Government Shutdown/Default [effect on investments]

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Stoney178
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Government Shutdown/Default [effect on investments]

Post by Stoney178 » Fri Oct 04, 2013 11:11 pm

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 ?
Last edited by Stoney178 on Fri Oct 04, 2013 11:25 pm, edited 1 time in total.

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FrugalInvestor
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Re: Givernment Shutdown

Post by FrugalInvestor » Fri Oct 04, 2013 11:14 pm

Recommended action: "Stay the course."
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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nedsaid
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Re: Givernment Shutdown

Post by nedsaid » Fri Oct 04, 2013 11:18 pm

This week, my investments hardly budged at all. I was very pleasantly surprised. Don't do your investing by news headlines. Stick with your plan.
A fool and his money are good for business.

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Re: Givernment Shutdown

Post by Jfet » Fri Oct 04, 2013 11:24 pm

I was a wee bit upset the market didn't drop much, but I did manage to snag a few hundred more shares of SPY at $166.90. I am trying to DCA $150,000 into the market between now and end of November. I want to be in for the Santa rally.

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Re: Government Shutdown

Post by CABob » Fri Oct 04, 2013 11:29 pm

Givernment Shutdown
Was that a freudian slip?
Oops, I'm heading for a lockdown. :twisted:
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Re: Government Shutdown

Post by madbrain » Fri Oct 04, 2013 11:31 pm

Stoney178 wrote:How will the current govt shutdown affect our investments? Should any actions be taken until the situation is remedied ?
So far, it really hasn't.

I was concerned because my plan's ESPP purchase happened on monday 9/30, the eve of the shutdown.
The plan has no lookback period and only a 5% discount.

But as it turns out, the stock price has barely budged from monday - it's up 0.1% . Hopefully next monday I will finally have the shares showing in my brokerage account and be able to sell them as I always do.

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Re: Government Shutdown [effect on investments]

Post by Stoney178 » Sat Oct 05, 2013 8:19 am

So you are selling everything?

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Re: Government Shutdown [effect on investments]

Post by nisiprius » Sat Oct 05, 2013 9:03 am

I am not doing anything. I can't predict what Congress will do, and even if I could, I couldn't predict what the effect on my investments will be. I can hazard a wild guess that in general it won't be good, and that the longer it continues the worse it will be, but I can't think of any easy, simple, cheap action that would be an effective protective shield. So, I'm being a fatalist.

Generally, whenever I fantasize my way through really-bad-case scenarios, the conclusion I come to is that the only thing that would really protect me would involve committing a lot of time and resources to an expensive plan that wouldn't pay off if the crisis never arrives, or if it unfolds in a surprising way (as crises often do). Specifically, the only thing I can see that would help would be to a have a pre-planned, pre-funded, already-in-place emigration plan, including a big chunk of money already in an overseas account, and starts on solutions to the problems of how I would leave, where I would go, and, possibly, how to earn money once I was there. It would help to have already learned the local language.
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Re: Government Shutdown [effect on investments]

Post by richard » Sat Oct 05, 2013 9:18 am

Do you have any reason to believe market prices don't properly reflect the effects of the shutdown?

Estimates are that each week of the shutdown will shave about 0.2% - 0.4% off GDP, more if it continued for a longer time. Some would be made up after the shutdown ends. The cuts in spending from the sequester are estimated to be having much larger effects. Did you make any adjustment when that went into effect?

A default would most likely have a much much larger impact, but not one really knows how that would play out.

Stay the course.
Last edited by richard on Sat Oct 05, 2013 9:18 am, edited 1 time in total.

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Re: Government Shutdown [effect on investments]

Post by madbrain » Sat Oct 05, 2013 9:18 am

Stoney178 wrote:So you are selling everything?
Only my ESPP shares, which I always do. The sale has nothing to do with the government shutdown.

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Re: Government Shutdown [effect on investments]

Post by Jfet » Sat Oct 05, 2013 9:31 am

I do revisit the idea of a significant portion of physical gold and silver, but I can't bring myself to do it. Everyone is saying the government will not default, but if they do the unthinkable it is in the back of my mind that all those gold nuts will end up being correct.

I have about 15% of our net worth in cash right now due to some exercise of options and grants. It wouldn't be difficult to turn 5% of that into gold.

What is the worst case for gold? Everything gets resolved, Boehner has thanksgiving over at Obama's house, and the market goes to 2000 and gold drops to $600. I lose about 2.5% of my net worth in gold holdings but gain 10% on my 70% stocks, 15% bonds portfolio.

Actually I really haven't seen any good analysis of what will happen if the US defaults on the debt. I am guessing our currency would go down relative to some others.

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Re: Government Shutdown [effect on investments]

Post by nedsaid » Sat Oct 05, 2013 9:52 am

I would not get too worked up over the "shutdown". This affects something like 13% of Federal Spending. So this affects a lot of people but it isn't the end of the world. Yesterday, I checked my investments and they were almost exactly where they were the week before. I expected a drop of several thousand dollars and I don't think it moved more than $100. I could not believe it.

This is a political disagreement in Washington. We have had shutdowns before and scares over the debt ceiling and somehow we got through it.

No one doubts the ability of Uncle Sam to pay his bills. If the debt limit is not raised by the deadline, different government agencies could sell Treasuries to pay the bills. Once the debt limit is raised, those treasuries would be repurchased again. Just a bookkeeping entry. So don't sweat the debt limit either. Pretty much debits and credits on a gigantic spreadsheet.

The important thing is to have a plan and a well designed portfolio. Stick with the plan.
A fool and his money are good for business.

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Re: Government Shutdown [effect on investments]

Post by TheTimeLord » Sat Oct 05, 2013 10:48 am

Stoney178 wrote:How will the current govt shutdown affect our investments? Should any actions be taken until the situation is remedied ?
For me with some available cash to invest and looking to incresae my equity exposure I check the market around 2:30 CST each day and if the S&P is down say 0.5% or more I tend to put a little money to work. I also pay attention to where it is versus its recent high. As far as what I already have invested it remains untouched.
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Re: Government Shutdown [effect on investments]

Post by Valuethinker » Sat Oct 05, 2013 11:48 am

A colleague just asked about putting all his investments into cash.

That strengthens my conclusion that I should do as little as possible.

Maybe have $1k in cash at home for bills. The rest? Just sit it out and watch, letting your investments do as they may.

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Re: Government Shutdown [effect on investments]

Post by umfundi » Sat Oct 05, 2013 3:43 pm

I think the Efficient Market Hypothesis (EMH) applies:

If you know something special that no one else does, you should act. If not, stay the course.

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Re: Government Shutdown [effect on investments]

Post by larryswedroe » Sat Oct 05, 2013 3:49 pm

I just finished off a fairly long piece on it and hope we can get onto my blog on Monday, worst case Tuesday
Larry

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Re: Government Shutdown [effect on investments]

Post by nisiprius » Sat Oct 05, 2013 4:03 pm

larryswedroe wrote:I just finished off a fairly long piece on it and hope we can get onto my blog on Monday, worst case Tuesday
Larry
Won't it be great if, by then, it's too late to be timely?
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Re: Government Shutdown [effect on investments]

Post by Jim180 » Sat Oct 05, 2013 6:46 pm

I think there has been government shutdowns 17 times and in each of those times the market has recovered. The advice is to stay the course. The government won't default. This might even be a good time to BUY stocks if someone feels they are light in equities. It would be foolish to sell stocks one morning only to hear that afternoon that a deal had been reached. By the time a person reacted to the news the stock market might be a few percent higher therefore the investor would miss out on gains.

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Re: Government Shutdown [effect on investments]

Post by larryswedroe » Sat Oct 05, 2013 9:40 pm

Nisiprius, yes it would but I feel fairly confident that my crystal ball is pretty clear on this one, at least in terms of it still be timely on Monday or even Tuesday
Larry

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Re: Government Shutdown [effect on investments]

Post by TimeRunner » Sat Oct 05, 2013 10:05 pm

deleted: obsolete.
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Where would one hide from debit ceiling apocalypse?

Post by McCharley » Sat Oct 05, 2013 10:13 pm

Bogelers,

I am not going to shift anything because y'all have convinced me that STAY THE COURSE is the way to go... but I was wondering if one was wanting to hunker down in bunker mode over the next month what one would put assets into... Not American dollars. Gold, perhaps? What's the safest asset in a US default? :confused

Cheers,
McC

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Re: Where would one hide from debit ceiling apocalypse?

Post by Texas hold em71 » Sat Oct 05, 2013 10:14 pm

Do you need the money in the next month? If not, why move it?

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Re: Where would one hide from debit ceiling apocalypse?

Post by Archie Sinclair » Sat Oct 05, 2013 10:17 pm

I read "debit ceiling apocalypse," and for a second I thought that maybe there was some crisis related to debit cards.

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Re: Where would one hide from debit ceiling apocalypse?

Post by livesoft » Sat Oct 05, 2013 10:40 pm

Clearly all one's money should go to TreasuryDirect.gov. With the government shutdown, no one will find it there and it will be totally safe.
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Re: Where would one hide from debit ceiling apocalypse?

Post by manwithnoname » Sat Oct 05, 2013 10:49 pm

Any "safe investment " would incur a premium.

WSJ had an article on investors buying credit default swaps insuring against value of treasury bonds if US defaults.
CDS must be purchased in London because they are denominated in euros. However only $23B CDS on Treasuries have been issued out of a total of $25T market for default of companies and sovereign debt issuers. Volume of US CDS are ranked 98th far behind debts of countries such as Italy.

But who is insuring the banks insuring the losses if the US defaults?

What you need to ask is what will happen to the value of a safe investment is the is no default.

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Re: Where would one hide from debit ceiling apocalypse?

Post by Ged » Sat Oct 05, 2013 11:02 pm

It would have to be a physical asset because in an apocalypse all financial instruments would be highly correlated. Look what happened with puny countries like Cyprus and Greece.

In true Boglehead style I guess I'd diversify.

Gold, farmland, guns & ammo, preserved food, antibiotics and propane.

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JoMoney
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Re: Where would one hide from debit ceiling apocalypse?

Post by JoMoney » Sat Oct 05, 2013 11:02 pm

The "safest" would be to spend it on something you can use and enjoy today. We never know what tomorrow will bring, or if we'll be around to see it.
The wise King Solomon wrote:"A person can do nothing better than to eat and drink and find satisfaction in their own toil."
If you want to convert your dollars into something else that you can later convert back to dollars to spend on goods and services at some later date, historically stocks have been then best place to be over the long run. Short term speculation is just speculation.
If you knew the stock market would drop, but only temporarily, you'd want to be in cash so you could quickly get back in, or buy a put option that you can sell during the panic.
If I was going to "hunker down" for apocalypse I'd buy books and camping supplies.
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LH
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Re: Where would one hide from debit ceiling apocalypse?

Post by LH » Sun Oct 06, 2013 12:01 am

http://www.amazon.com/The-Modern-Surviv ... 9870563457

Some may call it doomer porn (without reading it most likely) but this is an interesting take when things go bad in a western economy, Argentina 2001.

Its an interesting viewpoint. may be worth a read. Some of it seems overdone, but hey, I wasnt there, nor do I live in present day detroit USA either.... anyway.

No one thing is guaranteed.

Gold can diversify soviergn risk. Gold can also plummet and lose 5 times its value and stay down for 20 years.

Gold also fits into a Boglehead asset allocation, the permanent portfolio, and I think both Ferri, and Swedroe, state that while they do not recommend it, and they think people would have problems doing it in reality over time, they find the permanent portfolio ok (my apologies if I have conflated thier viewpoints, or overrepresented them on this, do a search yourself on it). You could put a 5-10 percent gold allocation into your portfolio, and if you manage to hold it when it drops 80 percent and stays down for 20years, then you are ok, the thought is, most will sell out of the gold when times feel good again. You could go out and do the 25 25 25 25 gold cash stock long bond approach too, I do not like it in my gut, but over 30 years its done well.

But there is nowhere to "hide" really. Badness could be deflation severe, or inflation severe, could be gold confiscation ala 1933, or not. gold might not spike up or hold value well in whatever particular badness state developes. When real badness hits, everyone usually takes a hit, just some more than others (yeah some do profit, if they guess/predict right)

Hopefully we will have no big problems : )

Its more an answer, barring timing and such, of getting out of a bad state with something, 100 percent protection is dicey.

Gold, TIPS, foriegn bonds, stocks, farmland, rental land, REITS, etc.

Diversify.

Then if you are thinking real badness, atms dont work, 1922 weimar germany like conditions, silver for transactions. Then the prepper/doomer stuff like ammo, guns, water purification, freeze dried food etc.

Hard to tell about your use of apocolyspe what you mean, but read the above book, and do not prepare for something that isnt likely to really happen aka mad max style badness.

but collapse and debt ceiling, starts to hit on US reserve currency, and what would happen in a default. gold is a player in alternative reserve curencies.

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Re: Wall Street and Government Shutdown

Post by telemark » Sun Oct 06, 2013 12:11 am

The market isn't uniformly efficient at pricing risk--some risks are easier to price than others. There are the common risks that happen all the time, things you can make actuarial tables for, and these are easy to price because the probabilities can be measured accurately. Then you have the so-called black swans, things that can have a big impact but occur only rarely or not at all, and there's no reliable way to assign them a probability. We can take the market price as the best available guess, but the best available guess doesn't have to be very good.

Think of calculating the intersection of two lines. If they're perpendicular it's easy, but the closer they get to parallel the harder it gets, and if they're close enough to parallel no amount of accuracy will give you a good answer. Some problems are just hard.

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Re: Wall Street and Government Shutdown

Post by protagonist » Sun Oct 06, 2013 12:19 am

telemark wrote:The market isn't uniformly efficient at pricing risk--some risks are easier to price than others. There are the common risks that happen all the time, things you can make actuarial tables for, and these are easy to price because the probabilities can be measured accurately. Then you have the so-called black swans, things that can have a big impact but occur only rarely or not at all, and there's no reliable way to assign them a probability. We can take the market price as the best available guess, but the best available guess doesn't have to be very good.

Think of calculating the intersection of two lines. If they're perpendicular it's easy, but the closer they get to parallel the harder it gets, and if they're close enough to parallel no amount of accuracy will give you a good answer. Some problems are just hard.
Yes, true, but this is a time of considerable risk regarding a specific event that could happen sometime in the middle of October, the downside of which is potentially HUGE, and there is no upside to balance it if it does not happen. I'd think there would be some level of panic with people taking profits now, especially since 2008 was not so long ago and is emblazoned in memories. Perhaps manwithnoname is correct in assuming that Wall Street just assumes that Boehner would step up to the plate if necessary at last minute and thus the risk of default is negligable?
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Re: Wall Street and Government Shutdown

Post by bottlecap » Sun Oct 06, 2013 12:20 am

It could be because "Wall Street" understands that this is a crisis largely manufactured by the media.

JT

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Re: Where would one hide from debit ceiling apocalypse?

Post by bottlecap » Sun Oct 06, 2013 12:22 am

I'll be going to the bar. The debt ceiling on my debt card is high enough to spend days, or even weeks, there.

JT
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Re: Wall Street and Government Shutdown

Post by protagonist » Sun Oct 06, 2013 12:23 am

bottlecap wrote:It could be because "Wall Street" understands that this is a crisis largely manufactured by the media.

JT

What is? Risk of default? Or its potential consequences? Perhaps that is true....I'm certainly no expert and the only information I receive about this is through the media.

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Re: Wall Street and Government Shutdown

Post by manwithnoname » Sun Oct 06, 2013 12:52 am

telemark wrote:The market isn't uniformly efficient at pricing risk--some risks are easier to price than others. There are the common risks that happen all the time, things you can make actuarial tables for, and these are easy to price because the probabilities can be measured accurately. Then you have the so-called black swans, things that can have a big impact but occur only rarely or not at all, and there's no reliable way to assign them a probability. We can take the market price as the best available guess, but the best available guess doesn't have to be very good.

Think of calculating the intersection of two lines. If they're perpendicular it's easy, but the closer they get to parallel the harder it gets, and if they're close enough to parallel no amount of accuracy will give you a good answer. Some problems are just hard.

Wall St Inaction has nothing to do with pricing risk of a known unknown or black swans but what is the less riskier bet.

Traders/investors have learned the hard way that betting on US govt default is more risky than holding on to US gov securities in the face of impending default. Bill Gross found that out 2 year ago when he sold all US treasures in the $238B PIMCO total return fund because of impending default and fear the US Gov credit rating would be cut. Congress increased the debt ceiling and treasuries rose 4% even tough US credit rating was reduced.

http://seekingalpha.com/article/257924- ... t-of-us-do

Gross shorted treasury securities.

http://dailyreckoning.com/why-the-world ... reasuries/

Gross has admitted that selling treasuries was a big mistake.
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Re: Wall Street and Government Shutdown

Post by bottlecap » Sun Oct 06, 2013 1:04 am

protagonist wrote:
bottlecap wrote:It could be because "Wall Street" understands that this is a crisis largely manufactured by the media.

JT

What is? Risk of default? Or its potential consequences? Perhaps that is true....I'm certainly no expert and the only information I receive about this is through the media.
It could be both. The shut down will be temporary, the risk of default isn't that great and, if it occurs, will only be temporary - everyone will be made whole in the end, and the market may know that. I don't know if that's why the market has been somewhat steady, but it is plausible.

JT
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Re: Where would one hide from debit ceiling apocalypse?

Post by umfundi » Sun Oct 06, 2013 1:46 am

What is the Debit Ceiling?

I plan to be at a brewery in Frankenmuth, MI today. I think that is a very actionable piece of advice in light of the oncoming apocalypse.

http://www.frankenmuthbrewery.com/

(Frugal Bogleheads should be able to find a Groupon for this.)

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Re: Where would one hide from debit ceiling apocalypse?

Post by Valuethinker » Sun Oct 06, 2013 3:22 am

Debit Ceiling apocalypse

Well, if the bank can no longer debit my account, I am in good shape.

So I'd run and celebrate ;-).

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Re: Where would one hide from debit ceiling apocalypse?

Post by Valuethinker » Sun Oct 06, 2013 3:22 am

Debt Ceiling Apocalypse

Easy. I'd hide in Canada. They even don't have health care exchanges ;-).

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Re: Wall Street and Government Shutdown

Post by Valuethinker » Sun Oct 06, 2013 3:28 am

protagonist wrote:
bottlecap wrote:It could be because "Wall Street" understands that this is a crisis largely manufactured by the media.

JT

What is? Risk of default? Or its potential consequences? Perhaps that is true....I'm certainly no expert and the only information I receive about this is through the media.
Actually I think the media has been lagging events not leading them.

Media tends to reflect conventional political wisdom. And CW said that this would be resolved. It was a few slightly more far seeing people who said 'actually, this could happen'. Krugman for example-- he had a blog post on this several months ago.

And so push has come to shove and the media is now rushing to catch up.

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Re: Wall Street and Government Shutdown

Post by richard » Sun Oct 06, 2013 5:18 am

bottlecap wrote:It could be both. The shut down will be temporary, the risk of default isn't that great and, if it occurs, will only be temporary - everyone will be made whole in the end, and the market may know that. I don't k ow if that's why the market has been somewhat steady, but it is plausible.
A temporary default is still a default.

The US had some payment processing issues in 1979 resulting in some late payments. Market reaction raised borrowing costs by billions of dollars http://dmarron.com/2011/05/26/the-day-t ... ury-bills/ The 1979 incident is usually ignored because it was unintentional and didn't get a tremendous amount of attention. A default now would be a highly publicized very intentional act.

The most likely reason the market has been steady is that default would be such a monumentally stupid thing that the market doesn't believe it would happen [OT comment deleted].

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Re: Wall Street and Government Shutdown

Post by richard » Sun Oct 06, 2013 6:08 am

But the thing to remember is this: Market sentiment can barely move for a very long time -- and then take a dramatic shift all at once. There were warnings that Lehman Brothers could collapse throughout the summer of 2008, but only after its bankruptcy on Sept. 15 of that year did the financial world come unglued. In 2011, the warnings that the debt ceiling negotiation could get ugly had been sounded for months -- but only turned into an extraordinary bout of volatility about a week before the bill came due for the U.S. government.

Markets are prescient, in other words, except when they're not.
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Re: Government Shutdown [effect on investments]

Post by Sconie » Sun Oct 06, 2013 6:38 am

TimeRunner wrote:Not very worried about the furlough at all, but if we go into Debt Ceiling default, that would be pretty grim according to many knowledgeable folk. Within the TSP (as a BogleFed), I've slid over to the G fund as cheap insurance until there's some clarity. You can argue that's market timing, but I'll argue it's prudent behavior and well...it's my money and I don't want to lose it. :) Happy to return to AA in a few days when we get past that.

Well, the fact is, the federal govt pays-out $30B a month in interest payments on the debt, all the while taking-in $250B a month in the form of tax receipts. Absent a decision by the Treasury Department to just stop making scheduled interest payments on the debt, it unlikely any type of federal debt default will occur.
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Re: Where would one hide from debit ceiling apocalypse?

Post by Call_Me_Op » Sun Oct 06, 2013 6:41 am

Treasuries.
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Re: Where would one hide from debit ceiling apocalypse?

Post by RNJ » Sun Oct 06, 2013 6:46 am

In the spirit of William Bernstein, this morning I will be preparing for the coming apocalypse by being hard at work on my interstellar spacecraft. Then I'm going apple picking with my kids. :Yawn:

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Re: Where would one hide from debit ceiling apocalypse?

Post by JoMoney » Sun Oct 06, 2013 7:05 am

Sconie wrote:Interestingly, for students of history, at the end of WWII in Europe, there was quite a bit of money made by individuals trafficking in not food or oil or gold or diamonds, etc.-----but in pharmaceuticals----and the new 'wonder drug,' penicillin----in particular. Given the confluence of both the Affordable Care Act and the budget (and "debt ceiling") wrangles in Washington, there may be other investment possibilities someone might want to consider! :D
Sounds more like a job than an investment, but pharmaceutical sales has been very lucrative even without an apocalypse.
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RadAudit
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Location: Second star on the right and straight on 'til morning

Re: Where would one hide from debit ceiling apocalypse?

Post by RadAudit » Sun Oct 06, 2013 8:26 am

Buy a sailboat. Go for a cruise.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The calvary isn't coming, kids. You are on your own.

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Aptenodytes
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Re: Where would one hide from debit ceiling apocalypse?

Post by Aptenodytes » Sun Oct 06, 2013 8:35 am

The premise seems inane, but the answer is simple. Money market funds. You are talking about seeking safety over 30 days. Return is irrelevant over such a short time period, so just plop the money where you have the highest likelihood of it not losing value. CDs might be another option but why go through that hassle.

Valuethinker
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Re: Where would one hide from debit ceiling apocalypse?

Post by Valuethinker » Sun Oct 06, 2013 8:37 am

Aptenodytes wrote:The premise seems inane, but the answer is simple. Money market funds. You are talking about seeking safety over 30 days. Return is irrelevant over such a short time period, so just plop the money where you have the highest likelihood of it not losing value. CDs might be another option but why go through that hassle.
If the US Treasury is not redeeming its debt, would that not mean the T Bills are about the worst thing to be in? At which point, we could see another liquidity meltdown in the MMF sector? As per the Primary Reserve Fund in September 2008?

Valuethinker
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Re: Wall Street and Government Shutdown

Post by Valuethinker » Sun Oct 06, 2013 8:40 am

richard wrote:
But the thing to remember is this: Market sentiment can barely move for a very long time -- and then take a dramatic shift all at once. There were warnings that Lehman Brothers could collapse throughout the summer of 2008, but only after its bankruptcy on Sept. 15 of that year did the financial world come unglued. In 2011, the warnings that the debt ceiling negotiation could get ugly had been sounded for months -- but only turned into an extraordinary bout of volatility about a week before the bill came due for the U.S. government.

Markets are prescient, in other words, except when they're not.
http://www.washingtonpost.com/blogs/won ... mes-wrong/
Or put it another way the market represents an expected value calculation

probability of loss x amount of loss

Since it was not 100% certain Lehman would default, the market was weak pre Lehman, but had not fully reflected the damage a Lehman default would eventually cause, because it was not 100% certain (and the total losses were uncertain as well, of course).

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greg24
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Re: Where would one hide from debit ceiling apocalypse?

Post by greg24 » Sun Oct 06, 2013 8:45 am

I would cut up my debit card, then go for a walk and smell the roses.

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