Monday, the SP ratings agency issued a warning that the US is in danger of being downgraded as a credit worthy borrower. The USA is rated the safest lender in the world right now so the only way it could move is down. The ripples of this warning sent the market into an immediate tailspin on Monday.  The market has regained ground in recent trade days.

What does this mean for the world at large?

The mere threat of a downgrade gave the news media reason for drama. The prices on US Treasury bonds sunk, and the corresponding interest rates rose, because the risk of default rose. The ramifications are profound. If the US actually were to default, stock markets would likely be pummelled, interest rates for US citizens and companies would rise, likely quickly and likely rise a lot. In fact, the status of the US dollar as the reserve currency could be called into question.

The odds of the USA defaulting on its debt are remote. Instead, a far more likely option is that the US will attempt to "inflate" its way out of the debt problem. This takes the purchasing power of a dollar and turns it into a smaller amount, so that we can buy less with our dollars. We've seen it happen before and, in fact, are likly seeing it now. Purchased gasoline and milk lately? Both of these staples are more expensive than they were just a few months ago.

What does this mean for our portfolios?

Our bond portfolio, Foundation Income, has already taken defensive measures to combat rising interest rates. Some of the investments in bonds may have greater pressure on them and now we, and our researchers, are watching these managers more closely than ever.

Our equity portfolios, either in direct stocks or in stock-related mutual funds, are experiencing volatility. Why do I say "volatility?" Because not all of them are correlated with the major indices. We are cautious and we are glad we have hedges with Trend Following and Foundation Income and alternative investments, like SBMA. If you have specific questions about your portfolio given the recent market swings, please give your advisor a call.