The Looming Debt Problem — How I’m Trading To Protect And Profit…
In recent articles over the past couple of months, I’ve written about my inflation concerns.
I’ve received several questions from readers about why I’m so obsessed with inflation. The truth is I don’t obsessively worry about inflation. That’s just one of the many concerns I have about the economy in the long run. (And besides, as I usually point out, there are ways we can make profitable trades in almost any market environment.)
One of my primary worries is debt. That’s based on research done by Harvard economist Ken Rogoff. I quoted Rogoff in in a recent issue of my Maximum Income trading service, and I was honestly surprised by his lack of concern about inflation.
During the financial crisis in 2008, Rogoff was famous for taking a level-headed look at debt. His work with Carmen Reinhart was widely cited as a warning of when government debt became a problem. They warned that problems develop when debt exceeds 90%. At that level, crises can develop quickly and defaults are possible.
That 90% level was based on a study of data covering 800 years that looked at crises in 66 countries across five continents. Their book, called “This Time Is Different: Eight Centuries of Financial Folly,” noted that crises developed when…
…the experts have chimed, “this time is different” — claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters.
Thirteen years later, it seems everyone forgot about that book and it seems like this time is different. Right now, U.S. debt exceeds the size of the nation’s economy. According to the Federal Reserve, total government debt is 127.5% of GDP.
This is a level long associated with financial crises. But for now, no one is worried. The time to worry about debt is coming soon, though…
According to the Congressional Budget Office, the debt limit will become a problem within the next few months.
The debt limit (or the “debt ceiling”) is the maximum amount of debt the Treasury Department can take on, therefore limiting how much money the federal government can borrow. This amount is set by law. Right now, there is no limit because Congress agreed to waive the limit in August 2019. That agreement ended on July 31.
Without a new limit, the government will probably run out of cash in October or November. No one knows when the money will run out since tax receipts have a degree of unpredictability and the Treasury can take extraordinary measures to keep operating.
How I’m Trading Right Now
While we don’t know when exactly, it does seem that this could be our next crisis. We’ll know soon whether it is approaching or not.
That’s one of the reasons why, to limit risks, I am sticking with making trades on safe stocks. One recent example includes a household name: Colgate-Palmolive Company (NYSE: CL).
The stock is bullish from a technical perspective, as the chart below shows.
Like many of the stocks I recommend, the chart shows an Income Trader Volatility (ITV) indicator “buy” signal. ITV is the indicator at the bottom of the chart. It is like the popular VIX Index in that it’s bearish when the indicator is rising. The ITV indicator (red) is bullish at its current low levels.
CL has been in a trading range since the end of last year, setting up a potentially large move. The smaller consolidation of the last month provides a short-term price target near $88. Earnings are due next month, and that announcement could provide the catalyst for the up move.
CL is a member of the venerable Dividend Aristocrats – a group of stocks that have raised their dividends for 25 years or more. In CL’s case, the company has raised payouts for an impressive 59 years and counting.
Right now, the stock offers a yield of about 2.3%. And while that beats the average S&P 500 stock, I’m sure most investors would find that payout to be a little underwhelming.
The good news is, thanks to the strategy we use over at Maximum Income, we can do much better than that.
By using a form of “market insurance”, we can not only protect ourselves from potential downside in owning CL – but get paid to do it.
Best of all, each time we write one of these “insurance” contracts, we get paid immediately. And based on the details of the trade we recently made over at Maximum Income, we could easily triple CL’s yield or more in the course of a year.
Want to learn more about how this works? Go here now to get all the details.