Why I Have Reduced my Allocation in US Investments

Last Friday October 17th, I made some major changes to my portfolio allocations:

• total US investments reduced from 19% to 4%
• European equities, much of it in fact consisting of the UK, also reduced from 19% to 17%.
• Canada upped from 44% to 55%
• Far East raised from 5% to 6%
• Developing countries raised from 4% to 5%
• Global increased from 9% to 13% through addition of the Vanguard Global Index Fund VEU

The reason in a nutshell - the aftermath of the debt crisis, which raises the risk of US investments, both for market results and for currency.

How so? Starting with the anecdotal but startling nevertheless - the clock tracking the US national debt in New York city has run out of digits the debt has ballooned so much. All the various bailout measures to shore up banks may have stabilized the system but the debt has not gone away and is now on the books of the US government/taxpayer. The negative consequences are likely to be severe and long term.

More substantial evidence:

• Contrary Investor details the US Federal government's rising debt, its dependence on foreign sources of funding in Fun with Funding and shows that they are losing confidence and pulling out in The 'Other' Consumer Confidence Survey.
• Sudden Debt posts on the level of personal debt in the US and how far it has to go to drop to a reasonable level with other posts on how consumer spending is already dropping.
• Cause for Depression has an informative graph of the deteriorating balance sheet of the US Federal reserve as well as a series of posts describing the financial crisis from its origins to the present; the blogger is a a US economics prof
• Market Ticker in Fiscal Cat 5 Hurricane Warning describes how US debt markets could totally collapse unless the government imposes some very harsh medicine
• Market Oracle discusses the impact on US government debt of the Fannie & Freddie bailout.
• Financial Times reports possible weak interest / few buyers for US debt in upcoming auctions.
  

Contrary mainstream views do exist:

• National Bank's Oct.17 Economic Weekly newsletter says the impact of the $700 billion rescue package on US government debt is inconsequential.
  

Of course, there's a song to go with the theme, Crash Dance by Versus (I recommend all their brilliant satirical parody songs). The same group has another great song The Dollar and Its Diving that express my fears that the USD while strong now, may not be so for long.

On the other hand, the increasing allocation to Canada, despite the consequent lessening of diversification, is to reduce the extreme USD currency risk and market risk. In contrast, Canada's debt levels are low enough and stable. No banks are going under. Times may be tough during the worldwide recession but survival is sure and Canada's eventual prosperity I feel confident in.

European countries and the UK in particular, may warrant a further reduction. Generally I have read that debt levels are high in the UK and the government's borrowing is at record levels - see BBC's UK Borrowing Hits a 60-year High - so there is increased risk there too. The big question is whether it has become unsustainable as in the case of the USA, a conclusion I have not reached yet.

Update October 25th ... A GlobeAdvisor article says the USD may suffer a crisis. It's nice to find supporting opinion but am I deluding myself? Need to find contrary views...