Stephen Foley: There is no real hedge against a US default

Outlook An investment strategist I know at one of the big Wall Street firms has his own idiosyncratic hedge against financial Armageddon: a cabin in the woods in Canada.

It is to this rustic retreat that he always refers when asked how investors should position themselves for a catastrophe of the sort that just might occur next week if the US Treasury's deadline for raising the federal debt ceiling is not met. Not for him the seductive charms of credit-default swaps on US Treasury bills. These swaps pay out in the event of a US government default, but it seems hardly likely that there will be confidence in your counterparty during the financial panic that will such a default will trigger.

Three years ago, Treasuries and the dollar were the beneficiaries during the flight to safety as the financial sky was falling. This time, these are not the safe haven but the locus of the crisis. There is no escape from a financial system in which AAA-rated Treasuries are akin to a universal currency. The absence of major disruption in markets so far is the result not so much of optimism as fatalism.

See you at the cabin.