The Ten Best Investments If The US Defaults

July 25, 2011 by Douglas A. McIntyre

The odds that the U.S. will default on its debt on or after August 2 increase each day. Some credit analysts believe the odds are in favor of insolvency. In the event of default, credit rating agencies like Moody’s and Standard & Poor’s will most likely downgrade the country’s credit rating from Aaa.

Worst still, if a deal is reached and the debt ceiling is raised only for the short term, the agencies may still downgrade. They may view the legislation as simply an act of “kicking the can down the road.”

U.S. bonds have always been considered a safe haven. Debt problems in Europe have caused international capital market investors to buy U.S. paper. This has kept the interest rates the federal government has to pay very low, despite unprecedented levels of American borrowing. The safe haven status could be ruined by a rating agency action.

24/7 Wall St. examined investments that would be safe in the event of a default. This does not mean they will have high yields or that they are inexpensive. It means that they are assets that are unlikely to lose their value. Additionally, they are holdings individual investors can buy. Of course, asset managers could provide a fairly long list of low-volatility and low-return assets.

The debt ceiling has been reached before and not raised immediately. The trouble did not cause stock markets to collapse at all. In the fall of 1995, it was reached, but not raised until the following spring. Until March of 1996, the issuance of new debt was suspended. During that period, the Treasury took steps to raise funds to meet federal obligations that did not exceed the debt ceiling. In the event the ceiling is not raised by August 2, investors would be happy to see a reprise like the 1995 to 1996 period. If that period is a precedent, no one would have to sell the stocks they own, or buy gold or silver to maintain the value of their portfolios. The predictions are so dire now, however, that fewer and fewer investors are willing to sit and hold their current portfolios.

1. Dividends & Cash Balances

AT&T (NYSE: T), with a yield of 5.7%, will not default on its dividend obligations. Neither will General Electric (NYSE: GE), which pays a yield of 3.1%. McDonald’s (NYSE: MCD) not only pays a high dividend, it has bought back billions of dollars of its own shares in the last five years, which has had the effect of lifting the stock price. Each of these companies has significant cash on hand. Each has strong earnings. There are at least a dozen public companies that meet these criteria. None of these have any chance of default or a suspension of their dividend payouts.

2. Gold

The ability of the U.S. to raise money was once based on its massive gold holdings. That is not true any longer, but it does speak volume about the value of the precious metal. The trouble with gold as an investment is that the limited supply means prices will rise as more people and institutions buy it as a “safe haven.” That means the price will probably go higher than its current all-time record, maybe even double, as some analysts believe. Gold has risen from $1,168 to $1,600 over the last year. The risk of gold is that its worth will fall precipitously if there is a solution to the debt disaster, the crisis in the EU and the slow global economy. The U.S. may solve its debt problems, but the other two economic problems that help pressure gold’s price up won’t improve any time soon.

3. T-bills

Treasury bills, as they are officially called, are a form of U.S. government debt, but one that the U.S. will almost certainly never default on. The yield on T-bills is near zero, but some have maturities of as little as four weeks. The financial world knows how little risk is involved in holding T-bills and will almost certainly not trade them lower. An advantage of T-bills is that they can be bought at almost any bank branch.

4. Swiss Francs

The balance sheet of Switzerland is among the best in the world. Billions of dollars have already poured into the franc this year. This has sent its value up from 0.95 USD to 1.24 USD in a year, and from 1.18 USD just a month ago. Investors have to worry that the value of the franc could fall if the logjam over the American budget is solved. Once again, the solution to the U.S. debt problem is not a solution to the world’s financial difficulties and the deficit problems in small EU nations. The Swiss franc will remain attractive.

5. Triple-A Corporate Bonds

Besides buying stock, there is another way for investors to seek the safety of American companies with the strongest balance sheets. That alternative is to invest in the corporate debt of the last four U.S. firms that still have Aaa ratings of their own: Exxon Mobil (NYSE: XOM), Johnson & Johnson (NYSE: JNJ), Microsoft Corp. (NASDAQ:MSFT) and Automatic Data Processing Inc. (NYSE: ADP). Economic Data recently made the point that Microsoft’s balance sheet is so solid that its borrowing costs are as good as those of the US government, which means its payout to investors is tiny. The analyst who made the observation wrote, “The company’s $1 billion of 0.875 percent notes due in 2013 and $1.75 billion of 1.625 percent debt maturing in 2015 have the lowest interest rates of more than 3,500 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt.” MSFT bonds have low yield, but are remarkably safe.

6. Silver

The devil’s metal is attractive as an investment in the case of a government debt default for many of the same reasons that gold is. Additionally, it has the benefit of being the de facto currency on Wall St. in the extreme cases when paper currency can be devalued.  Demand for silver is also high because it has more industrial uses than gold.  Another benefit is that at $40 an ounce, silver is much more within the reach of many who cannot afford gold at $1,600 an ounce. Central banks don’t trade as much in silver as in gold because the market is small. It takes too much bulk weight of silver to add up to real value compared to gold.

7.  Gold & Silver ETFs

Many investors will turn to exchange-traded funds and other exchange-traded products rather than try buying hard gold or hard silver assets. The reason is simple: gold and silver have to be re-certified to be put back into the system. Middlemen take a cut as the metals are bought and sold. The two most common ETF proxies for gold are SPDR Gold Shares (GLD) and iShares Gold Trust (IAU). The SPDR product is highly liquid based on daily share volume and in total dollars traded. If there is a full breakdown in the economy, taking delivery of gold will be nearly impossible. ETFs take away that problem. The iShares Silver Trust (SLV) is by far the top ETF for the metal and it now has a value of more than $12 billion. These ETFs are the easiest way for the public to move in and out of the precious metals. These products also have options that trade actively, allowing investors the ability to make projections for the most extreme cases or for hedging purposes.

8. Singapore Funds: iShares MSCI Singapore Index Fund (EWS)

Singapore may be one of the safest markets for U.S. investors who want international exposure in the event of trouble with U.S. debt. When we covered the nations with Aaa ratings earlier this year, we noticed it was Singapore that had one of the strongest ratings in the world. It is perhaps the most advanced economy of its kind, and this ETF is down less than 3% from its recent highs. This nation was not immune to the recession and would not be immune to future recessions. However, its GDP did recover better than that of almost any other developed nation. The real problem for U.S. investors is that Singapore is small with a population of about 4.7 million and its GDP is only about $292 billion. Amazingly, this ETF is now close to $1.9 billion in market capitalization.

9. Canadian Funds

CurrencyShares Canadian Dollar Trust (FXC) is the easiest investment for most U.S. citizens to make into a North American nation. Canada has an economy that is based upon hard assets, many of which will rise in value with commodities. Mining, minerals, oil and agriculture dominate the economy. Canada is still the top trading partner of the U.S.  The nation is also English-speaking for the most part and its corporate law is very close to that of America.

10. International Bond Funds

One stand-out international bond fund is the T. Rowe Price International Bond Fund (RPIBX). The average maturity is between 5 and 10 years, so it is not an international money-market fund. Its performance and its holdings could easily make it one of the more focused funds if U.S. investors decide to begin looking for safer opportunity outside U.S. stocks or government debt. It is a $5.6 billion fund with minimal U.S. exposure (4%) and has more than 56% of its weighting tied to the debt of Germany, Japan, the UK, and France.

Jon Ogg and Douglas A. McIntyre