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Supplementary Report - The Debt Ceiling

A number of clients have contacted me about the debt ceiling issue, which has been dominating the airwaves for the last few weeks. Their questions revolved around the issue of what I perceive as the immediate risk and how the portfolio is structured to cope with this particular risk.

My comments will assume only a slight knowledge of the subject so please skip over the areas that are already well understood.

Most developed countries do not have a "debt ceiling", which is a limit at which the Executive branch has to go to the legislative body to ask for more money i.e. an increased credit line. So what we experience here is very much an artificial construct, which has the goal of bringing the nations finances before the legislature and the public on a regular basis. There is nothing magic or dangerous about this particular level of debt and all of the fuss and bother is about 99% political circus and maneuvering for the 2012 elections.

So this is, essentially, a non-event despite the ratings scare from the ratings agencies and all the other dire warnings. It might be a great nuisance for those working in, or dealing with, the Government, but that will be a transitory effect. It will do no harm to the status or the position of the U.S.A. There are real issues here in the medium term surrounding the absolute level of national debt and the effect on the US. economy and role as the main world reserve currency, but this is not a problem in 2011.

The key issue for the portfolio is whether there will be a lasting negative effect and the answer is no. However there may well be turbulence, particularly if August 2nd arrives without an agreement, and I intend to take full advantage of any panic that ensues. There may also be a burst of enthusiasm in the markets if, as I suspect, we work out a last minute deal. I also would take advantage of any exuberance to sell any of our positions that reach their target prices.

In summary, the debt ceiling crisis has the same long-term significance as the Y2k problem, but I hope many people disagree with that and that they create a turbulent couple of weeks in the marketplace. You can be sure that I will be watching events very, very closely and moving swiftly if opportunities occur.

Please call or write with any questions.

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