Debt ceiling strategy

[arcyallen]

I think there's two things we're talking about here:

1) Making investment decisions on what has definitely happened.
2) Making investment decisions on what might happen.

I'm a big fan of #1. It may seem "slow" or "out of touch", but is foolproof in being "correct at the time" based on all the known information.
I'm not a fan of #2. It is fun to think and talk about, and can be quite lucrative if you make the right moves, but more often than not we don't. More often than not, we'll make decisions that, looking back on, we'll regret. I can't count how many people I know moved into cash these last five or so years because "we're due for a bear market" or because of another perceived threat. Unfortunately most of us will see many more threats than actually exist, and if we act on all of them I think we'll experience a net worsening of our personal situations.

So to answer the question, no change for me. This is the same "threat" we've seen over and over and over again, and every time (with every threat it seems) I hear "this time is different". Maybe it is, but history is on the side of it not.

[Montecfo]

Quote:

Originally Posted by waynezo Doesn't the Constitution require the President to pay the debt? "Fourteenth Amendment, Section 4: The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

I would give that a "maybe" given bolded language.

[lawman]

Sometimes there has to be a reset due to irreconcilable differences. This would not be the first nor the most consequential.

[FI_RElater]

Quote:

Originally Posted by OldShooter There's nothing special about ETFs. Almost any asset not denominated in dollars would benefit from a weakening. That’s one of several reasons that we hold the world on a cap-weighted basis (VTWAX), not just the US. There are many interests wanting the dollar to weaken.

I wasn't thinking "special", rather I was thinking that you can specify your purchase price (they either take it or not).... funds - - you put your order in and it happens at whatever price the market gives. Sometimes, if enough pile in, the price isn't good enough/too high; When I buy I virtually always have a limit order.

[Popeye]

Quote:

Originally Posted by Montecfo I would give that a "maybe" given bolded language.

Exactly! The debt is authorized by law, up to the ceiling. That’s the phrase it would turn on.

For me, I think 2008-9 with the Great Recession and 2020 with Covid were much bigger threats. The proven strategy there was to sit tight.

[copyright1997reloaded]

I keep hearing "The US has never defaulted on its debt", but that is not true.

1. 1790 - The funding act of 1790 took over state obligation of war debt, but also deferred payment until 1801 (so technical default).
2. 1862 - Demand notes. In 1862 the US government created "Green Backs", which could be redeemed at a pre-specified rate into gold. However, in 1862 they refused and decided that green backs were "legal tender" and holders could not force redemption in gold. In result, the value of those notes fell against gold.
3. In 1918, the US issued "Liberty Bonds", which specified redemption in gold. This was reneged on in 1933.
4.In 1968 the US refused redemption of "Silver Certificates" in silver, even though the promise is explicitly stated on the certificates.
5. 1971 - prior to this, the US had guaranteed foreign government holders of US currency the ability to redeem in gold.
6. 1979 - The US Treasury failed to make payments (on time) to individual holders of debt maturing on April 26, May 3, May 10 (1979). https://www.forbes.com/sites/beltway...h=136b12ea30ad

[jollystomper]

Quote:

Originally Posted by donheff For the first time ever I am tempted to take about half of our tax protected assets into cash until it’s clear we can get through this one. Anybody else thinking that way?

My strategy going into retirement was to keep enough cash on hand for 3-5 years. to avoid being forced to withdraw from bonds or equities. A secondary benefit was the "dry powder" that could be used, should I choose to gamble on buying opportunities. So far so good. That strategy was meant for times like these .

[OldShooter]

Quote:

Originally Posted by arcyallen ... This is the same "threat" we've seen over and over and over again, and every time (with every threat it seems) I hear "this time is different". Maybe it is, but history is on the side of it not.

Sir John Templeton: “The four most expensive words in the English language are 'This time it’s different.' ”

[USGrant1962]

Quote:

Originally Posted by Montecfo I would give that a "maybe" given bolded language.

Yea, there's that pesky Article 1, Section 8 in the Constitution.

Quote:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

[Free bird]

No one gets hit by the bus they see coming. Only by the bus they don’t see coming. Debt ceiling is the bus everyone sees coming as its horn is honking its lights are flashing. It’s moving as lower than a float in a parade. So what should we be paying attention to?

[bloom2708]

I had a conversation with my dad something like this:

I was only 10 when the debt hit $1 trillion. But since that point...

The debt is $2 trillion. It can't go on like this. Can it?
The debt is $5 trillion. It can't go on like this. Can it?
The debt is $10 trillion. It can't go on like this. Can it?
The debt is $15 trillion. It can't go on like this. Can it?
The debt is $20 trillion. It can't go on like this. Can it?
The debt is $25 trillion. It can't go on like this. Can it?
The debt is $30 trillion. It can't go on like this. Can it?

They were funny/rhetorical conversations. It is outside of my individual scope of control, but the trend is not great.

I'm doing nothing. Whatever I do or don't do will probably be a mixed bag of right and wrong.

[copyright1997reloaded]

Quote:

Originally Posted by Free bird No one gets hit by the bus they see coming. Only by the bus they don’t see coming. Debt ceiling is the bus everyone sees coming as its horn is honking its lights are flashing. It’s moving as lower than a float in a parade. So what should we be paying attention to?

I am worried about what it will take to make this: https://finance.yahoo.com/quote/KRE/ from trending towards zero.

PacWest, which came out with decent results only a little over a week ago, is down 28% today, down 39% in the last 5 days, and down 72% YTD.

The regionals are acting very very badly, and the big guns (e.g. JPM) have already been used on the FRC takeover.

So far, treasury and the Fed have been "behind the curve" in terms of stabilizing the regionals, and it will likely take more action to get this contained. That more action is likely to be inflationary (at least in the longer term). That in turn might push more countries away from the US $ and if that spins out of control, good luck to us all.

I have some PM's / commodities and related equities, but feeling underinvested in those areas.

[bloom2708]

Quote:

Originally Posted by copyright1997reloaded I am worried about what it will take to make this: https://finance.yahoo.com/quote/KRE/ from trending towards zero. PacWest, which came out with decent results only a little over a week ago, is down 28% today, down 39% in the last 5 days, and down 72% YTD. The regionals are acting very very badly, and the big guns (e.g. JPM) have already been used on the FRC takeover. So far, treasury and the Fed have been "behind the curve" in terms of stabilizing the regionals, and it will likely take more action to get this contained. That more action is likely to be inflationary (at least in the longer term). That in turn might push more countries away from the US $ and if that spins out of control, good luck to us all. I have some PM's / commodities and related equities, but feeling underinvested in those areas.

I read that $2 billion flowed into Apple's new Apple Savings account in the first week. Paying 4.15%.

My local regional bank is paying .3% on savings. Nearly 14x less. They don't want the money. Don't need the money. But, but if everyone takes their money out, it sure causes some issues.

Can regional banks not pay 3% in a 4.2% market? That will put them under? Or everyone taking out their cash will put them under.

Crazy place we are in. Moar interest rate increases coming.

[copyright1997reloaded]

Quote:

Originally Posted by bloom2708 I read that $2 billion flowed into Apple's new Apple Savings account in the first week. Paying 4.15%. My local regional bank is paying .3% on savings. Nearly 14x less. They don't want the money. Don't need the money. But, but if everyone takes their money out, it sure causes some issues. Can regional banks not pay 3% in a 4.2% market? That will put them under? Or everyone taking out their cash will put them under. Crazy place we are in. Moar interest rate increases coming.

Their Net Interest Margins (NIM) are getting impacted. The bigger issue (I think, without having looked at a bunch of their balance sheets) is that they have deposits (already deposited in the past when cash was flush for a variety of reasons including stimmy checks and other stimulus) that they had to invest. So they invested in things like treasuries (at almost nothing), commercial real estate (some of which is pretty iffy now in terms of return), etc.

So now rates have gone up and their deposit base is leaving. If they raise rates dramatically, they have now borrowed high and lent low (not a good strategy to stay in business). As rates have gone up and STAYED up, more and more people are either moving funds or only staying if given significantly higher yields.

[bloom2708]

Quote:

Originally Posted by copyright1997reloaded Their Net Interest Margins (NIM) are getting impacted. The bigger issue (I think, without having looked at a bunch of their balance sheets) is that they have deposits (already deposited in the past when cash was flush for a variety of reasons including stimmy checks and other stimulus) that they had to invest. So they invested in things like treasuries (at almost nothing), commercial real estate (some of which is pretty iffy now in terms of return), etc. So now rates have gone up and their deposit base is leaving. If they raise rates dramatically, they have now borrowed high and lent low (not a good strategy to stay in business). As rates have gone up and STAYED up, more and more people are either moving funds or only staying if given significantly higher yields.

Yes. They would be OK if people leave their money. Taking the money out requires them to sell the investments at a big loss.

But, they won't pay competitive rates (for many) and there are better options which means people will move their money. #REF! error. Does not compute.

[copyright1997reloaded]

Quote:

Originally Posted by copyright1997reloaded Their Net Interest Margins (NIM) are getting impacted. The bigger issue (I think, without having looked at a bunch of their balance sheets) is that they have deposits (already deposited in the past when cash was flush for a variety of reasons including stimmy checks and other stimulus) that they had to invest. So they invested in things like treasuries (at almost nothing), commercial real estate (some of which is pretty iffy now in terms of return), etc. So now rates have gone up and their deposit base is leaving. If they raise rates dramatically, they have now borrowed high and lent low (not a good strategy to stay in business). As rates have gone up and STAYED up, more and more people are either moving funds or only staying if given significantly higher yields.

So I looked up a few of the holdings of KRE.

NYCB - deposits up 44%, but this is hard to figure out (quickly) as it includes signature assets. "Total deposits increased $26.1 billion, or 44%,
from the prior quarter, primarily due to the
Signature transaction, net of expected
outflows."
MTB - deposits off 2.7%
Zions - deposits off 16%
RF - off 3%
CFG - off 4.7%

So at least these don't seem super bad. (Given how fast money can move these days I don't know how up to date or valid the numbers from the most recent quarterly report are.)

[copyright1997reloaded]

Quote:

Originally Posted by bloom2708 Yes. They would be OK if people leave their money. Taking the money out requires them to sell the investments at a big loss. But, they won't pay competitive rates (for many) and there are better options which means people will move their money. #REF! error. Does not compute.

Correct. If they are forced to sell assets, they have to mark to market and realize the loss.

I think most of the banks and credit unions hope to have sticky, lazy money. People who are there because they've been there a long time, and don't want the "hassle" of moving. Then if you get someone complaining, offer them up a 1 or 2 year CD with a higher (but not market leading) rate.

[mpeirce]

My understanding is that tax income is sufficient to cover interest payments. Of course that would only work if the federal government didn’t make any other payments.

So if the constitutional requirement to pay debt is enforced, they could squeak by for a time by delaying accounts payable and government worker paychecks. Not a great solution, but not a default either.

[SecondCor521]

I personally do not see this time as any different from the past half dozen times in the past 10 or 15 years when we've gone into semi-default for a short period of time. The various sides posture for a while, a few non-essential services close for a short period of time, perhaps a 3 day continuing resolution gets passed, and then eventually an agreement is hashed out.

(I would be interested in anyone saying what, objectively, appears to make this situation worse than any of the previous similar occurrences. Feel free to PM me with them if you're concerned about thread closure.)

My conclusion is that this time it's not different and so my investment strategy is to stay the course. I'm barely paying any attention to the default issue, and probably only know about it because it's impossible to miss the news stories.

[copyright1997reloaded]

Quote:

Originally Posted by Free bird No one gets hit by the bus they see coming. Only by the bus they don’t see coming. Debt ceiling is the bus everyone sees coming as its horn is honking its lights are flashing. It’s moving as lower than a float in a parade. So what should we be paying attention to?

Just happened upon this:

Quote:

but honestly, all this focus on the debt ceiling instead of the future fiscal issue is like sitting on the beach at Santa Monica worrying about whether a 30-foot wave will damage the pier when you know there’s a 200-foot tsunami just 10 miles out.

source: https://finance.yahoo.com/news/druck...185540149.html