3 Ways to Trade the U.S. Default Talks No Matter What Happens

by: Follow My Alpha

The end is near! Or at least that’s what the media keeps telling use every day. It seems that a U.S. debt apocalypse is all but certain. Before you conjure up images of cataclysmic fire and brimstone raining down, let’s remember that nothing is accomplished with stress. In our view, the prudent path is to objectively look at the default situation and see how to make money - no matter what happens.

We doubt the U.S. government will actually default on its debt, but credit rating agencies might downgrade the U.S. regardless. Why would they do this? First, because they can - and it’s that simple. Second, the reality is that the U.S. hasn’t put on its best face in dealing with the situation and isn’t instilling much confidence among the rating agencies. After all, going to the media to point fingers and try to gain favor with voters isn’t helping to resolve the situation. It just makes U.S. look childish.

For investors, what matters is controlling what you can control and knowing the options relative to this situation. In our view, there are three simple strategies regardless of whether you’re bullish or bearish about to the U.S. debt situation.

1. Strafing the U.S. Treasury Market

The federal government can look more like a circus with a variety of clowns and an ineffective lion tamer than an elected body of representatives. What’s a hard-working, red-blooded American to do when people of questionable intent and intellect are threatening? Simple: just strafe the U.S. Treasury market with short-term Treasury ETFs. Here are few instruments to check out:

  • ProShares Short 7-10 Year Treasury ETF (NYSEARCA:TBX)
  • ProShares Short 20+ Year Treasury (NYSEARCA:TBF)

While your local congressman or U.S. senator may not take a call from you, he’ll definitely get the word when the U.S. Treasury market starts to take a beating because of the political impasse. If you’re bearish and feel that the U.S. is likely to get downgraded or that there will be some type of default, this is a strategy to adopt.

2. Buy When Heads Roll

OK, perhaps you aren’t quite ready to start shorting the U.S. Treasury market. That doesn’t mean you sleep like a baby, either. Perhaps the situation is overblown and, in the long term, the U.S. will come together like it always has. Still, between now and that day, it may feel like the road to perdition. Think long term and reap the benefits of investor irrationality over the short term. That means buying the broad indexes if you see at least a 10 percent drop in the market. In particular, we recommend going after the SPDR S&P 500 (NYSEARCA:SPY) or iShares Dow Jones (NYSEARCA:IYY).

Buying individual securities is like playing Russian roulette because the market could take a big dip. Maybe you get lucky, but luck isn’t an investment strategy. But if you’re an investor who just isn’t interested in indexes, technology is the way to go. Names such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), and Netflix (NASDAQ:NFLX) are all “best of breed” in their respective sectors with plenty of room to grow. Buying these names after a sound retracement due to a strong market correction would be a nice play.

3. Cement Your Future Into Place With Gold

The gold bugs have been screaming their point of view till they were blue in the face - and they have been validated once again. Gold has been reignited by the U.S. default concerns and has rocketed past $1,600. Our current situation looks a lot scarier than the PIIGS default scenario because it has bigger legs and concerns the largest economy in the world. So what’s the game plan with gold? Buy it if you really don’t want any exposure to classic investment instruments such as stocks and bonds. If you’re looking to correlate your investments with hard assets without liquidity concerns, the SPDR Gold ETF (NYSEARCA:GLD) is the instrument we like.

If the U.S. hits some type of default or gets downgraded, we have little doubt that gold will fly even higher. Investors will be ducking for cover under hard assets such as gold - as we’ve been seeing for years. While some might argue this won’t last forever (which is our personal view), that doesn’t mean the party will end tomorrow or that it doesn’t make sense to own some gold.


We stand in the Buy When Heads Roll camp because we like the idea of taking a low risk/long-term approach during a period of such uncertainty. Buying indexes over the long term at opportune times hasn’t failed investors yet. In addition, we missed the easy money with the gold train and we aren’t going to start chasing it now. We could short U.S. Treasuries but then we’d have to worry about unexpected government intervention in the U.S. Treasury market. Hate to say it, but governments don’t play fair when it comes to the capital markets. Remember, they aren’t just the house. They’re the house and the landowner. In a volatile market like this, we’re picking our battles carefully. That’s why we end up in the Buy When Heads Roll camp.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.