Debt ceiling: Financial advisor says 'no asset is really safe' from default

GenWealth Financial Advisors Co-Owner and Managing Principal John Shrewsbury joins Yahoo Finance Live to discuss how investors can position themselves amid debt ceiling talks, protecting your assets, and the debt ceiling deadline.

Video Transcript

- Well, with less than two weeks until the debt limit ex-date concern around a default is growing, how can investors continue to build wealth amid all this uncertainty? We find out with our next guest, John Shrewsberry, GenWealth Financial Advisors' co-owner and managing principal. Thank you so much for joining me this morning.

And so a lot of people wondering, there's a lot of different outcomes that could be here. So we'll first start with the one that's most likely. Brinkmanship, that will sort of have everyone panic a little bit up until, as we saw with 2011, right up until that edge. What does that mean in terms of how investors or people should be positioning themselves?

JOHN SHREWSBURY: Well, Rachelle, as you remember, 2011 was one of those situations where we actually did have impact on the economy and the markets. I remember being at a financial conference on that Monday in 2011, and the markets went down over the next couple of days about 10%. That financial conference cleared out. All the advisors went home because of all the turmoil.

So we can not default but have economic turmoil. And the problem is is that this is kind of like a bunch of kids playing the whole musical chairs game. And when the music stops, unfortunately, the person without the chair to sit in is likely to be the consumer, likely to be the person who's worked hard, trusted the system, saved and invested their money. They likely could take a financial hit, even from just the brinksmanship.

- And so then, if a deal is done, perhaps some sort of short term fix, that still leaves us with this sort of kick the can down the road, where we don't actually still have the long term solution here. What does that mean for how people should really look at the investments and how that will affect markets as well.

JOHN SHREWSBURY: Yeah, absolutely. The pain of kicking the can down the road is going to be just a little bit less than what we would be in if we did default. But it is eventually going to really impact us with higher interest rates, potentially a lower stock market. But there's also going to be this squeeze on the debt market because when treasury issues dollars in new debt, let's say, then that consumes a lot of the capital that's out there in the debt marketplace. That means that you've got to compete and offer higher interest rates for those bonds that may be issued by private corporations. So likely, we're going to see more inflation and higher interest rates, even if we do kick the can down the road.

- I mean, and it's not looking great, shall we say? I mean, both sides have committed to keep the talks going, but both are still digging their heels in. President Biden is saying, look, default is off the table. We have to move forward in good faith with a bipartisan agreement. But then we're seeing some reports from Republican negotiator Garrett Graves saying I don't think things are going well. So when you have that sort of build up here, what should you be doing in terms of protecting what you have versus sort of the aspect of trying to build wealth in this environment?

JOHN SHREWSBURY: Clearly, all bets are off if there is a default. If there's a default, then no asset is really safe. Even guaranteed assets have to be backed up by certain assets like government bonds. And if those government bond values are in question, then you've really got an economic calamity going on.

So hopefully, cooler heads will prevail. Hopefully, we'll have a situation where there are meaningful cuts in government spending because that's going to give us some encouragement for the long term future but also a raise in the debt ceiling on a temporary basis to get us through this crisis.

I do think it's important that we point out that this didn't just happen. We've been going through this for years and years and years. And clearly, we have kicked this can down the road. So far that we're right up against the wall on this, and there's got to be some cooler heads to prevail in order for the economy to continue the track that it's on, which is bouncing back from all of the turmoil of the higher interest rates that were brought upon us by the Fed.

- And so for people who are wondering how soon they're going to start seeing the effects show up in their own personal finances and investments if there is a default or with this sort of growing brinksmanship, where will that start showing up first?

JOHN SHREWSBURY: I'm a little bit concerned about the timing right now because it does take some time to get legislation through Congress. Even if they said, hey, we've got a deal today, we're still running up against that sort of June 1 deadline that the Treasury Secretary has talked about. So clearly, we've got a situation that demands action now. But we should see over the next week or so, beginning more of a not just a slight concern but more of almost a very real concern and maybe even a panic in some of the financial markets if we continue to have this game of brinksmanship.

- So then, is it better to hold on to your cash at the moment? We are seeing a lot of people sort of rushing into short term yields as they wonder about combine sort of the debt ceiling and inflation and wondering what the Fed will do next. What should people be doing right now?

JOHN SHREWSBURY: I think the only thing you can do is get very short and very conservative until this blows over. I don't know that there's any real asset out there that is not going to be affected by this to some degree. The best you can do is to try to protect what you have in the short term, and let's see what happens when the smoke clears from all of the things that are going on in Washington right now, all the negotiations. That clearly is going to give us some direction.

If they come out of this with some type of an agreement, then I think we see some fundamentals take over in the economy and the markets. Lower inflation. Interest rates may be slowing a little bit as far as the Fed is concerned. The future could look bright, but we've got to get past this June 1 date before we're really going to have any clarity about what's going on in the markets.

- And so we're seeing that tentativeness in the markets today. They certainly seem to agree with you. A big thank you there to John Shrewsbury. Thank you so much for joining us on Yahoo Finance.