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US Debt Limit concerns


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Before 2008 when Congress allowed the bank bailout bill to fail and the dow fell 600 or 700 points in a matter of minutes, I would have told you there is a 0% chance they don't hike the debt ceiling. 

 

I would say there is a 5% chance they don't hike the debt ceiling.  Even more absurd, once they reach an 11th hour agreement, you will see a monster rally. 

 

 

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I don't think anyone is seriously worried that the US won't repay its creditors. I think you see this reflected in the bond markets. Much more worrisome is that the US would try to stealth default through money printing. Note that the current theatrics in congress right now potentially help avert the latter scenario in the future.

 

Also, if you have to ask whether someone's credit rating is AAA, it probably isn't.

 

Finally, Stan Drunkenmiller had a good OpEd in the WSJ a few weeks ago on this topic.

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It has nothing to do with the US being able to repay.  They will never default, as you said.  They will print money forever to get out of it.  This is really just about two things:

 

1)  Do they go past the deadline for a few days or a week and essentially halt the world economy in the meantime?

2)  If Moody's downgrades to AA, even though it should be meaningless given how awful Moody's and the credit rating agencies are, it isn't because many institutions can only buy AAA rated bonds.  This will mean there will be widespread selling of US Govmt bonds and borrowing costs will skyrocket which will have devastating effects on the economy. 

 

 

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It has nothing to do with the US being able to repay.  They will never default, as you said.   They will print money forever to get out of it.  This is really just about two things:

 

1)  Do they go past the deadline for a few days or a week and essentially halt the world economy in the meantime?

2)  If Moody's downgrades to AA, even though it should be meaningless given how awful Moody's and the credit rating agencies are, it isn't because many institutions can only buy AAA rated bonds.   This will mean there will be widespread selling of US Govmt bonds and borrowing costs will skyrocket which will have devastating effects on the economy. 

 

 

 

The ownership of AAA bonds is what concerns me. Additionally, I can't imagine that if people don't get their government checks, that they won't be more apt to withdraw or spend cash that is in banks (be it doctors who receive medicaid payments, or seniors who get Social Security)- which could have some pretty bad effects, but, might offset any inflation caused if the fed buys bonds en masse to keep the prices from plummeting and interest rates going up.

 

While I read the op-ed in the journal, I just can't see how everybody seeming unconcerned is a good thing.

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Keep in mind that Bernake just announced QE3. To get the funds he will have to print bills, & that will require congressional approval.

 

The real question though, is how far the USD devalues right after the announcement ? - when there are deep liquid forwards & futures markets to sell USD into

- If congress approves. USD debases. Buy back the position for a consolation gain

- If congress rejects. USD denominated assets sell off aggressively. Buy back the position for real money

- Lifetime chance to be beat Soros's bet against the BoE.

 

SD

 

 

 

 

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I guess if the US Triple A gets downgraded to AA+ or whatever, then AA+ becomes the new triple A.  What is there that can possibly have better credit than the US government?  Anyone who relies on the US for business, which by extension is everyone on Earth, will have to take a downgrade as well. 

 

There will be a monster rally once the agreement is reached whether it is by the deadline or later.  Suppose the US peacekeeping and active military is sidelined without pay for a few days, or the US civil service.  Talk about a miserable situation. 

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It has nothing to do with the US being able to repay.  They will never default, as you said.   They will print money forever to get out of it.  This is really just about two things:

 

1)  Do they go past the deadline for a few days or a week and essentially halt the world economy in the meantime?

2)  If Moody's downgrades to AA, even though it should be meaningless given how awful Moody's and the credit rating agencies are, it isn't because many institutions can only buy AAA rated bonds.   This will mean there will be widespread selling of US Govmt bonds and borrowing costs will skyrocket which will have devastating effects on the economy.  

 

 

[

 

The ownership of AAA bonds is what concerns me. Additionally, I can't imagine that if people don't get their government checks, that they won't be more apt to withdraw or spend cash that is in banks (be it doctors who receive medicaid payments, or seniors who get Social Security)- which could have some pretty bad effects, but, might offset any inflation caused if the fed buys bonds en masse to keep the prices from plummeting and interest rates going up.

 

While I read the op-ed in the journal, I just can't see how everybody seeming unconcerned is a good thing.

    /quote]“Anyone who isn’t confused really doesn’t understand the situation.” I took this from an article that was from a guy discussing the European situation. The majority of people can't forsee what might happen to things including our banks once country's there start defaulting no matter how much subterfuge they use to confuse the fact.

   We recently had a meltdown that many really "smart" people thought could happen but really couldn't rationalize and so weren't prepared for. Maybe this is why so many people put it into the too hard to understand pile and hope it all works out and go on to something else. Some people are advocating cash, some precious metals, some are saying we'll have a monster rally. It will be interesting that's for sure.

 

    Also a link to another short discussion on this topic.  http://www.gurufocus.com/news/138664/debt-and-deficit-when-graphics-speak-louder-than-words

   

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The wide agreement of the assumption of a rally after an agreement is reached is what concerns me! I am making no predictions, but, don't see how something that is widely regarded as a certainty is such a certain thing.

 

Let me be clear:  I think there is a greater than 5 or 10% chance they do not raise the debt ceiling, so it is far from a guarantee there is a rally.  I basically see it as a 2% up day when they raise it and a 10-20% down day/week if they fail to do it.  Even if it's done day 3,4,5 - the repercussions will be huge.  Moody's has said they will lower the rating to AA indefinitely.  Congress will make the mistake of a generation fucking this up.

 

 

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I would boldly suggest there is a greater than 5-10% chance that they do not raise the debt limit as soon as many people think.  I would even suggest that number is closer to 30%.  People will often do the most absurd things to make a point.  Even if that means the outcome is far more costly than to concede.  Cheers!

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Keep in mind that Bernake just announced QE3. To get the funds he will have to print bills, & that will require congressional approval.

 

The real question though, is how far the USD devalues right after the announcement ? - when there are deep liquid forwards & futures markets to sell USD into

- If congress approves. USD debases. Buy back the position for a consolation gain

- If congress rejects. USD denominated assets sell off aggressively. Buy back the position for real money

- Lifetime chance to be beat Soros's bet against the BoE.

 

SD

 

 

 

 

 

Compared to the Jackson Hole speech, Bernanke's recent comments were more restrained. The condition of increasing likelihood of deflation suggests that new voting members require higher hurdles for QE.

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The wide agreement of the assumption of a rally after an agreement is reached is what concerns me! I am making no predictions, but, don't see how something that is widely regarded as a certainty is such a certain thing.

 

Your probably right Ragnar... Things are never that predicatable.

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Guest Dazel

 

Rome fell by not being able to pay its army....they went from gold to silver to copper...and eventually their currency was worthless...and it fell...simliarities to the U.S...yes but the rest of the world relies on the U.S so it is much different.

 

What I find funny is that the U.S is looking at a default....yet the safety trade is to buy what? U.S debt! Does anyone have a trade other than gold and silver that goes against this craziness? even the CDS market in europe is loosing luster because investors know that the governments are going to try to reorganize without a CDS payout.

 

Dazel.

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The wide agreement of the assumption of a rally after an agreement is reached is what concerns me! I am making no predictions, but, don't see how something that is widely regarded as a certainty is such a certain thing.

 

Your probably right Ragnar... Things are never that predicatable.

 

I think unfortunately, at least in the short term, ever since the financial crisis things are that predictable.  In the past 3-4 years, good news is great news and bad news is good news.  The smallest iota of good news is blown out of proportion and bad news simply means Ben will come riding to the rescue. 

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Guest Dazel

 

 

Kraven,

 

This is not a shot at your post because I agree with you....however, the whole world thinks the financial crisis  ended 3 or 4 years ago.....actually for the market it has been 2 years and 3 months for the market.

 

The economy however, is only 2 years out of a recession. I have heard the "new normal" and all kinds of financial commentary. But the fact of the matter is the financial press is short term headlines. That is the same as any other time in history. The fact we are two years into a recovery..should lead to 1 or 2 more years of cyclical growth...yes the next post will be it's a weak recovery and it is different this time...when owning a house is cheaper than rent housing it will go up. That is a fact.

 

Other than government nonsense all over the finacial news...is it that different this time? I like Jim Rogers and a lot of what he says...However, I know he is a trader and he is playing his own book. If the government would step up and show some confidence and a LONG term plan instead of acting like Jim Rogers than things would be just fine.

 

I like to think about Warren when I hear this stuff...He did not need to go public with his letter to America in late 2008..."buy American equities I am" he did it to instill confidence in the country and because he has common sense when the rest of the world does not. That is leadership.

 

America needs a leader. Obama show some balls. put your reputation on the line for the good of the country. Enough with the political bullshit! What kind of leader gets pushed around publically and blackmailed over a potential default on the country. Show some heart...and think about the people instead of your next headline.

 

Dazel

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Why cant U.S gov't continue to print money, while keeping the debt ceiling at current level, continue buying their bonds (keeping interest rates artificially low) +/- buying stock markets (as a stable market is very important for consumer confidence, valuation of various pension funds, etc).

 

The real value of dollar to decline.

 

The worst thing to hold is U.S. debt, cash.

 

 

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Bottom line is no matter what happens we will muddle along because the alternative is not an option. Good companies will find a way to survive. I will hold some cash to have available to use, giving some flexibility to add more to companies, or whatever seems more prudent as we see the effects. Until inflation restarts.

  Eventually more inflation because politicians know that with deflation they will be voted out of office because people will lose their jobs. With inflation everyone will bitch but most will at least still have their jobs. The sad thing is people will be happy to have inflation because the alternative is worse.

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I would boldly suggest there is a greater than 5-10% chance that they do not raise the debt limit as soon as many people think.  I would even suggest that number is closer to 30%.  People will often do the most absurd things to make a point.  Even if that means the outcome is far more costly than to concede.  Cheers!

I think most money managers are handicapping the debt ceiling not being raised at 10% or less there fore I do not believe we get a monster rally if it is. We only get the monster rally if it is not raised and a crises occurs and a big sell off happens first. This is just a side show however because the real 800 lb gorilla is Europe. Greece is still not done and the rest of the PIIGS are even bigger problems and the solutions will take more money and time  good will ,I hope you all have been paying attention to the fact that the only things that are working  right now are momentum plays and gold, that is not what I would call the dynamics of a really healthy mkt.

    I agree that it is time for Obama to grow a pair, the only thing the tea party has going for it is their anger and self righteous indignation and

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What's interesting is that if you look at the little side poll on that page, which asks:

 

"Should lawmakers support Senator Mitch McConnell's proposed "backup plan" if debt negotiations remain deadlocked?"

 

53% of respondents say "No!" 

 

If the general public is split on this issue and actually the majority say "no", then what do you think politicians who are only concerned about their own station in life are going to do?  They are playing with fire, and somebody's already poured the gasoline!  Cheers!

 

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I am probably wrong but I am very much on the side of Drunkenmiller on this issue.  People have fallen into the theatre that the politicians have purposefully created around this issue but fortunately investors haven't fallen for it (iRates haven't budged.)

 

The fact that the US is even having this conversation shows just how solvent we are.  If we miss an interest payment for a few days or weeks, no one would care.  That's like saying investors would stampede out of Coke if they said they were going to defer a single dividend payment one week.  At the end of the day, billions of servings are going to be guzzled and Coke is going to make money off of it.  Dividend timing here and there is largely irrelevant.

 

Same goes for US debt.  We are still the biggest economy with the brightest people with a very reasonable debt level.  And the US has plenty of run-way for taxing these people more and more.  Timing here and there is a non-issue.

 

P.S. - On a similar note: the state of California had a somewhat similar issue and issued IOUs.  And you know what ... those things were 100c on the dollar.  Banks even took them as deposits at face.  If people shrugged at California; they won't even blink at the US.

 

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