We are now at 31st July 2021.
It is official. The Democrats and Republicans have opted for Option 1 –
The first option would be to tuck a debt ceiling hike into the massive reconciliation bill Democrats plan to pass later this year. However the risks are high that USA’s credit rating will be undermined , raising interest rates.
Do reference my post regarding the 3 options that the US Government had for approaching the US Debt Default potential crisis here
This is effectively kicking the can down the road.
The Treasury will take action to prevent default on 2nd August . One of the actions will be to stop the sale of bonds.
The default will be reached either in September or October. I’m not confident that the government can wait until November.
What does this entail moving forward for retail investors like you or me ?
1) High Interest Fears
Well, it starts with bonds. If the treasury stops the sale of bonds on 2nd August, the 10 year US Dollar yield will go up in August.
Growth/bubble stocks may experienced heavy volatility leading up to September/October.
2) Financial Market Uncertainty
Should the House and Senate encounter obstacles in deciding on the borrowing limit action, this will create financial market uncertainty in August after their recess. Mr. Market hates uncertainty. Therefore investors may flock to gold and other safe haven assets leading up to September/October.
The worse thing is this debt limit risk dovetails with the bond asset tapering.
Q3 2021 will be Risk On!
For those who are already on the sidelines, i would suggest to continue as there may be a market correction in the coming months.
For those who are already invested, i would suggest
- To invest in good companies with consistent earnings, positive operation income,
- Low PEG, low PE Ratio.
- Stay away from Chinese stocks due to regulation risk. If you must, trade Chinese stocks with stop loss, do not invest in them
- Buy into gold, gold-related ETFs, gold mining companies. Already gold is rising.