I'm largely through talking about what I think should happen, as my opinions are different from those of the vast majority and I'm completely fed up with politics.  Instead, I'm just going to discuss what I think is going to happen and how one can try to profit, or at least protect one's self, from events.

First, let's not kid ourselves -- the debt ceiling will be raised.  The only question is by how much, and therefore how soon it will come up for yet another vote.  Oh, there will be some hand wringing and political grandstanding, but there is no way in hell politicians are willing to accept the immediate consequences of a failure to raise the debt ceiling.  The can will, once again, be kicked.

I think that the most likely course of events will be as follows:

1. Conservative politicians do a lot of tough talking and bloggers write about how we need to get this situation under control.
2. The stock market sells off sharply.
3. Articles start appearing in the MSM about all the bad effects of failure to raise the debt ceiling -- pension fund insolvency, big jump in unemployment, etc.  The rhetoric coming out of the administration (which Geithner has already started) increases to a fever pitch.
4. Politicians, after a lot of closed-door meetings with Wall Street types, where Armageddon is (yet again) threatened, decide they don't have the stomach for a difficult course of action.  Conservative bloggers write conciliatory pieces while trying to make it sound like they're not doing a complete 180.  
5. The debt ceiling is raised by about $1.5T, with some nominal budgetary concessions and a lot of stomach-churning grandstanding.  Conservative bloggers whine a bit but console themselves that 'it was the best deal we could get.'
6. Risk assets go 'yee-haw!' and rally back strongly.  Gold heads for $1,500, silver for $50, and Oil for $120.  Everyone immediately starts bitching about inflation.
7. The whole farce is replayed again in about a year except under much more dire circumstances.

Needless to say, I'm already set up for this kind of series of events, with a hedged wealth-preservation portfolio.  If all goes as predicted, the hedge can be lifted about two weeks prior to the actual vote on the debt ceiling.  Still, one will need to pay very close attention to any deviation from the above, as even seemingly small details (such as what comprises the concessions to enable the increase) can impact a proper investment stance.

Posted by: Hermit Dave at 11:40 AM | No Comments | Add Comment
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