Seeking Alpha
Profile| Send Message| ()  

The situation:

The United States has an obscene amount of external debt. External debt is the total public and private debt owed to non-residents. It is currently sitting at $16,737,246,099,998 as of 2013. Putting into perspective, that is 17 times more than 99% of the world.

Adding to this massive debt problem, the United States also has the largest trade deficit in world which totals $784,775,000,000 as of 2011. In comparison to other countries, the trade deficit is 480% higher than the United Kingdom, which is the second leading trade deficit holder in the world. If the United States were a publicly traded company, it would be trading near $0 and on its way to filing a Chapter 11.

What is the problem with having a lot of external debt? Every country has some external debt, right?

The problem with having external debt, especially when it is a large amount, means that money will be leaving the country. When money leaves the country, the country becomes more poor and this leads to other socioeconomic problems. Aside from having a lot of external debt, what is amplifying the debt problem is the United States is increasing its debt every year by having a trade deficit. As stated above, in 2011, the trade deficit was around $780 billion. It also currently pays around 3% interest (on average for past 5 years). This comes out to be around $300 billion per year. With $700 billion in trade deficit and having to cover $300 billion per year in interest, the United States is going further into debt by 1 Trillion dollars per year. When you take all this into consideration, you cannot help but realize how bad of a situation the United States is currently in.

How the United States is currently handling its debt crisis and trade deficit:

The United States' solution is to increase the supply of money. The benefits of printing more money is it will be able to pay down its existing debt and also cover its trade deficit. However, the problem with printing more money is that over time, it will lead to a lower valued currency and lower purchasing power overall. For now, it is okay because the United States has a strong currency compared to its creditors and trade partners. For example, if the currency exchange rate with its largest external creditor (China - currently owed $1.26 trillion in US Debt) or trade partners (China and Canada) is 1USD to 50XYZ, it can continue to print money until the ratio is no longer favorable. In the long term, this is not a viable strategy and is only delaying the inevitable. Even though this strategy is stimulating the economy, it only stands to make the degree of the crash worse.

The only alternative solution is to lessen degree of the collapse. How can they do this?

With the United States' largest creditor being its citizens (owed $4.14 trillion), the only solution that comes to my mind is to hyper inflate the economy and take positions to profit on the crash. For example, it might issue reports of a strong economy to encourage investors to continue to invest in the market. Once the market reaches a predetermined level, the United States government will then initiate a sequence of events that will trigger the crash. When the market crashes, the government will profit at the expense of its largest creditors and will be able to use this profit to pay down the debt owed to them.

More signs pointing to a crash - technically inspired:

The other reason the market may crash is based purely on a technical pattern of the S&P 500 over the last 50 years. Below is a chart of the S&P 500 showing a triple top. This pattern usually results in a downtrend that breaks below the previous support level. This implies that the market could crash below the 700 support level.

50 year chart of S&P 500 showing Triple top.

If the market is going to crash, what you should do and how can you profit from all of this?

There are many options available to doing both. For example, I would recommend you research into buying stocks that have a negative correlation with the S&P 500. This will allow you to profit when the market crashes. You can also look into buying options on these stocks if they are available. If you have the capital to maintain the minimum margin requirement, you can also consider shorting stocks that have a positive correlation with the market. For the more risk averse investor, who is time sensitive and believes that the crash will happen in the next year or so, you might consider selling put options on stocks that are directly inversely related to the S&P 500 or purchasing calls options on them. One ETF that I've been eying is SPXU. This has a direct negative correlation with the S&P 500. You might also want to consider investing in gold and silver companies, ETFs, or other investment vehicles that represent these commodities. Investors usually turn to gold and silver in the market declines because they help preserve dollar value. One gold company that I have on my watchlist is IAG. It is currently near its six-year low and looks poised for a rally.

Conclusion:

The United States' has a lot of growing debt and this can lead to a long bear trend in its markets. I would avoid taking any long positions that are positively related to the market.

If you have outstanding long positions that you've had for a while and profited from, I would consider liquidating them so that your portfolio does not give up its gains. Doing this will also put you in a good position to use your profits to take new positions that can profit when the market crashes. It will also give you the ability to pick up stocks that have been deeply discounted as a result of the crash.

Source: U.S. Debt Levels Could Crash The Market - Here's How To Profit From It