on the controls and unfortunately humans are not infallible.

Should you sell wonderful companies that you own because of a potential crash? No. If you own a business that has the ability to grow over the long term regardless of most economic conditions and that business is not trading at exorbitant prices then over time you will be fine. If you own wonderful companies that have excess cash or cash-flow, in market routs, these companies can buy back shares and increase your wealth over time.

Is there anywhere which it is safe to place your money? Cash is probably the safest, however it is also not a zero probability that higher inflation isn’t around the corner, so an over allocation to cash is also risky. The academics who control the central banks are printing money and do not have a crystal ball. This in an experiment and the end result is unknown. The safest place to have your money over the long term is in productive assets or businesses which have pricing power. This is where the majority of our clients money is invested.

We live in interesting times.