Debt ceiling strategy

[Free bird]

I was just looking at my Vangard sweep account. They use VMFXX which a Federal Securities MMF paying pretty well. Schwab, on the other hand, does use a cash deposit account of some sort that is currently paying about .45%.

I am not sure of how these accounts will work in a crisis. I'm not worried about getting my money out in the short term. I would just like to be able to exchange to equity index ETF's after a big drop off - if one occurs.

All my strategy to not be a bag holder if somehow the wheels come & we go down some illogical road could end up being balderdash. If a treasury bill note or bond holder gets stiffed wouldn’t they have a legal claim to some government asset? The practicality of that would be awkward but don’t get something from the bankruptcy court? Say that’s a nice tank you have there

 

[jebmke]

All my strategy to not be a bag holder if somehow the wheels come & we go down some illogical road could end up being balderdash. If a treasury bill note or bond holder gets stiffed wouldn’t they have a legal claim to some government asset? The practicality of that would be awkward but don’t get something from the bankruptcy court? Say that’s a nice tank you have there

I think it is only backed by full faith and credit. Non-recourse financing.

Maybe try not paying your taxes -- take a miscellaneous credit (Line 6z, Schedule 3)?

 

[copyright1997reloaded]

I think it is only backed by full faith and credit. Non-recourse financing.

Maybe try not paying your taxes -- take a miscellaneous credit (Line 6z, Schedule 3)?

Or maybe we will have to read up on: "Topic No. 453, Bad Debt Deduction"
https://www.irs.gov/taxtopics/tc453

 

[Jerry1]

Remember, the government is collecting revenues at a clip of about $4B per year. We're spending at about $6B per year. (https://fiscaldata.treasury.gov/americas-finance-guide)

That means the government can continue to pay for about 2/3 of things without exceeding the debt limit.

I’m sure you meant Trillion, not Billion. It’s really hard to comprehend how much money that is.

 

[Aerides]

Of course it is. The way to accomplish that is to focus on questions such as “what should we be doing to protect our portfolios” or even “should we forum members be doing anything different” and avoid discussions about the legislative process, who says what or who did what. And please, no more snark.

^^
Ahem

Final Mod Reminder:
Let's keep this thread on track to discuss your personal approaches, vs. dancing on the political edge as several posts have tried to do.

 

[Chuckanut]

Everyone takes Apple Pay now -- a few take CC only. Most places don't use humans so not much use for the paper stuff. I keep a $20 bill in my wallet for mugger money.

The local Costco does not take Apple Pay as far as I can tell. Neither does Kroger. There are too many holes in Apple Pay in my part of the world.

Back on topic, other than keeping an eye out for temporary market distortions that might signal a deal on something of interest, I won’t be doing much different.

 

[dobig]

We have 75% of our assets in cash paying between 4.5% to 5%. We'd like to get more into the market but have been complacent so this might be the perfect opportunity to take advantage of fear and panic. Not sure what level on the S&P is a good point to start putting money in. Was thinking 10% at S&P 4,000 (VTI and SCHD), another 15% at 3,900 and another 25% at 3,800. Any thoughts?

 

[donheff]

We have 75% of our assets in cash paying between 4.5% to 5%. We'd like to get more into the market but have been complacent so this might be the perfect opportunity to take advantage of fear and panic. Not sure what level on the S&P is a good point to start putting money in. Was thinking 10% at S&P 4,000 (VTI and SCHD), another 15% at 3,900 and another 25% at 3,800. Any thoughts?

Wait a few weeks for the debt ceiling issue to get resolved or cause a panic. If a panic causes a big drop start buying in bit by bit as it falls. The trick is always to get all in (to your target) before you miss a lot of the swing back up. That’ll much easier said than done which is why most of us normally stay put.

 

[dobig]

Wait a few weeks for the debt ceiling issue to get resolved or cause a panic. If a panic causes a big drop start buying in bit by bit as it falls. The trick is always to get all in (to your target) before you miss a lot of the swing back up. That’ll much easier said than done which is why most of us normally stay put.

That sounds like a good strategy. Thank you.

 

[SecondCor521]

I’m sure you meant Trillion, not Billion. It’s really hard to comprehend how much money that is.

Ah, you're right.

Of course, my main point still stands, which is that it's not like the government has a savings account that goes to zero. There is ongoing receipts that cover approximately 2/3 of spending.

It would still be traumatic, but going from 100% on 5/30 to 67% on 6/1 is not the same as 100% to 0% overnight.

And I still think the government would pay interest on the debt as one of the top priorities (if not #1), and that is less than 10% of the budget.

 

[rmorris50]

I carry mine around in my wallet. So your a genius compared to me

It’s not a bad idea to have some decent level of cash in the house, say $1000 in 20’s and less, in case there is a large scale electricity outage for an extended period of time. Just ask New Yorkers during the black out they had about 20 years ago.

I shunned crypto the past couple of years, but maybe its worth considering having some money in a more “established” crypto should the dollar unravel due to a default. Or precious metals or oil I suppose. But I guess I’ll live dangerously and just stay the course.

 

[Montecfo]

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.

See Post 47. Not that simple.

I think the best way to prepare is to assume it happened, imagine what you would have wanted to do, and then prepare accordingly.

Trying to guess how government would wire around it is I think not addressing the issue.

 

[pb4uski]

We have 75% of our assets in cash paying between 4.5% to 5%. We'd like to get more into the market but have been complacent so this might be the perfect opportunity to take advantage of fear and panic. Not sure what level on the S&P is a good point to start putting money in. Was thinking 10% at S&P 4,000 (VTI and SCHD), another 15% at 3,900 and another 25% at 3,800. Any thoughts?

50% at 3,800 would be best. [emoji4]

 

[Free bird]

If a default occurs & they stop paying interest on my ibonds should I cash them in & buy gold Swiss francs & bitcoin? Under a default scenario will savings bonds be cashable or will they be toilet paper?

 

[donheff]

At the end of the day, you gotta do what you need to as far as protecting your interests. If that means moving things around, then go for it, don't second guess yourself. It's the right decision for you under the circumstances. Maybe your concerns turn out to be justified and things work out in your favor. Maybe you are reading things wrong, and you lose money versus just doing nothing. Maybe it's all a big nothing burger.

I wouldn't be asking for advice, I'd just do it. You've done your analysis, looked at the tradeoffs, and reached a logical conclusion for you. It will help you sleep better at night, so again, just do it.

I think the best way to prepare is to assume it happened, imagine what you would have wanted to do, and then prepare accordingly.

Trying to guess how government would wire around it is I think not addressing the issue.

Let me close out with one more question before Porky sees something he doesn't like.

Assuming I conclude that this is a nice opportunity for some fairly low risk market timing in an IRA (i.e. a fair likelihood of a brief downturn before compromise cools things off; a modest likelihood of a messy panic also eventually resolved cooling things off) I would want to move a selection of funds to cash - probably a MMF.

It's a guessing game about what would be hurt most in such a temporary situation. My guess is that US equities would get hit (they react wildly to everything), bonds funds too but not as much, and international a bit less than US unless everything goes badly south. Given that I could limit my speculative moves to Total Stock. Or, do folks think it would be a better idea to move in proportion to my AA in Total Stock, Total Bonds, and Total International?

I may be mixed up on Bond funds. I'm assuming the price might drop as people tried to run but would eventually smooth out. If a temporary default actually occurred I suppose its possible the darn funds might actually get frozen until things could be resolved making it hard to buy back in low. I was inclined to leave them alone but would other speculators get out of them first?

 

[Aerides]

My guess is that equities will slump before any actual default occurs, so if you're going to move, move sooner than later.

Of course, that's kinda like running out of town before a storm - it might not hit where and when you think it does.

I think that any impact will be hard and rough and temporary, and then things will improve. So I'll stick with my existing strategy which allows for riding out such things - keep my AA, keep my current 2-3 years in cash so I don't have to adjust while things recover.

 

[MichaelB]

Let me close out with one more question before Porky sees something he doesn't like.

Assuming I conclude that this is a nice opportunity for some fairly low risk market timing in an IRA (i.e. a fair likelihood of a brief downturn before compromise cools things off; a modest likelihood of a messy panic also eventually resolved cooling things off) I would want to move a selection of funds to cash - probably a MMF.

It's a guessing game about what would be hurt most in such a temporary situation. My guess is that US equities would get hit (they react wildly to everything), bonds funds too but not as much, and international a bit less than US unless everything goes badly south. Given that I could limit my speculative moves to Total Stock. Or, do folks think it would be a better idea to move in proportion to my AA in Total Stock, Total Bonds, and Total International?

Money market funds are primarily invested in US Treasuries or the Fed reverse repo facility, which is based on US Treasuries, so if the debt ceiling is res ni guarantee those funds will remain solvent or liquid. To be fully prepared the cash should be in a another liquid deposit not based on treasuries.

 

[pb4uski]

If a default occurs & they stop paying interest on my ibonds should I cash them in & buy gold Swiss francs & bitcoin? Under a default scenario will savings bonds be cashable or will they be toilet paper?

They will be toilet paper.

But if you endorse them over to me an I'll buy them from you for 10c on the dollar. Let me know.

 

[donheff]

Money market funds are primarily invested in US Treasuries or the Fed reverse repo facility, which is based on US Treasuries, so if the debt ceiling is res ni guarantee those funds will remain solvent or liquid. To be fully prepared the cash should be in a another liquid deposit not based on treasuries.

True, but that problem would occur in a worst case scenario which would be a disaster. Ironically, in that case I think the safest, long term place to be would be Fed securities. Maybe you couldn't touch them for a while but eventually the government would stabilize and the funds would be available. In the meantime a worldwide financial crisis would leave equities depressed and a good buy. In the more likely nothing-burger or brief panic drop the funds would remain fine.

Underneath it all, I am an optimist and a believer in the full faith and credit of the US.

 

[scrabbler1]

Is anyone else here wondering how they respond if their health insurers are not paid their advanced premium subsidies through the ACA? For me, that's about $500 per month I would be unable to invest elsewhere, or would have to withdraw from somewhere in my portfolio (as I don't have that much extra cash per month for some months laying around). Would the ICs be unable to pay claims, causing the providers to pursue the insureds (if it is legal), or would the ICs pursue us for the unpaid subsidies (if it is legal)?

 

[MichaelB]

True, but that problem would occur in a worst case scenario which would be a disaster. Ironically, in that case I think the safest, long term place to be would be Fed securities. Maybe you couldn't touch them for a while but eventually the government would stabilize and the funds would be available. In the meantime a worldwide financial crisis would leave equities depressed and a good buy. In the more likely nothing-burger or brief panic drop the funds would remain fine.

Underneath it all, I am an optimist and a believer in the full faith and credit of the US.

I wasn’t suggesting that scenario was likely, but if one wants to raise cash to take advantage of a possible fall in price of a financial asset, that same scenario might also impact the money market liquidity, so a “safer” place to hold the cash might be a good idea.

 

[donheff]

I wasn’t suggesting that scenario was likely, but if one wants to raise cash to take advantage of a possible fall in price of a financial asset, that same scenario might also impact the money market liquidity, so a “safer” place to hold the cash might be a good idea.

I'm having a hard time figuring out where. I would have to stay within the institution - it's IRA money. So where do I park it so it is quickly available to buy back? The Sweep accounts seem like the best bet since they are the only actual source to make a purchase. In VG that is government securities MM. At Schwab it is some sort of FDIC insured mix of bank accounts.

Nothing is truly safe.

Edit: I forgot to mention TSP, ironically stable and safe (long term) in the G Fund. But that is a very minor part of our portfolio.

 

[pb4uski]

Is anyone else here wondering how they respond if their health insurers are not paid their advanced premium subsidies through the ACA? For me, that's about $500 per month I would be unable to invest elsewhere, or would have to withdraw from somewhere in my portfolio (as I don't have that much extra cash per month for some months laying around). Would the ICs be unable to pay claims, causing the providers to pursue the insureds (if it is legal), or would the ICs pursue us for the unpaid subsidies (if it is legal)?

Another unintended consequence I suspect that few people.. and probably no Congresscritters have thought of... lots of nuances that will break if there is a default.

 

[jldavid47]

We have 75% of our assets in cash paying between 4.5% to 5%. We'd like to get more into the market but have been complacent so this might be the perfect opportunity to take advantage of fear and panic. Not sure what level on the S&P is a good point to start putting money in. Was thinking 10% at S&P 4,000 (VTI and SCHD), another 15% at 3,900 and another 25% at 3,800. Any thoughts?

Personally I won't even consider adding to our equity exposure until the S&P 500 gets below 3500. I can get over 5% risk free on treasury bills. The S&P 500 earnings yield (not dividend yield) is 4.62%. The potential return on stocks right now is not worth the considerable downside risk in this environment. The debt ceiling nonsense in Washington is only one of many risks. YMMV.

 

[pb4uski]

+1 I'm out of equities until valuations get more sensible. Even 3,500 might not be low enough... an 18 TTM P/E would be about 3,100.