You must have heard these days again and again the word: debt ceiling or debt limit. So what does it mean and does it have anything to do with you?
Debt ceiling is unique to the US. While the concept had a very good wish to start with, it has become more and more a joke, a political joke to be more precise! The idea for a debt ceiling was great that the US government should not be able to spend as much as it would like and it must be monitored and controlled. Debt ceiling is a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public (i.e., anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare. The first limit was set about 100 years ago in 1917, which was $11.5 billion. How much is it now? Mind-boggling at $14.294 trillion or $14,293,975,000,000. So why I said the debt ceiling is a political joke? Because it has never done what it was supposed to do. Debt ceiling has become a tool for politicians to fight with each other, not for the benefits of people, but for their own political interests, ONLY. How can I be so sure? Just look at its history: since March 1962, the debt ceiling has been raised 74 times, according to the Congressional Research Service. Ten of those times have occurred since 2001. Do you think this time it will be different? I highly doubt.
There are only 2 weeks left to the deadline of Aug 2, by which time the US government may default on its debts. Till this very moment both sides are very stubborn that they will not comprise for their positions. Obama was reported to have even stormed out of the negotiating session with top congressional lawmakers yesterday. He said he would not yield even if it meant to cost his presidency and he absolutely would not sign a deal for a short-term temporary solution. Do you really believe that? To me, it is just a political show. I think either they rush into some deal in the next few days or more likely Obama will surrender for a temporary extention for the deadline to allow them for more time to fight.
Although I'm quite suer there will be no default on Aug 2, I don't want to take any chance for my money. Who knows what may eventually turn out as the politicians nowadays have become more and more irrational and bizarre. I just cannot place any of my hope on them. So for protection purposes, I think it will be better to buy some insurrance. I think the ETF, ProShares UltraShort S&P500 (SDS), is probably a good choice. It is a leveraged inverse fund, meaning twice (200%) the inverse of the daily performance of the index of S&P500. If the index plummets due to the catastrophic impact of the missed deadline for raising the debt ceiling, the fund will protect you by increasing twice as much. If you know how to play with options, its short-term call options will be even better: relatively cheap and more importantly you can define the cap of the total loss you can tolerate.
Very important: this is not a trade for making money. You really have to treat it as it sounds: an insurrance to protect you from the worst. So be prepared to lose the money you put in for the trade as the insurrance premium. You spend the money to buy your peace and safety! If you buy SDS itself (not the call options), you should sell your positions as soon as the debt ceiling is raised. I think the S&P500 will shot up sharply when this is announced. So be careful about the size of your positions. It should not be too big and you end up losing too much, but not too small that it has no meaningful protection for you when the worst comes. You have to figure it out yourself based on your portfolio size and your risk tolerance.
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