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US default Any portfolio insurance?


netnet
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I'm just curious at whether anyone on the board has done any trade to help protect a portfolio from a US default.  

 

Frankly we looked at this a month ago, but decided not to do any trades, despite handicapping the default risk at more than 10%.  I think currently it is more like 30 to 50% now.

 

The imbedded assumption here is that a default will disrupt markets.  Now it may turn out that a "default" causes only a minor disruption. Or that the markets have already discounted it.  If you believe the markets, then you have to think that default is not an issue, but I just find that really hard to believe. 

 

(I think this is one of those things that you can not imagine happening, but may actually occur.  Like say the Princess of Wales being a rather frumpy concubine...no wait that did happen :-X )

 

But other than a general market put or a long bond put or a short of one of the etf's what did people do?  Clearly most people had done nothing!

 

 

Netnet

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I said a week ago that a default was about 30% likely.  

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=4768.0

 

I think a default will result in a 5-10% market correction...possibly more, as a default is very likely to exacerbate the possibility of a double-dip recession longer term.  The government's interest costs go up...the financial industry's costs go up...thus borrowing rates for every other business goes up, as well as consumer rates also go up.  

 

Default would be the dumbest thing to do, as the cost to the U.S. economy would be quite large...I would say north of $200-300B in economic value...as well as any drop in asset values...perhaps over $1T!  Not something they should take a chance on like this.  Cheers!

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http://online.wsj.com/article/SB10001424053111904233404576462461660747244.html?mod=WSJ_markets_liveupdate

 

"Investors looking for protection against a U.S. debt default could be in for a surprise. In the market for credit default swaps, it is currently more expensive to buy one-year insurance on Treasurys than on "junk"-rated Indonesian bonds.

 

The unexpected price differential is one of many quirks of the market for U.S. credit default swaps, a small corner of the financial system that has been thrown into the spotlight by Washington's tortuous talks over raising the debt ceiling."

 

How about holding some cash?

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Could it be that the CDSes are so expensive because people are fighting the last war? Everybody saw how much money Paulson & co made, so they now jump on CDS contracts as soon as something could be on the horizon?

 

Just guessing.

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Default would be the dumbest thing to do, as the cost to the U.S. economy would be quite large...I would say north of $200-300B in economic value...as well as any drop in asset values...perhaps over $1T!  Not something they should take a chance on like this.  Cheers!

.

.

NEVER EVER underestimate the stupidity of a group of Democrats and Republicans who are gathered together in a group!!

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