Unless you are living under a rock you would be aware of this event. The media has megaphoned it to all the corners of the globe and in the process magnified it above all other news. As the saying goes: “Bad news sells!” Or rather in this case, the potential of bad news.
Is it really bad news? All media reports have placed huge emphasis on the USA debt ceiling not being raised as a really negative outcome. It probably would be if default occurred. Negative forever? A few weeks? A few months? Or years? Will we never have a positive environment again in which to invest if the USA debt ceiling is not raised? I don’t think so! But when?
Would there be any positives in the debt ceiling not being raised? Apparently not. Well I haven’t heard a single commentator put one forward. I haven’t heard or read every commentary but I’m sure I would have heard at least one positive by now.
What opportunities would present if the United States did default on its debt? And in what timeframe? I ask this question to emphasise that investors should always keep an open mind to both sides of the equation, that is, a neutral mindset.
The investing world, indeed the whole world, is comprised of millions of variables. The debt ceiling event is just one of those variables, albeit magnified right now. It certainly can potentially be a variable with a massive weighting in the short term.
The opinions, analyses and strategies of every entity (individuals, companies, countries etc) that invests either directly or indirectly in the markets are variables in the markets. Commodities, interest rates, currencies, companies, staff of companies, economies in every country, geopolitical statuses and players around the world, events (terrorist, weather, outliers, black swan, etc ) are also all variables in the markets. Every one of these variables affect the financial markets. And the weightings of each variable are continuously changing.
It is impossible for any investing entity to know in advance all the time how any single variable or group of variables will impact the financial markets. Likewise, how other variables will react to any one given event, regardless of its magnification or weighting, and in what timeframe.
I’m not putting forward that I have any answers as to how to control these variables or to know how the variables will react or how you should react in advance. But I will provide a solution on how to handle such events, in fact how to handle all events on a continuous basis. Because they never stop coming!
Some investors have “run for the hills” because of this USA debt ceiling event. Is this a solution for every event that investors are faced with? How high does your fear level need to be on the fear scale (somebody should invent a fear measurer, like the thermometer or breathalyser or Richter Scale) to initiate such a reaction?
Amongst many other things, investing is about overcoming fear and finding a solution to know “when to hold ’em and when to fold ’em.” And this is done by reading. But not reading (or listening to) all the noise out there megaphoned by the media. It is not done by reading voluminous amounts of ‘expert’ commentator columns in newsletters, newspapers and on the internet which so often contradict each other.
It is done by reading the market.
In the same way that alphabets of the many languages around the world provide a method for creating language that can be read and listened to, so the market has its own ‘alphabet’ for communicating with those that learn its language. The market’s ‘alphabet’ is price action displayed as bar charts (or candlesticks or quite few other chart types). The price action forms patterns that can be read. The investor’s task is to get a trained eye for the ‘language of the market’ in the same way that you have a trained eye for reading English or Spanish or any other language.
Rather than relying on opinions of others, go to the source. Go to the market itself and read it to make your decisions rather than be hijacked by somebody else’s opinion.
So what has the market communicated to us to do in this situation? How has the price action reacted to the last 3 – 4 weeks of megaphoned USA debt ceiling crisis? Let’s look at the price action.
The main equity indices have reacted as follows over the last 3 – 4 weeks from their most recent peaks in September:
| Maximum drop | WED before Congress Decision | |
| -5.75% | -3.25% |
| -4.1% | -1.6% |
| -3.67% | -0.63% |
| -2.04% | +1.27% |
| -2.94% | -0.71% |
Hardly a “run for the hills” opinion from reading the market!
Those that can read the language of the market would have been able to read this objectively on a day by day basis as it unfolded. The key world being, objectively. This is your task as an investor, to become objective and consistent. Build objective investing processes that are your decision support system through thick and thin. That’s what our customers come to us for.
Even though it looks like agreement has been reached for the 17th October USA debt ceiling event, there may be another USA debt ceiling event in a few months. It will be just another variable amongst millions out there. How will you handle the few weeks leading up to that event?
There will no doubt be many other events before then that will be variables that you need to navigate. How will you handle them?
“It doesn’t matter what happens, it’s how to take it that counts.”
