Letter to Clients – Global Debt Crisis

Dear Wiser Investor,

The last few days have been very volatile ones for the global stock markets. The headlines of a Greek debt default and the US August 2 debt limit increase deadline are contributing to the uncertainty in the market.  Over the last few days we have taken several calls from investors concerned about these debt issues and what actions we are taking in the portfolios to counteract these events.

It is important to understand that the Greek and US debt issues are not the same. Greece can not generate enough revenues to cover their interest payments nor can they raise the funds needed through the bond market. In the US we are facing a technical default, meaning that we can very easily offer US Government bonds to the market and sell them at relatively low interest rates but the self imposed debt limit is preventing new offerings without expiring existing ones. The August 2nd deadline has become political in that both sides of the debate want to cut spending but have different view points in how to do this. The US may miss a debt payment that could cause short term pain but this does not mean that the US will default as a nation on all its obligations forever.

US Government bonds are the safe haven for investors world wide. If a US technical default were to happen, where would the world go to invest safe money? Recently we have seen gold, FDIC insured accounts and German bonds as alternatives to US Treasuries. It should be noted, though, that amongst this uncertainty we have seen long term US Government bonds decline in value faster than shorter duration US Government bonds. This seems to show that despite a technical default looming, by its investment behavior, the world continues to regard shorter duration US Treasuries as a safe haven. This certainly is not what you hear about on the nightly news.

Here at Wiser we build portfolios for the long term. Two years ago we shortened the duration of our bond allocations to reduce risk. We also added international treasuries in foreign currency to  help cushion the falling dollar’s effect on the portfolios. We know from long term data that market timing is a loosing game. We know that gold does not pay us anything to hold it and FDIC insured accounts pay very little. As investors we do not want to react to emotion or feeling but rather trust that quality investments will prevail over time. This is how we survived the financial crisis and exactly how we will address this current situation.

Looking at current events, we believe that there is a greater risk in not cutting long-term spending than meeting the August 2 deadline. This does not mean that missing the deadline will be a non-event but that any pain caused will be short in duration. Long term we believe that the dollar will continue to decline, interest rates will remain low and we could see another stimulus plan put into place to push along our slowing economy. With this view we are looking at adding to asset classes such as commodities and other alternative investments that have a low correlation with the stock market. We will continue to search for long term healthy asset classes and look for opportunities to lower your overall cost of investing. Our focus will always be long term.

Thank you for your trust and business.

By Published On: July 21, 2011

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