Wednesday, August 3, 2011

What should I do?

Once again I am getting this question, and from multiple people.  What should I do with my money at this point?  First off, lets take a look around and see where we are headed now that the debt ceiling debate is finally over, for now.

United States:  The way lawmakers dealt with the $1.5 Trillion budget deficit was to trim next to nothing from it.  So once again we will spend $3.5 Trillion and collect $2.0 Trillion.  The tea party "right" will soon become more infuriated (due to their base realizing nothing changed) and will become more extreme, going further to the right in the coming months.  But in the end, and not to sound fatalistic, but it was the right call not to cut anything.  We might as well try to squeeze out one, possibly two more years of blissful ignorance.  I have said this in the past, but once again, there is no one in government that will willingly take the economy and ruin their own career.  So will will prop it up, patch it, borrow, and spend until no one will loan us anything any longer.  Just the way it is.  Initial reports have the AAA credit rating being downgraded in Jan of 2012.

Europe:  An economic disaster is in progress.  Portugal, Ireland, and Greece have all failed.  Italy and Spain (along with Belgium) are now in the spot light, and not fairing very good at all. 
Note the spreads for Italy and Spain.  Everyone else that touched this line has had a not so good fate.  And even better, it does not matter which one goes up, either will collapse Europe.  Italy is supposed to have a bond auction Thursday, and the European Central Bank has already figured out that it will fail, so they are planning to step in to buy the bonds, this is a bad bad sign. 

So what to do?  First convince yourself I am correct, and that is not at all certain.  Then ask yourself, will the US default/inflate its debt away, or will it be able to grow itself out of this mess.  If you think that I am right, there are still questions.  But here is my take.

If you have Euros physically, dump them.  I have no experience with a currency that goes defunct, but I have no plans to find out first hand either.  I see no upside to holding Euro's, and with the best case being a break even scenario, why would one hold them.

That is the easy part, moving forward from a US focus, things trudge along for another 6 months.  The market has no upside potential in my opinion, and lots of downside risk.  Lots!  You have to ask if you have stocks, will they continue up?  I think no.  Therefore dump them.  Should you go short, only if you are well versed in what you are doing.  I am short currently and looking to go more short.

Ok, you say I dumped my stocks, now what.  401k?  Still a tough question.  It is pretty clear that taxes will rise, but not until next year.  I suspect in about 12-18 months the government will
start looking towards the 401k's as a source of funding.  That scares me, there is a lot of money there, and the US needs a lot more.  It appears to be about $2.4 Trillion in all 401k's, although I cannot seem to find an official total.  The more I read about 401k's, the harder it is to get the money out of there.  Apparently some plans do not even allow you to withdraw at all.  The first step I can suggest is stop contributing!  Even if you are a bit worried, why would you lock your money up in the government coffers?  Put the money in your bank account.  Yes, you will lose 20-30% for income taxes now (versus 20-30% of income taxes later, presuming they do not rise to say 40%).  As for withdrawing/closing your 401k, look into it.  Try this site, but googling for it on your own is just fine.

Now, what to invest in?  With my funds that are not short, I have the rest of my money invested in the USD.  Yes, you can say I am long the US Dollar if that will make you feel smarter at parties.  Otherwise, if you are fine with not sounding sophisticated, "cash" works just fine.  I will start to say this, you should have 2 types of cash, bank account cash (short term CD's, plain savings, short term treasuries, short term money markets, etc and the second type, physical cash

If you have metals, keep them.  No need to play that game.  I strongly suspect the price of gold and silver will tumble, and would not be buying here, but if I am wrong... you will have some at least.  So, below I will set up a ROUGH chart on what I think you should have and when.  If it is not obvious, I do not know your actual situation and therefore cannot tell you what you really should do.

Things are getting fun now!  The June 2013 thing is a total guess, but I just added it to paint a picture. 



  1. Hi Patrick. Can you be more specific about what you think will happen with 401k's? Will the government change the rules and declare them taxable?

    I can see a debt crisis coming (a real one this time) but I'm not sure how savings accounts will be safer than 401k's.

  2. I firmly suspect the government will change the rules for 401k programs, thus making them impossible to get out of. Once they do that, well you can kiss it goodbye, unless you think they will do a better job. Hyperinflation will come eventually, and by then your money will be locked in treasuries I suspect, and may get you a pack of bubble gum.

    Are savings accounts safe, no. For now they are ok. They do allow quick mobility in case things go wrong. You will need to move to hard assets, but when? Not sure.