Investing in stocks offers one significant benefit that is taken advantage of by long-term investors time and time again, but short-term investors seem to lose sight of at the first sign of trouble: equity markets have an upward bias over the long run.
However, with U.S. stocks reaching new highs seemingly every day without any sizable correction taking place in over two years, market experts are cautioning individuals to get on the defensive and trim down their risk, thereby experiencing slimmer profit margins. They view the impending U.S. default as the trigger for a substantial market correction.
Fortunately, the increased volatility surrounding the U.S. debt problem provides tremendous profit potential for individuals seeking to increase their gains, rather than watch them diminish into oblivion.
A Question of Near-Term Danger
Since the beginning of September, investors have been worrying about an impending U.S. default on its debt, which would send shockwaves throughout the world markets. In that time, the S&P 500 dropped a staggering 3.1 percent.
Therefore, investors can reasonably expect that the equity markets could experience a severe drop as a U.S. default looms in the not too distant future. However, it is highly doubtful that the U.S. government will ever default on its debt, because it only seems to know one solution, which is to keep plugging the dam with money printing while decreasing the value of the nation’s currency.
Given the USD’s status as a global reserve currency, a significant hit to the nation’s money would spark very real concerns about the strength of the U.S., the U.S. dollar, and its diminishing global position.
Protecting Against a Default
Every analyst agrees that the USD would take a severe hit if a default were to occur, but it will continue receiving small blows if the current monetary policy continues as well. Thus, many analysts recommend investors place their funds into foreign bonds and use a respected broker like Netotrade to bet against a declining dollar by investing in the foreign currencies of economically stronger countries, such as Germany, Switzerland, UK, and even Japan. For investors not adverse to slightly more risk, analysts also recommend the potential upside of the Mexican peso, Brazilian real, or Chile’s swaps rates.
Others recommend taking advantage of the increased volatility by opening long put positions on major indices or long call positions on the CBOE Volatility Index. Any legitimate threat of a default will create an explosion of market volatility, allowing individuals to make a substantial amount of money in a short period of time.
Investors interested in sizable returns should not short volatility, because every road leads to it, providing fertile ground for massive returns.
Society Generale considers it highly unlikely that a U.S. default will occur, and money managers Bill Gross of Pacific Investment Management Co. and Laurance Fink of BlackRock Inc. recently told students at UCLA’s Anderson School of Management that a default would not occur.
Fortunately, savvy investors can explode their profits in ether scenario simply by embracing volatility and shorting the U.S. dollar, which will continue declining, regardless of whether or not the U.S. defaults on its debt.
