Bloomberg News

How to Handle a Debt Default. You Know. Just in Case.

October 11, 2013

Investment Fears

Photograph by Tim Hawley/Getty Images

On the ninth day of Shutdown I started to freak out.

Should I sell my stocks? What do I buy? I pictured my portfolio trashed, me without a job, my 60-something parents' retirement delayed, the economy in chaos. The misery of 2008 and 2009, only worse.

This wasn't like me. I'm an experienced personal finance reporter in my 30s who has absorbed, and given, many a lecture on staying calm in the face of fear. Now, at least in the investment world, I couldn't seem to find anybody as agitated as I was, and that was agitating me. The stock market sits complacently near an all-time high. Where were my angsters-in-arms? I even got a pitch from a public relations firm letting me know of a financial adviser who could comment on "how to handle a government default."

How to handle a government default?

While my head was filling with apocalyptic visions, Wall Street and Washington seemed to expect a last-minute deal. My worry was that the last minute would be too late, crushing our reputation as a haven, already shaken in 2011's near-default. The U.S. Treasury might be able to avoid default without Congress's approval, but not without sparking a deep recession.

In 2007 and 2008, I interviewed more than a happy few economists and strategists who kept saying it was going to be fine. Just before I took a long and poorly timed vacation in September of 2008, I wrote a blog post quoting three distinguished experts who thought stocks had hit bottom. "When people make predictions about this stock market," I wrote, "I don't know whether to congratulate them for their boldness or question their sanity."

Now I know.

That crisis actually benefited me, in a way. I held on to my job and diligently saved more in my 401(k) plan. Today I feel flush after the SP 500's 150 percent rise since the market bottom in March 2009.

And that means I have more to lose.

I IM'd my friend Mark, a finance nerd.

Me: Hey curious what you think: are you worried about default?

Me: cause I'm terrified

Mark: um

Mark: I just wish I had more cash on hand to invest in case it does.

This was reassuring, kind of. Maybe there would be an upside to any chaos.

Mark: The U.S. will lose its dominance with or without a default.

Mark: Gold bitcoins are probably the only other assets to compete [with Treasuries]

Should I have more cash around to take advantage of market panic? Was the financial system so precarious that Bitcoins, the investment du jour of drug smugglers and money launderers, could make a comeback? Should I be building a bunker in my basement and stocking it with the vegetarian equivalent of Spam? Is there a vegetarian equivalent of Spam? Throw in a few gold bars? Actually pay attention to libertarians?

I would call Milo. That's what I would do. I would call Milo.

In previous crises, when I needed a quote from a voice of reason, I often reached out to Milo Benningfield of Benningfield Financial Advisors in San Francisco. Now, on the phone, he sounded relaxed.

He admitted to feeling a bit of gut-tightening after reading the same articles that I had. "It was kind of like watching a trailer for a summer blockbuster," conjuring up economic horrors like worldwide depression in place of exploding cities and Zombie apocalypse, he said. But he wasn’t freaking out. Like most blockbuster movies, the media coverage is over the top, "sensationalized," he said. As a reporter I couldn't escape from the news, unlike clients of his whom he advises to just turn off the TV. It was true. I was at Bloomberg with 11 TV monitors in my line of sight.

Wall Street was right in betting that the U.S. wouldn't stop paying interest on its bonds, Benningfield said. I said my worry wasn't just default, but the unexpected consequences of even getting close. In corporate America, that would be called reputational risk. What happens if the government pays creditors but not Social Security recipients?

Benningfield has long experience calming clients who disagree with him. He didn't think my fear was irrational, he said diplomatically. "Markets are not necessarily great at pricing the risk of highly improbable events."

Great.

He tried to turn the conversation to something more productive -- not what the future holds but what my actual options were. I could sell my stocks. If I did, what would I do with the money? Ironically, the safest place to be in times of economic stress is usually U.S. government bonds, he said. Yes, that was ironic.

When actual clients call up Benningfield in a panic, his first question is whether they have the means, and the stomach, to weather a volatile market. If you have money in stocks that you need in just a few years, you shouldn't have those assets in stocks anyway, he says. That doesn't apply to me, he observed. With my stocks in a retirement plan I can't touch without penalties for decades, I can take plenty of short-term losses in exchange for long-term gains. My stress is the price long-term investors must pay.

"This is part of the plan," he said. "If the risk goes away, so do the the returns."

Then he told me a story about a surfer. I was watching 11 TVs at the moment and didn't entirely follow, but it seemed a veteran surfer was out off the California coast having a great day, the sun was out, the waves were perfect, all was well and he was bitten by a shark. I stopped watching 11 TVs.

The surfer survived to tell the tale, Benningfield added quickly, drawing this lesson: Some dangers we can see coming. Many we can't. I could exit the market now, only to jump back in when everything looked safe and then "get blindsided." The biggest profits often come to investors when the sharks are circling.

After hanging up with Benningfield, I pulled out my "Stock Trader's Almanac" and confirmed his contention that the market's worst days are often followed by its very best days. The Dow Jones Industrial Average's worst days of 1929 were Oct. 28 and 29, while its best was Oct. 30. Miss out on the losses and you'll probably miss out on the gains.

Benningfield is good at his job. I left my investments alone. But I felt just as anxious as before. More, really. And now I was thinking about sharks and one-legged surfers.

On the next day of the shutdown, the 10th, House Republican leaders floated the idea of lifting the debt limit temporarily. For six weeks. Now it's day 11. Will the deal fall apart, on all 11 TV screens? Even if it's approved, what happens in six weeks? Does this mean the government stays shuttered for even longer, damaging the economy in another unpredictable way?

I don't know. I do know I'm not doing anything stupid in the heat of the moment.

You hear that, Washington?


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