Investors Scramble to Prepare for the Unthinkable

[scandal 951]

I hit most of my stop losses when markets sold off on Monday. I liquidated most of the rest during the week. I'm out of most of my long positions. Yes, I missed the big rallies on Tues and Wed but frankly I don't care. I'm not trying to time rallies, at this point I'm just trying to get out of the way of the steam roller. If they come to a deal, I'll reacquire the same holdings after Aug 2. If they don't get a deal I'd rather just wait things out for a few weeks. If there is no deal I'm sure I'll have much bigger worries than just my IRA and 401(K) accounts. But liquidating seemed like the one prudent thing I could do now, proactively. Only question is: of what value will FDIC insurance on money market holdings be if we truly have a melt down?

Investors Scramble to Prepare for the Unthinkable

By BINYAMIN APPELBAUM and ERIC DASH

Published: July 23, 2011

WASHINGTON — World markets have behaved until now as if it were inevitable that Congress would raise the debt ceiling, the maximum amount the federal government can borrow, before the Treasury Department exhausts its ability to pay all of its bills in early August. The breakdown of negotiations Friday has jolted that sense of equanimity, wrenching the worst-case scenario from unthinkable to merely unlikely.

Some debt traders said they were looking for evidence of progress toward a deal before markets open on Monday.

“This press conference was a pretty significant moment,” said Ajay Rajadhyaksha, head of United States fixed income strategy at Barclays Capital, referring to President Obama’s announcement after markets had closed for the week that talks had broken down. “I would be pretty surprised if investors did not exhibit a greater degree of worry when we walk in Monday morning than they have shown so far.”

Investors also are increasingly worried that even if a deal is reached, the rating agency Standard & Poor’s may reconsider its certification of government bonds as an ultrasafe investment. The company has said there is a 50 percent chance it will downgrade the rating in the next three months, depending on whether the federal government adopts a long-term plan to pay down its debts. Such a move could send interest rates higher for a broad range of government and consumer loans.

Some of the options still on the table to raise the debt ceiling, involving smaller packages of spending cuts, might not be sufficient to satisfy S.& P. or Moody’s and Fitch, two other rating agencies that have expressed concern over the debt negotiations.

“I think the market still has confidence that the debt ceiling will be raised in time,” said Terry Belton, head of fixed income strategy at JPMorgan Chase. “The focus is on downgrade risk.”

A downgrade would raise the government’s borrowing costs, exacerbating its financial problems, because investors generally demand higher interest rates to hold riskier debt. Consumers and businesses also would face higher borrowing costs because the rates on Treasuries are widely used as a benchmark to set the rates on other kinds of loans.

The government cannot borrow more than $14.3 trillion, the current debt ceiling, a limit that it reached in May. Since then, however, Treasury has continued to repay securities as they come due and issue new debt in their place, a process known as rolling over debt. Officials are concerned that it will become harder to find investors willing to participate in the weekly auctions, and that the remaining buyers will begin to demand higher interest rates.

Over the last few weeks staff members in the Office of Debt Management, a part of the Treasury, have been phoning the desks of the 20 major Wall Street dealers for Treasury bonds to assess investor demand for upcoming bond auctions, and to seek assurances that the dealers themselves will purchase any surplus.

About $87 billion in federal debt comes due on Aug. 4, and roughly $410 billion comes due throughout the rest of August. If interest rates climbed even a tenth of a percentage point, the added cost to rollover the debt would be another $500 million a year.

The heightened uncertainty is prompting financial firms and other companies to stockpile cash. Walter Todd of Greenwood Capital, a wealth management firm in Greenwood, S.C., said that so far he had advised his own worried customers not to do the same, operating under the assumption that a deal would be reached. But after the talks fell apart on Friday, Mr. Todd said he and his partners began to discuss a more pessimistic possibility.

“If nothing changes, if the headline out of the weekend is that the talks have broken down, I think you’ll start to see assets reacting to that,” Mr. Todd said. “It blows my mind that it’s come to this. It’s incredibly irresponsible what’s happening, on the part of both sides.”

Other investors said they did not view the opening of markets on Monday as a critical deadline, as they still expected a deal, but that each passing day would put a little more stress on the markets. Bond prices fluctuated last week on the news from Washington, falling Thursday after S.& P.’s latest warning, then rising on Friday amid renewed talk that a deal was imminent.

“Every day without an agreement increases the risk of default,” said Ward McCarthy, chief financial economist at Jefferies & Company. “Congress likes to go to the edge of the precipice with the debt ceiling, and we are headed toward the edge again.”

Binyamin Appelbaum reported from Washington, and Eric Dash from New York. Louise Story contributed reporting from New York.

[scandal 951]

I thought this was a really well written piece. From the Detroit Free Press. Good things DO come from Detroit

http://www.freep.com/article/20110714/OPINION01/107140418/Editorial-Don-t-believe-debt-ceiling-myths-pain-will-real

Editorial: Don't believe debt ceiling myths; pain will be real

12:51 AM, Jul. 14, 2011

Of all the distortions being floated in relation to the nation's debt ceiling, none is more damaging than the idea that not raising it might actually be the best option -- or at least not pose any real danger.

For those just tuning in, the federal government hit its debt limit back in May, precluding it from borrowing more money. Since then, temporary money shifts have kept the country operating -- as in Social Security stipends being issued, doctors' bills for Medicare patients being paid, soldiers getting their pay and defense contractors getting their checks, etc. -- but Treasury Secretary Timothy Geithner says that strategy will stop working about Aug. 2.

So America should just start living within its means thereafter. Or so goes this particular thought experiment.

What this thought experiment fails to consider is:

• The hardship would be severe. Incoming revenues account for only about 60% of what the country is spending. So one solution might be to pay bills at 60% of what is owed. Senior citizens who depend on Social Security would not be happy, nor would their doctors. Those who are expecting interest payments on their Treasury bonds are not likely to sit still for a partial payment, either, which leads to ...

• The bond markets would exact a huge penalty. Even a hint of default or partial payment would likely roil the markets -- a harsher mistress, in some respects, than angry senior citizens. To restore confidence and/or lure investors back, the U.S. could expect to have to pay higher interests rate, perhaps long into the future, when it resumes borrowing. And having to pay higher interest rates on the U.S. debt could easily wipe out the potential savings negotiators are currently discussing.

• No matter what decisions President Barack Obama makes about how to deal with the limited dollars available, he will be breaking the law. Congress has the power of the purse; it has instructed the president on what money to spend. It has not instructed him on how not to spend money if there's no longer enough to go around, which leads to ...

• Congress has signed off on every cent currently being spent. This is not "the president's debt ceiling," as U.S. Rep. Eric Cantor, R-Va., recently referred to it -- it's everyone's debt ceiling. No single congressperson may have voted for all the tax cuts currently in effect, both wars, the Medicare prescription drug benefit and various budget and safety net programs that kick in when times are tough, but the country's current taxing and spending levels reflect collective choices and compromises that Congress has already made. People who refuse to take responsibility for their own decisions usually are known as hypocrites, weasels or worse.

• The comparisons between the federal budget and a household budget only go so far. The U.S. cannot send the house keys to the bank and move into a cheap rental while it gets its debt under control; it cannot go out and get a second job to raise more money. As for the usual belt-tightening suggestions -- the household equivalent of no more carry-out dinners or cable TV -- the government could shut down all so-called discretionary, nondefense spending and still not have enough tax revenue coming in to pay the remaining bills.

None of this is to say that the nation can continue to dodge questions about long-term spending and tax rates. But holding the debt ceiling hostage looks increasingly counterproductive to reasonable compromise on those issues -- and failure to raise it will only make the nation's finances much, much worse.

[웃 910]

Poor people actually benefit from financial crisis. Unless this financial Armageddon was so severe that the government had to cutoff the food stamps and welfare checks another crash would not really affect them.

They would only see gas prices plummet and housing prices drop. They benefit from both.

I'm talking about the tens of millions of Americans that don't have jobs or have minimum wage work...No bank accounts, no real attachment to the stock market, etc.

Or am I completely wrong to think that?

[scandal 951]

Poor people actually benefit from financial crisis. Unless this financial Armageddon was so severe that the government had to cutoff the food stamps and welfare checks another crash would not really affect them.

They would only see gas prices plummet and housing prices drop. They benefit from both.

I'm talking about the tens of millions of Americans that don't have jobs or have minimum wage work...No bank accounts, no real attachment to the stock market, etc.

Or am I completely wrong to think that?

You may very well be right. I'm not one of those, so I'm worried.

I think anyone with a job, with a bank account, with savings, with retirement goals, with a stake in a functioning economy and financial system, should be worried.

[mawilson 2,133]

I hit most of my stop losses when markets sold off on Monday. I liquidated most of the rest during the week. I'm out of most of my long positions.

So am I. I flattened out a couple of weeks ago when the Dow hit 12,500.

Not really expecting an Armageddon, but the market has been a little schizophrenic lately.