bchadwick Wrote: ------------------------------------------------------- > The US may be in a situation very similar to Issue > 2 here. The Tea Party Republicans won’t agree to > anything that isn’t 99% what they demand, and > don’t really care if a voluntary default happens, > because the economic collapse it will provoke can > be used in the next election to strengthen their > hand. The horrific thing is that it will probably > work. So basically, the Tea Party wing’s best > strategy is to force the economy into collapse and > blame Obama for it. This is why they can hold out > for 99% or 100% of what they want. I agree with you completely here. The Tea Partiers are clearly willing to throw the country into complete chaos to try to seize power. The scary part is that they appear to sincerely believe that they are doing the right thing. It shows you how dangerous uninformed ideology can be, and for me evokes historic comparisons to the tactics used after the Great Depression that led to further economic collapse and eventually to WWII. Where I may differ is I think they have shot themselves in the foot with the extremist stance, and recent polls seem to support this. I honestly hope that is the case. > And the fact that it’s voluntary is what will make > investors think twice when it comes to buying US > Debt, and that will push up yields. > > And Treasury Yields are the base of the required > return equation for stocks. Stocks are high > duration instruments. > > So it may be time to freaque out after all. I am not dismissing lightly the idea that it may be time to freak out. However I am more concerned with the abrupt hit to economic activity from rapid spending cuts than any true risk to the treasury markets. The public has no understanding of what the debt ceiling actually is, it is simply a looming abstract concept loosely associated with scary things like “big government”. We could potentially vote our way into another recession/depression, despite how rediculous the idea is accademically speaking. Incidentally, the same problem can be seen with all of the media usage of large numbers. The word “trillion” is being thrown around a lot these days as if anyone comprehends the magnitude of the number. It’s hillarious when the talked heads on CNBC say things like “only $1 trillion in cuts, that’s not going to do it!” They simply do not know that they are talking about.
Zesty Wrote: ------------------------------------------------------- > @Dwight, the statement “there is zero risk of a > default” is blantantly inaccurate/false and is not > something I would expect from a AF poster (maybe > something from an uninformed politician). That’s a fair point. However I have qualified any claims that there is zero risk by saying “there is zero risk of default EXCEPT BY CHOICE” which is a true statement. The US government cannot be forced to default by foreign creditors (unlike Greece) unless I suppose if you physically went and operationally took away the government keyboards that are used to type in deposit numbers at financial institutions. An important thing to realize is that foreigners have already decided to accumulate US reserves. Therefore they now have the choice of: 1) spending them, which helps the US economy 2) buying treasuries to support the dollar and help their trade/employment or 3) holding them in cash and collecting 0% interest. None of these choices necessarily hurt the US, although it does hurt our employment since the countries are borrowing demand from our domestic sector through their export markets.
I think we’re on the same wavelength here, Dwight. I also think that the Tea Partiers and Republican sympathizers don’t realize how contractionary the deficit reduction is going to be, which is why I think it is crazy for them to say that the deficit is an immediate problem and must be solved pretty much entirely by spending cuts. I hope you are right that the average voter is smart enough to apportion blame for an economic contraction appropriately to all parties involved, but I fear that the voter will go to the polls and say “the economy sucks, I don’t know why, but the last guy I voted for didn’t seem to make things better, so I’m voting for whoever is running against them.” BTW, a great quote from Richard Feynmann: “There are 10^11 stars in the galaxy. That used to be a huge number. But it’s only a hundred billion. It’s less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.”
AlphaSeeker Wrote: ------------------------------------------------------- > Also, US is definitely not issuing bonds to mop up > liquidity now (call sterilizing). Only China and a > few other countries, where FDI is strong and > growth is rapid, have that “luxury” now. My choice of words may not have been the best. By “mopping up liquidity” I meant to refer to providing the private sector an incentive to save which is the opposite side of the balance sheet of the government spending deficits. Another way of explaining it is if the government just revved up the printing press and started spending money without issuing any bonds, the excess deposits in the system would chase interest rates to zero across the curve. At this point people would have a lot of dollar savings but no reason (interest) to hold on to them, so you might have the private sector start spending aggressively (a dollar of consumption today is more valuable than a dollar next year). The most likely outcome of this situation would be runaway inflation. Therefore the fed conducts monetary policy of buying and selling treasuries to stimulate and depress aggregate demand to smooth the business cycle. Unfortunately, this is all in theory, and monetary policy does not really work that well in situations like now because people want to hold cash even if earning effectively 0%. An interesting parallel in Japan is that people may actually want to hold MORE in savings when interest rates are low to keep their investment income constant.
Zesty Wrote: ------------------------------------------------------- > You said, “at whatever point the government > decided to begin paying its bills again, the risk > premium would immediately go away”. That’s a > statement not grounded in any type of research. > Are you aware that many decades after the great > depression there were people still putting money > “under their mattresses”. That is so say, you have > no idea to what extent such an event may alter the > trading/investing behavior of market participants. > Without modeling the behavioral aspects, you have > your head stuck in a textbook that has little to > do with the real world. Another good point. I do not have any knowledge of a historical situation that would approximate the one that might happen now, so like the rest of us, I’m just guessing! My critical assumption, as you point out, is that people would rather receive some interest than no interest. So in order for the premium to go away when the government switched gears and decided to start paying its bills again, it would require that people realize that dollars under their mattress are no safer than Treasuries, indeed they are identical in riskiness, only one has a yield and the other does not.
This really points to the rise of a new Reserve currency; I know fairly recently the BRICS had called for a new reserve currency. I think after this fiasco; it will probably happen. The next job I get; after the interview is over and they ask if I have any special requests. I’m going to demand that I be paid in Swiss Francs!
bchadwick Wrote: ------------------------------------------------------- > I also think that the Tea Partiers and Republican > sympathizers don’t realize how contractionary the > deficit reduction is going to be, which is why I > think it is crazy for them to say that the deficit > is an immediate problem and must be solved pretty > much entirely by spending cuts. > > I hope you are right that the average voter is > smart enough to apportion blame for an economic > contraction appropriately to all parties involved, > but I fear that the voter will go to the polls and > say “the economy sucks, I don’t know why, but the > last guy I voted for didn’t seem to make things > better, so I’m voting for whoever is running > against them.” I hope so too. Great quote, here is another good one for you, by stand up economist Yoram Bauman, phd (I could not find it word for word so it is paraphrased): “I went to China recently, and was very excited to get there and tell them about the wonders of democracy. Then I arrived and they started asking me about the debts, deficits, economy, etc and I said ‘well, let me tell you about the wonders of democracy…’”
There is no chance that the US defaults. There is no chance that the US credit rating is downgraded by S&P/Moody’s, who are government-sanctioned oligopolies that didn’t dare show backbone in 2006/2007/2008 and aren’t going to start now. In the worst-case, Obama will just raise the debt ceiling and force the courts to try to stop him under the 14th Amendment, which would play out over a multi-year timeframe. Even this is unlikely. Edit: I accidentally a word.
The way I see it is that default would be a big “Bad Thing” that Obama would like to avoid, as it would likely really hurt his chances for re-election, and his hands are pretty tied in that regard. Republicans know this, but they really have nothing to lose, their goal is to bring down Obama, they really have no incentive to work out a deal. If US defaults, they benefit primarily by being the opposition and painting the Obama as unwilling to compromise. As the days tick closer, Obama’s hand is going to weaken further and further. And if the Republicans can’t push forward a satisfactory plan for Obama, he is going to be in more and more trouble… My guess on probable outcome is —> Obama caves to Republican plan, DC is increased, taxes stay the same.
Palantir Wrote: ------------------------------------------------------- > Republicans know this, but they really have > nothing to lose, their goal is to bring down > Obama, they really have no incentive to work out a > deal. If US defaults, they benefit primarily by > being the opposition and painting the Obama as > unwilling to compromise. Yeah, cause Obama’s been unwilling to compromise. /sarcasm It amazes me how the Republicans have the Democrats so fooled, thinking the Rs are so crazy that they’d actually let the country default.
Uh, I think for the Dems, it’s a bit like playing chicken (the kind with the cars) with a guy who’s drunk and doesn’t care. How do you win in that situation? Your choices are: 1) You lose. 2) Both of you die, although there is a small chance that one of you crawls through the ashes permanently mangled. But you can’t tell beforehand if that is going to you or them. So it really all depends on whether you prioritize relative vs absolute gains. If you care about absolute gains in the outcome, option 1 is better. If you care about relative gains (beating the opposition), then 2 is better. The Tea Party and sympathetic Republicans really seem to be in the relative gains category. Disaster isn’t really as disastrous for them as it is for the Democrats. The Dems are more likely to be in the absolute gains camp. Most likely outcome: the Dems cave.
bchadwick Wrote: ------------------------------------------------------- > Uh, I think for the Dems, it’s a bit like playing > chicken (the kind with the cars) with a guy who’s > drunk and doesn’t care. They’re not drunk, and they do care. They won’t let the gov’t default, and the Ds are idiots for believing so. Option 3, show some cajones and call the Rs’ bluff.
I think Obama caves soon too. Yves Smith has an informative video up where she is interviewed talking about the political stuff going on in the background. Good stuff. http://www.nakedcapitalism.com/2011/07/we-discuss-the-manufactured-us-debt-crisis-at-the-real-news-network.html
justin88 Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > Uh, I think for the Dems, it’s a bit like > playing > > chicken (the kind with the cars) with a guy > who’s > > drunk and doesn’t care. > > They’re not drunk, and they do care. They won’t > let the gov’t default, and the Ds are idiots for > believing so. I don’t see any evidence that they’re not drunk… or high. They’ve read Ayn Rand and have decided to make public policy based on a work of (poorly written) fiction: http://sites.google.com/site/atlassucked/part-1 > Option 3, show some cajones and call the Rs’ > bluff. Well, yeah, that is Option 3. But I’m not convinced it’s a bluff.
I’m puzzled by the repeated dismissals of the ratings agencies. Yes, it can be acknowledged that they totally screwed up on rating ABS/MBS. However, their long term record on rating plain old corporates and sovereigns is still quite good. This stuff isn’t all that complicated, and it has been their bread and butter for 50+ years. If you’d still like to bury your head in the sand, it matters for another reason - the ratings are built into all kinds of investment standards and contracts. I actually can’t imagine a massive sell off in treasuries due to banks, funds and insurance companies sell stuff that was formerly rated AAA, because what the heck are they going to put that money into? Regardless, even if you think they’re incompetent, you still have to listen to what they say.
^ The rating agencies are fine for corporates sure. I don’t disagree with that. I’ll also grant that they just missed the boat along with everyone else on ABS/MBS, though there should be some accountability there as well in my view. Where I think they have things screwed up is with the large sovereign fiat nations, where I think they are wrong, and heavily influenced by politics rather than accuracy. The WSJ has a nice summary of how much influence the rating agencies had over Japan’s interest rates, which is the closest modern equivalent to the US as far as budget dynamics. http://blogs.wsj.com/marketbeat/2011/07/25/the-us-can-lose-its-aaa-rating-without-the-world-ending/
After analyzing the situation, I’ve decided to go to 75% cash. Virtually ALL scenarios are bad for stocks and commodities (except precious metals) and real estate. Some are bad for fixed income. Scenarios are also bad for the USD, but it’s not clear where else to go. Maybe SGD, BRL, INR. Definitely not EUR. If there’s a debt ceiling agreement, then there may be a pop in stocks in relief, but the economic contraction that’s likely to follow an agreement, plus the fact that US debt now has material political risk is going to make life difficult. I figure it’s not as essential to be 100% out of risky assets as it is to have cash to deploy once people are done freaking out. Maybe I’ll miss the relief rally, but the downside risks are just so much greater here. I still have gold exposure, and have left some in TIPs, and a little bit in commodities.
bchadwick, I’m getting more and more nervous about the situation every day. As I kinda mentioned a few posts ago, I’m Canadian, so I have both a taxable acct that is all USD and one of our tax free accounts (also USD). I think I’m going to take advantage of this situation to realize my taxable gains and move the cash into my tax free acct. When you move USD into one of those accounts, the broker sees what it’s worth in CDN using the exchange rate at that time and then use the CDN when figuring how much you can contribute since those accounts have an annual contribution cap ($5,000). It lowers my equity exposure and gets me a favorable exchange rate for my contribution all at once. I want to realize a lot of gains this year anyway since I’m still a student and probably won’t have to pay taxes this year even with my taxable gains.
Sorry, I said INR, when I meant IDR (Indonesia, not India).
krazykanuck Wrote: ------------------------------------------------------- > bchadwick, I’m getting more and more nervous about > the situation every day. > > As I kinda mentioned a few posts ago, I’m > Canadian, so I have both a taxable acct that is > all USD and one of our tax free accounts (also > USD). I think I’m going to take advantage of this > situation to realize my taxable gains and move the > cash into my tax free acct. When you move USD into > one of those accounts, the broker sees what it’s > worth in CDN using the exchange rate at that time > and then use the CDN when figuring how much you > can contribute since those accounts have an annual > contribution cap ($5,000). > > It lowers my equity exposure and gets me a > favorable exchange rate for my contribution all at > once. I want to realize a lot of gains this year > anyway since I’m still a student and probably > won’t have to pay taxes this year even with my > taxable gains. Sounds smart to me.