Government Shutdown/Default [effect on investments]

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VictoriaF
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

I predict that the parties involved will continue coming together and drifting apart until the day of reaching the debt ceiling. On 17 October, at 04:30 in the morning, they will adapt some temporary measure for raising the ceiling and funding the government operations. They won't do it any sooner in order to convince their supporters that they have negotiated in good faith to the end. They won't do it any later to avoid the dare consequences of the default. For the next week, markets will be turbulent with the downward bias. On the 17th, the markets will have some modest gains, and the upward bias will continue until Halloween, at which point they will get spooked again. A recommended strategy is to sell on 16 September, buy on 16 October and sell on 30 October.

Victoria
Last edited by VictoriaF on Wed Oct 09, 2013 7:11 pm, edited 10 times in total.
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Doc
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Re: Government Shutdown/Default [effect on investments]

Post by Doc »

Moody's sees no risk of US defaulting.
A major credit rater expects the Treasury Department would avoid default if the $16.7 trillion debt limit were not raised.

In a document dated Oct. 7, Moody's Investors Service said it believes that if the borrowing cap were not increased, the government would prioritize making interest and principal payments on its outstanding debt above other government bills, even though the Treasury Department has repeatedly called prioritization plans unworkable.

"We believe the government would continue to pay interest and principal on its debt, even in the event that the debt limit is not raised, leaving its creditworthiness intact," the rater said.
http://thehill.com/blogs/on-the-money/b ... mit-boost-

There are several other references to this report showing up on a Google search. The actual report from Moody's requires a subscription/fee.
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Re: Government Shutdown/Default [effect on investments]

Post by madbrain »

Doc wrote: Since bond prices are going to drop in a default also you need that $13k in cash (T-bills maybe?) So taking your idea to the $13k level might be a good place to run to.
In a default scenario, going to cash won't help. Even if you are talking about actually physical US dollar currency, they will be backed by the same "full faith and credit of the US" as US bonds. So, I would expect cash to take a big hit as well.

If you truly believe in a US default, you would have to be invested in some foreign assets not denominated in dollars, for example, foreign bonds, currency, equities.
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Re: Government Shutdown/Default [effect on investments]

Post by Jfet »

madbrain wrote:
Doc wrote: Since bond prices are going to drop in a default also you need that $13k in cash (T-bills maybe?) So taking your idea to the $13k level might be a good place to run to.
In a default scenario, going to cash won't help. Even if you are talking about actually physical US dollar currency, they will be backed by the same "full faith and credit of the US" as US bonds. So, I would expect cash to take a big hit as well.

If you truly believe in a US default, you would have to be invested in some foreign assets not denominated in dollars, for example, foreign bonds, currency, equities.
Shhh, or gold. Oh no he didn't just say that!
manwithnoname
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Re: Government Shutdown/Default [effect on investments]

Post by manwithnoname »

Doc wrote:Moody's sees no risk of US defaulting.
A major credit rater expects the Treasury Department would avoid default if the $16.7 trillion debt limit were not raised.

In a document dated Oct. 7, Moody's Investors Service said it believes that if the borrowing cap were not increased, the government would prioritize making interest and principal payments on its outstanding debt above other government bills, even though the Treasury Department has repeatedly called prioritization plans unworkable.

"We believe the government would continue to pay interest and principal on its debt, even in the event that the debt limit is not raised, leaving its creditworthiness intact," the rater said.
http://thehill.com/blogs/on-the-money/b ... mit-boost-

There are several other references to this report showing up on a Google search. The actual report from Moody's requires a subscription/fee.
And how is the govt going to make sure the checks keep on coming to holders of treasury debt among the 80,000,000 million payments made each month? Treasury doesn't have the capability to locate all debt that must be paid.

http://www.foxbusiness.com/2013/10/03/u ... -payments/

Second, its not whether the govt can eventually make such payments but whether the financial markets believe the payments of interest and principal will be made on time. Fidelity has announced that it has sold all of the short term treasury debt for Oct to mid Nov that it owned because it was not sure that the govt will be able to make its payments on time. If enough institutional investors dump treasuries, money market funds will collapse as they did in 2008.

http://abcnews.go.com/Business/wireStor ... t-20520740

And third, whoopee doo, what good will it do if the Treasury can pay all of the interest and principal on its debt but skips payment of SS benefits of 24B on 10/16, 24B on 10/23 and 75B more due on 11/1 for SS, Medicare and vets benefits. Not exactly going to enhance the creditworthiness of the US govt or boost the GDP.

PS wasn't Moodys one the credit rating agencies that graded sub prime mortgage debt as Triple A rated?
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Re: Government Shutdown/Default [effect on investments]

Post by American In Korea »

VictoriaF wrote:I predict that the parties involved will continue coming together and drifting apart until the day of reaching the debt ceiling. On 17 October, at 04:30 in the morning, they will adapt some temporary measure for raising the ceiling and funding the government operations. They won't do it any sooner in order to convince their supporters that they have negotiated in good faith to the end. They won't do it any later to avoid the dare consequences of the default. For the next week, markets will be turbulent with the downward bias. On the 17th, the markets will have some modest gains, and the upward bias will continue until Halloween, at which point they will get spooked again. A recommended strategy is to sell on 16 September, buy on 16 October and sell on 30 October.

Victoria
Why would there be another spook on Halloween?
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Re: Government Shutdown/Default [effect on investments]

Post by TimeRunner »

deleted: obsolete
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American In Korea
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Re: Government Shutdown/Default [effect on investments]

Post by American In Korea »

Doc wrote: You don't know what is going to happen and there is no really good place to run to if you did know. If you are above your AA in equities you could rebalance back to target. And have enough cash in your wallet to buy a couple of weeks groceries in case the ATM won't work for a while.
Run to international bonds or stocks.
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Re: Government Shutdown/Default [effect on investments]

Post by MnD »

30 day T-Bill rates :shock:
09/23/13 0.01
09/24/13 0.02
09/25/13 0.02
09/26/13 0.04
09/27/13 0.03
09/30/13 0.03
10/01/13 0.10
10/02/13 0.08
10/03/13 0.12
10/04/13 0.11
10/07/13 0.13
10/08/13 0.27
10/09/13 0.26
http://www.treasury.gov/resource-center ... &year=2013

NEW YORK (AP) - Fidelity Investments, the nation's largest money market mutual fund manager, has sold all of its short-term U.S. government debt - the latest sign that investors are increasingly nervous about the possibility of a government default.

Money market portfolio managers at Fidelity Investments started selling off short-term U.S. government debt a couple of weeks ago, Nancy Prior, president of Fidelity's Money Market Group, said Wednesday. While Fidelity expects the debt ceiling issue to be resolved, the Boston-based asset manager said it has taken steps to protect investors.

"We expect Congress will take the steps necessary to avoid default, but in our position as money market managers we have to take precautionary measures," Prior said.

Fidelity, which manages $430 billion in money market mutual funds, has taken similar actions in the past. The most recent instance was in the summer of 2011, when the U.S. government came close to a default and Standard & Poor's downgraded the nation's credit rating, Prior said.

Prior said that Fidelity no longer holds any U.S. debt that comes due in late October or early November, the window considered by many investors to be the most exposed if the government runs out of money to pay its debts.
http://money.msn.com/business-news/arti ... d=16982865
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AndroAsc
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Re: Government Shutdown/Default [effect on investments]

Post by AndroAsc »

I rebalance by adding new contributions every quarter on Jan, Apr, Jul, Oct. So this month is rebalancing month.

I know we don't market time, but has anyone placed a limit order on a 30% discount off current prices... you know, just in case?
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Re: Government Shutdown/Default [effect on investments]

Post by AndroAsc »

MnD wrote:30 day T-Bill rates :shock:
09/23/13 0.01
09/24/13 0.02
09/25/13 0.02
09/26/13 0.04
09/27/13 0.03
09/30/13 0.03
10/01/13 0.10
10/02/13 0.08
10/03/13 0.12
10/04/13 0.11
10/07/13 0.13
10/08/13 0.27
10/09/13 0.26
http://www.treasury.gov/resource-center ... &year=2013

NEW YORK (AP) - Fidelity Investments, the nation's largest money market mutual fund manager, has sold all of its short-term U.S. government debt - the latest sign that investors are increasingly nervous about the possibility of a government default.

Money market portfolio managers at Fidelity Investments started selling off short-term U.S. government debt a couple of weeks ago, Nancy Prior, president of Fidelity's Money Market Group, said Wednesday. While Fidelity expects the debt ceiling issue to be resolved, the Boston-based asset manager said it has taken steps to protect investors.

"We expect Congress will take the steps necessary to avoid default, but in our position as money market managers we have to take precautionary measures," Prior said.

Fidelity, which manages $430 billion in money market mutual funds, has taken similar actions in the past. The most recent instance was in the summer of 2011, when the U.S. government came close to a default and Standard & Poor's downgraded the nation's credit rating, Prior said.

Prior said that Fidelity no longer holds any U.S. debt that comes due in late October or early November, the window considered by many investors to be the most exposed if the government runs out of money to pay its debts.
http://money.msn.com/business-news/arti ... d=16982865
Question: So if Fidelity don't hold any US debt, what on earth are they putting their money market fund into? Cash underneath the pillow?
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Re: Government Shutdown/Default [effect on investments]

Post by madbrain »

AndroAsc wrote:
MnD wrote:30 day T-Bill rates :shock:
Prior said that Fidelity no longer holds any U.S. debt that comes due in late October or early November, the window considered by many investors to be the most exposed if the government runs out of money to pay its debts.

Question: So if Fidelity don't hold any US debt, what on earth are they putting their money market fund into? Cash underneath the pillow?
See above.
US debt with other due dates, presumably.
protagonist
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

Doc wrote:Moody's sees no risk of US defaulting.
Possible conflict of interest?

I'm not saying there is one, but I wonder.

Actually I think it is useless to listen to anybody's speculation. Everybody's an expert. http://www.newyorker.com/archive/2005/1 ... rbo_books1

Without predicting what will happen, I still think we are facing a situation with a large downside and minimal, if any, upside potential.

I also think that if default does not happen, or if it does and the markets are nonplussed, the "stay the course" folks will all say , "see? I told you we were right". And if there is a market meltdown some new forecaster who got it right will be on the nightly business report with his predictions for the next twenty years. That is my prediction. After all, everybody's an expert. Including me.
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Re: Government Shutdown/Default [effect on investments]

Post by Valuethinker »

VictoriaF wrote:I predict that the parties involved will continue coming together and drifting apart until the day of reaching the debt ceiling. On 17 October, at 04:30 in the morning, they will adapt some temporary measure for raising the ceiling and funding the government operations. They won't do it any sooner in order to convince their supporters that they have negotiated in good faith to the end. They won't do it any later to avoid the dare consequences of the default. For the next week, markets will be turbulent with the downward bias. On the 17th, the markets will have some modest gains, and the upward bias will continue until Halloween, at which point they will get spooked again. A recommended strategy is to sell on 16 September, buy on 16 October and sell on 30 October.

Victoria
The game theory part of your piece (settlement at 1 minute to midnight) is dead right to my mind.

Except I think you don't go far enough. There will *have* to be a default. An actual non payment of interest, probably by non redemption of T Bill.

Then there has to be a legal test of what the US government does. Can the Fed simply buy the T Bill from the US Treasury? Can the US Treasury simply issue more debt to pay it (I understand there is some conflict of laws going on here).

At which point, with ST T Bills suddenly yielding 150 or 200 basis points (ie +180 bips from where they are now), it will begin to dawn on the political classes that they are playing with fire, that the market implications, and therefore the impact on the real economy, is quite significant. And their phonebanks will start to explode with calls from irate MMF holders in their congressional districts as well as from the industries that contribute to their reelection campaigns and employ their constituents.

Or to quote Bill Murray in Ghostbusters to the Mayor of New York 'Lenny. This is your opportunity to save the lives of millions....


....of registered voters".

The politicians will only play ball when they see a realistic threat to their reelection prospects.
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

American In Korea wrote:
VictoriaF wrote:I predict that the parties involved will continue coming together and drifting apart until the day of reaching the debt ceiling. On 17 October, at 04:30 in the morning, they will adapt some temporary measure for raising the ceiling and funding the government operations. They won't do it any sooner in order to convince their supporters that they have negotiated in good faith to the end. They won't do it any later to avoid the dare consequences of the default. For the next week, markets will be turbulent with the downward bias. On the 17th, the markets will have some modest gains, and the upward bias will continue until Halloween, at which point they will get spooked again. A recommended strategy is to sell on 16 September, buy on 16 October and sell on 30 October.

Victoria
Why would there be another spook on Halloween?
To adhere to the trend of October being a down month.

Victoria
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

TimeRunner wrote:What would one do with the proceeds after selling on Oct 30? Buy ammo and antibiotics? Krill, I tell ya, we're all Krill. :)
It will be time for the Christmas gifts.

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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

Valuethinker wrote:
VictoriaF wrote:I predict that the parties involved will continue coming together and drifting apart until the day of reaching the debt ceiling. On 17 October, at 04:30 in the morning, they will adapt some temporary measure for raising the ceiling and funding the government operations. They won't do it any sooner in order to convince their supporters that they have negotiated in good faith to the end. They won't do it any later to avoid the dare consequences of the default. For the next week, markets will be turbulent with the downward bias. On the 17th, the markets will have some modest gains, and the upward bias will continue until Halloween, at which point they will get spooked again. A recommended strategy is to sell on 16 September, buy on 16 October and sell on 30 October.

Victoria
The game theory part of your piece (settlement at 1 minute to midnight) is dead right to my mind.

Except I think you don't go far enough. There will *have* to be a default. An actual non payment of interest, probably by non redemption of T Bill.

Then there has to be a legal test of what the US government does. Can the Fed simply buy the T Bill from the US Treasury? Can the US Treasury simply issue more debt to pay it (I understand there is some conflict of laws going on here).

At which point, with ST T Bills suddenly yielding 150 or 200 basis points (ie +180 bips from where they are now), it will begin to dawn on the political classes that they are playing with fire, that the market implications, and therefore the impact on the real economy, is quite significant. And their phonebanks will start to explode with calls from irate MMF holders in their congressional districts as well as from the industries that contribute to their reelection campaigns and employ their constituents.

Or to quote Bill Murray in Ghostbusters to the Mayor of New York 'Lenny. This is your opportunity to save the lives of millions....


....of registered voters".

The politicians will only play ball when they see a realistic threat to their reelection prospects.
The politicians have two constituencies: people who elect them and people who fund their campaigns. At this time, major campaign contributors have a more immediate impact than the voters. If the funding class does not want a default there should be no default.

On the other hand, the debt ceiling threat and resulting market fluctuations lend themselves to grand market plays, and members of the funding class may have large stakes in specific outcomes and the timing of these outcomes.

Victoria
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Re: Government Shutdown/Default [effect on investments]

Post by JoMoney »

VictoriaF wrote: The politicians have two constituencies: people who elect them and people who fund their campaigns. At this time, major campaign contributors have a more immediate impact than the voters. If the funding class does not want a default there should be no default.

On the other hand, the debt ceiling threat and resulting market fluctuations lend themselves to grand market plays, and members of the funding class may have large stakes in specific outcomes and the timing of these outcomes.

Victoria
It's possible that gerrymandering of voting districts has given political parties more influence than the individual voters, and it may be that political parties are influenced by contributions to party coffers. It's an interesting hypothesis that influential contributors could plan a scenario that would influence the market to "play" it. They wouldn't even need to know if it would drive prices up or down, with option strategies and VIX based ETF's someone could theoretically profit just by making the market more volatile.
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Re: Government Shutdown/Default [effect on investments]

Post by nisiprius »

I predict that what happens within the next month with regard to the government shutdown and the debt ceiling will be reasonably surprising and will contain important twists, turns, and details that nobody in this forum will have predicted.

With less certainty, I predict that the outcome will not be a satisfying story that makes sense and results in any sort of (dare I say it) closure, but will be some complicated, complex mix of partly fixed and partly postponed. When it is over, we will not be sure whether it is over and we will not quite understand what has happened.
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Re: Government Shutdown/Default [effect on investments]

Post by scone »

According to the front page at Kitco, at this writing the 30 day change for gold is -4.31% (Oct 10, 2013 08:26).

http://www.kitco.com/

Here are the longer charts:

http://www.kitco.com/charts/livegold.html
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Re: Government Shutdown/Default [effect on investments]

Post by Valuethinker »

VictoriaF wrote:
Valuethinker wrote:
VictoriaF wrote:I predict that the parties involved will continue coming together and drifting apart until the day of reaching the debt ceiling. On 17 October, at 04:30 in the morning, they will adapt some temporary measure for raising the ceiling and funding the government operations. They won't do it any sooner in order to convince their supporters that they have negotiated in good faith to the end. They won't do it any later to avoid the dare consequences of the default. For the next week, markets will be turbulent with the downward bias. On the 17th, the markets will have some modest gains, and the upward bias will continue until Halloween, at which point they will get spooked again. A recommended strategy is to sell on 16 September, buy on 16 October and sell on 30 October.

Victoria
The game theory part of your piece (settlement at 1 minute to midnight) is dead right to my mind.

Except I think you don't go far enough. There will *have* to be a default. An actual non payment of interest, probably by non redemption of T Bill.

Then there has to be a legal test of what the US government does. Can the Fed simply buy the T Bill from the US Treasury? Can the US Treasury simply issue more debt to pay it (I understand there is some conflict of laws going on here).

At which point, with ST T Bills suddenly yielding 150 or 200 basis points (ie +180 bips from where they are now), it will begin to dawn on the political classes that they are playing with fire, that the market implications, and therefore the impact on the real economy, is quite significant. And their phonebanks will start to explode with calls from irate MMF holders in their congressional districts as well as from the industries that contribute to their reelection campaigns and employ their constituents.

Or to quote Bill Murray in Ghostbusters to the Mayor of New York 'Lenny. This is your opportunity to save the lives of millions....


....of registered voters".

The politicians will only play ball when they see a realistic threat to their reelection prospects.
The politicians have two constituencies: people who elect them and people who fund their campaigns. At this time, major campaign contributors have a more immediate impact than the voters. If the funding class does not want a default there should be no default.

On the other hand, the debt ceiling threat and resulting market fluctuations lend themselves to grand market plays, and members of the funding class may have large stakes in specific outcomes and the timing of these outcomes.

Victoria
I disagree that in a situation like this the politicians will listen to their funders more than the people who pick them in the primaries, and the people who elect them in the general elections.

It's easy to see how money in politics alters legislation and the detail of legislation. But on the big things, and the default counts as a big thing, it's what the voters think: most especially the registered voters who vote in primaries, but also the general electorate in the district.
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Re: Government Shutdown/Default [effect on investments]

Post by MnD »

Looks like MM funds can handle a whole lot of rate spike and maintain $1.00 . Meanwhile it looks like congress is ready to offer a 6-week condition free debt limit increase.
I suspect what happened to T-Bill's yesterday woke up a few folks.

http://www.reuters.com/article/2013/10/ ... 2620131007
U.S. asset manager Federated Investors estimates that it would take a spike in rates on short-term securities of approximately 300 basis points before the net asset value of a money market fund with a 60-day average maturity would be in danger of breaking a buck.
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Re: Government Shutdown/Default [effect on investments]

Post by technovelist »

The official position of the US Treasury on its gold holdings:

'In other words, according to the official position of the U.S. Treasury, the promises and commitments of the government, and its “full faith and credit,” are actually worth less than gold. They’d rather default than lose their bullion. '

http://www.marketwatch.com/story/why-un ... 2013-10-04

In my opinion, this is actionable information. If they aren't willing to give up their gold even to avoid default, isn't it reasonable for investors to have some?
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

Valuethinker wrote:I disagree that in a situation like this the politicians will listen to their funders more than the people who pick them in the primaries, and the people who elect them in the general elections.

It's easy to see how money in politics alters legislation and the detail of legislation. But on the big things, and the default counts as a big thing, it's what the voters think: most especially the registered voters who vote in primaries, but also the general electorate in the district.
You may be right. But people have short memory, and the next elections are farther away than the next request for campaign funding.

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Re: Government Shutdown/Default [effect on investments]

Post by Doc »

MnD wrote:30 day T-Bill rates :shock:
09/23/13 0.01
09/24/13 0.02
09/25/13 0.02
09/26/13 0.04
09/27/13 0.03
09/30/13 0.03
10/01/13 0.10
10/02/13 0.08
10/03/13 0.12
10/04/13 0.11
10/07/13 0.13
10/08/13 0.27
10/09/13 0.26
http://www.treasury.gov/resource-center ... &year=2013
Bought the 28 day at auction Tuesday and received YTM of 0.355%. The yield on the 3 month is only 0.05% so the short term yield curve is inverted. Would speculate that market action like Fidelity's is the reason.
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Re: Government Shutdown/Default [effect on investments]

Post by Jfet »

Looks like the trouble is over and all will be well. Went long 500 shares of SPY today. Going to pop to $172 when the deal is done.
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Re: Government Shutdown/Default [effect on investments]

Post by Jfet »

Now the DOW is almost up 300 pts and the deal isn't even struck yet.

This is why you don't sell everything in fear.
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Re: Government Shutdown/Default [effect on investments]

Post by cflannagan »

Jfet wrote:Looks like the trouble is over and all will be well. Went long 500 shares of SPY today. Going to pop to $172 when the deal is done.
The trouble isn't over. In fact, I think at this point they're still talking about a possible debt ceiling deal, and not passing it just yet (hopefully they will).

And I think it's a short term thing - just enough to raise ceiling for 6-8 weeks, before we see drama all over again. Unless I'm getting this mixed up with really meaning 6-8 weeks of stopping the shutdown (which is different than debt ceiling issue).
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Re: Government Shutdown/Default [effect on investments]

Post by Toons »

What Shutdown? :happy
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Re: Government Shutdown/Default [effect on investments]

Post by nedsaid »

I think there is broad agreement that the platinum coin thing is out.

Selling Treasuries from the Social Security Trust fund is out. I remembered after being reminded by other posters that these are non-marketable securities. Redeeming these for cash to keep the government running is theoretically possible but there would be an outcry and I don't think this will happen.

Premium bonds are a possibility but probably a non-starter.

The Government could prioritize and pay the interest on the debt and prioritize the spending of the rest of the available funds. I don't think we will stop paying the interest on our bonds.

I read somewhere that the UK suspended payment of interest on its sovereign bonds held by its Central Bank. In essense, the UK Government pays zero interest to itself. This is another option perhaps available to Congress. Some good Boglehead I am sure will google this and report back.

In any case, I think a resolution to this will be reached.

What should an investor do? If you have a good asset allocation and investment plan, you should do nothing. Time will cure whatever volatility is created by these events.

As Larry Swedroe said, crisis are the norm for investors. In my investing lifetime, there have been lots of them.
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Re: Government Shutdown/Default [effect on investments]

Post by HomerJ »

Valuethinker wrote:The politicians will only play ball when they see a realistic threat to their reelection prospects.
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Re: Government Shutdown/Default [effect on investments]

Post by Ketawa »

Very interesting info in a blog post by Ezra Klein. It's been around for a week, and hopefully it's not even an issue if the ceiling is raised. http://www.washingtonpost.com/blogs/won ... t-ceiling/
The computer system that handles U.S. sovereign debt payments, Fedwire, is separate from the system overseeing payments to government agencies and other vendors. That raises the question of whether Treasury could stop all other payments and only pay bondholders, to avert a financial crisis. (Some market observers quietly suspect this is, in fact, what would happen.)

There are two problems here. First, it's unclear whether Treasury has the legal authority to do this — the agency has never dealt with this situation before. "Anyone who says they know for sure whether this is legal is not telling the truth," Steve Bell of the Bipartisan Policy Center told me. (See pages 8 and 9 of this Congressional Research Service report for more on this.)

Those legal questions could, in theory, be cleared up: Back in 2011, Toomey introduced a bill that would require Treasury to prioritize bondholders above everyone else. But that bill never passed Congress.

Second problem: If Treasury only paid bondholders, that could require stopping virtually all other payments the government makes in order to hoard cash. Stop paying Social Security. Stop paying Medicare. That might avert a financial crisis, but it would roil the U.S. economy — Goldman Sachs thinks a recession could well result from the massive drop in spending.

The Obama administration, for its part, maintains that it can't and shouldn't prioritize payments. "Any plan to prioritize some payments over others is simply default by another name," Lew wrote in his letter to Congress. "There is no way of knowing the damage any prioritization plan would have on our economy and financial markets."
Going off of this, it's unknown whether "prioritization" is possible; it might be. We live in interesting times.

With a purely cynical hope, I hope livesoft's wish is fulfilled: maybe we'll find out for sure, and not have to speculate in the future.
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Re: Government Shutdown/Default [effect on investments]

Post by Valuethinker »

http://www.reuters.com/article/2013/10/ ... LU20131008

What Money Market funds are doing-- avoiding short term maturity US paper. That seems to be the crucial area of risk.

Wonkblog on Washington Post has a good series about what the debt ceiling means, and what breaching it might imply.

http://www.washingtonpost.com/blogs/won ... t-ceiling/
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Re: Government Shutdown/Default [effect on investments]

Post by manwithnoname »

Ketawa wrote:Very interesting info in a blog post by Ezra Klein. It's been around for a week, and hopefully it's not even an issue if the ceiling is raised. http://www.washingtonpost.com/blogs/won ... t-ceiling/
The computer system that handles U.S. sovereign debt payments, Fedwire, is separate from the system overseeing payments to government agencies and other vendors. That raises the question of whether Treasury could stop all other payments and only pay bondholders, to avert a financial crisis. (Some market observers quietly suspect this is, in fact, what would happen.)

There are two problems here. First, it's unclear whether Treasury has the legal authority to do this — the agency has never dealt with this situation before. "Anyone who says they know for sure whether this is legal is not telling the truth," Steve Bell of the Bipartisan Policy Center told me. (See pages 8 and 9 of this Congressional Research Service report for more on this.)

Those legal questions could, in theory, be cleared up: Back in 2011, Toomey introduced a bill that would require Treasury to prioritize bondholders above everyone else. But that bill never passed Congress.

Second problem: If Treasury only paid bondholders, that could require stopping virtually all other payments the government makes in order to hoard cash. Stop paying Social Security. Stop paying Medicare. That might avert a financial crisis, but it would roil the U.S. economy — Goldman Sachs thinks a recession could well result from the massive drop in spending.

The Obama administration, for its part, maintains that it can't and shouldn't prioritize payments. "Any plan to prioritize some payments over others is simply default by another name," Lew wrote in his letter to Congress. "There is no way of knowing the damage any prioritization plan would have on our economy and financial markets."
Going off of this, it's unknown whether "prioritization" is possible; it might be. We live in interesting times.

With a purely cynical hope, I hope livesoft's wish is fulfilled: maybe we'll find out for sure, and not have to speculate in the future.
And does anyone know if Treasury can separate the debt payments from the millions of other payments it makes each day? Bond repayments are made through Fedwire, while all other payments are made through the standard banking ACH system. Logistically, it’s entirely possible to keep up to date on all Fedwire payments without making any ACH payments at all. But treasury software systems are set up to make all of the 80,000,000 payments due each month in the order in which they are to be paid. There is no certainty or even probability that the Treasury IT people (some of whom are furloughed) would be able to change the IT system to isolate debt payments without blowing up the system that make fedwire payments. About a year ago Knight Trading activated a new high speed trading software program which inadvertently activated a dormant software program and in 40 minutes Knight lost 440M before the program was shut down. Does any one want to take a chance of a $30 Billon malfunction on a single treasury debt payment?

http://www.bloomberg.com/news/2012-08-1 ... tware.html

Secondly, in order to have enough cash to make debt payments Treasury would still have to manually shut down most of the 80,000,000 monthly payments that are paid to vendors, defense contractors, SS beneficiaries, veteran, doctors, hospitals, etc. which is impossible to complete because it is an IT nightmare which ultimately would have to be reversed when the debt ceiling is raised.
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Re: Government Shutdown/Default [effect on investments]

Post by Doc »

And yet there's this:
Moody's offers different view on debt limit

One of the nation’s top credit-rating agencies says that the U.S. Treasury Department is likely to continue paying interest on the government’s debt even if Congress fails to lift the limit on borrowing next week, preserving the nation’s sterling AAA credit rating.
http://www.washingtonpost.com/blogs/pos ... 7c5c814d82

I am not disagreeing with the previous few posts. Just pointing out that at least one very knowledgeable FI organization has a different view.
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Re: Government Shutdown/Default [effect on investments]

Post by lostInFinance »

Why hasn't this thread been locked already? If all the speculation about what Congress is likely to do and why isn't a discussion of politics, then I don't know what is.
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

lostInFinance wrote:Why hasn't this thread been locked already? If all the speculation about what Congress is likely to do and why isn't a discussion of politics, then I don't know what is.
No. This thread is a product of mergers and acquisitions of all other threads about government, shutdown, default, debt and ceilings.

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Re: Government Shutdown/Default [effect on investments]

Post by LadyGeek »

lostInFinance wrote:Why hasn't this thread been locked already? If all the speculation about what Congress is likely to do and why isn't a discussion of politics, then I don't know what is.
Due to the popularity of the topic, we decided to permit one thread for discussion. The notice is at the top of the Bogleheads.org home page and in the first post:

Subject: Government Shutdown/Default [effect on investments]
Stoney178 wrote:Note from admin alex - We will allow discussion of these topics on this thread only. I have merged a couple of other recent, but locked threads here. The post titles reveal which post went with which thread if a reply seems confusing. But note that our prohibition on politics and economic policy issues still applies here. Those making such comments will have their posts deleted and will be warned (and suspended if their history of previous violations warrants it).

How will the current govt shutdown affect our investments? Should any actions be taken until the situation is remedied ?
Update: As noted in the post below, we've made a compromise. Remember that the policy's intent is to keep the peace (avoid contentious disagreements). We'll make a judgement call if anything tends in that direction (or goes off-topic). If anyone disagrees with what we do, just send a PM and explain why.
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Re: Government Shutdown/Default [effect on investments]

Post by The Wizard »

Unlike "normal" situations where something gets enacted before we're allowed to discuss it in any depth, here we have a crisis of paralysis that is obstructing resolution.
So the mods have made a decent compromise to deal with the reality of the situation...
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Re: Government Shutdown/Default [effect on investments]

Post by taegirain3 »

There have been some recent T Bills with 5-day and 7-day maturities, presumably related to the 'exceptional measures' the Treasury is carrying out. Is there any way we as retail investors can purchase these types of bills in TreasuryDirect?
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Re: Government Shutdown/Default [effect on investments]

Post by Doc »

taegirain3 wrote:There have been some recent T Bills with 5-day and 7-day maturities, presumably related to the 'exceptional measures' the Treasury is carrying out. Is there any way we as retail investors can purchase these types of bills in TreasuryDirect?
No it's standard operating procedure. These are Cash Management Bills (CMB). See link for a list of what has been issued by year in the past. A quick look doesn't show any recent increase in frequency.

http://www.treasurydirect.gov/instit/an ... re_cmb.htm
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Re: Government Shutdown/Default [effect on investments]

Post by LazyNihilist »

Other democracies usually pass a budget from a single house of govt. (usually parliament). and if they fail, there is an automatic re-election. Is this a peculiarity of American Democracy? Where 3 different branches of govt. have to agree upon the budget, debt. limit., etc...?
Does any other country have a similar situation? This system is not logically sound.

The current state of politics reminds me of this

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Re: Government Shutdown/Default [effect on investments]

Post by LadyGeek »

Let's stick to investing aspects from a U.S. government perspective. Discussion of other nations' budgetary processes is off-topic.

If you want to look at the legislative process from other countries, try this google search: parliamentary government budget

Since the forum has members worldwide, here is some background information on the US legislative process: The Legislative Branch

Additional information: U.S. Senate: Legislation & Records Home > Bills & Resolutions
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Re: Government Shutdown/Default [effect on investments]

Post by AndroAsc »

Can we discuss on how capitalize if there is indeed a government default? Is anyone setting limit orders for ETFs?
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Re: Government Shutdown/Default [effect on investments]

Post by LadyGeek »

Here's the guidelines.
LadyGeek wrote:How will the current govt shutdown affect our investments? Should any actions be taken until the situation is remedied ?
ETF limit orders would be on-topic (actions to take).

Wiki background: Orders
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Re: Government Shutdown/Default [effect on investments]

Post by runner26 »

Well I am wondering how the I-Bond rates will be reset. The CPI release that triggers the reset rate is scheduled for the 16th of Oct (Sept. CPI data), but BLS says the shutdown has caused them to stop collecting CPI data. I can find no information on contingencies. I suppose the options are to go with the August data, or try to play catch up before the end of the month.
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Re: Government Shutdown/Default [effect on investments]

Post by livesoft »

AndroAsc wrote:Can we discuss on how capitalize if there is indeed a government default? Is anyone setting limit orders for ETFs?
I am going to submit a limit order(s) to purchase ETF(s) at 19.8% below the previous market close. The idea is that if the market drops 20%, then circuit breakers go into effect and the market will close for the day. Hopefully, my order will execute and only then the market will close. Then the next time the market opens, it will open gap-up and there will be lots of buying, but my buying from the day before will look like I was a genius.

Based on October 1987, there will be little or no chance that any retail investor will be able to get through to their broker (by phone, e-mail, or website) to submit any orders once the market has dropped by 10% or so. Thus, one will have to submit their order(s) before that happens.
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Re: Government Shutdown/Default [effect on investments]

Post by AndroAsc »

livesoft wrote:
AndroAsc wrote:Can we discuss on how capitalize if there is indeed a government default? Is anyone setting limit orders for ETFs?
I am going to submit a limit order(s) to purchase ETF(s) at 19.8% below the previous market close. The idea is that if the market drops 20%, then circuit breakers go into effect and the market will close for the day. Hopefully, my order will execute and only then the market will close. Then the next time the market opens, it will open gap-up and there will be lots of buying, but my buying from the day before will look like I was a genius.

Based on October 1987, there will be little or no chance that any retail investor will be able to get through to their broker (by phone, e-mail, or website) to submit any orders once the market has dropped by 10% or so. Thus, one will have to submit their order(s) before that happens.
So are we talking about just US market, VTI, or will the international stock indexes be affected by a default as well?
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Re: Government Shutdown/Default [effect on investments]

Post by JoMoney »

AndroAsc wrote: So are we talking about just US market, VTI, or will the international stock indexes be affected by a default as well?
The U.S. has a major role in the global economy. If there's a problem in the U.S., it will have far reaching global impacts.
IF there is a default, what that means to the stock market is yet to be determined. I'm curious what the Federal Reserves response would be if the public market for treasuries suddenly disappeared. If the market decided the credit worthiness of the U.S. required an increase on interest rates, would the Fed increase purchases to keep the interest rate low?
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Re: Government Shutdown/Default [effect on investments]

Post by littlebird »

livesoft wrote:
AndroAsc wrote:.

Based on October 1987, there will be little or no chance that any retail investor will be able to get through to their broker (by phone, e-mail, or website) to submit any orders once the market has dropped by 10% or so. Thus, one will have to submit their order(s) before that happens.
I had no trouble getting thru to my broker that day in "87. Unfortunately I left it up to him to decide what I should buy (I hadn't prepared for this) and he picked a fund that languished, didn't recover and was finally dissolved returning to me exactly what I had put in. Fortunately I didn't have much money at that time to put in.
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