Debt ceiling strategy

[Montecfo]

It would seem that a relief rally would be hard to buy back into fast enough. I suppose an alternate strategy would be to assume that any relief rally is a sucker's rally and buy back in on the second dip. I have no idea of how anyone might tell what was about to happen though.



I'm going to channel Mr. Morgan again and say that it will fluctuate.

No, you have to buy on the selloff. It is not about selling the rally.

But if you short the market, you have to take profits before the relief rally was my point.

 

[Montecfo]

heh; I'm reminded by something i overheard one of my young controllers saying to another at lunch one day. "The nice thing about stocks (meaning, not options) is that the most you can lose is all your money."

Yes. They stop at zero.

 

[Montecfo]

This analogy proves an EXCELLENT point, but not the point I think you're trying to make. The market bottomed in March 2020, when Covid was in its infancy. It was super duper doom and gloom. Never mind businesses - whole COUNTRIES were shutting down! Most people were NOT buying, and if you reflect back on your personal attitude back then when the market was plummeting 1000+ points a day, I think you'll find "buying opportunity" was very likely not the message you were thinking. That's the catch with finding true buying opportunities in dire situations - they rarely feel like buying opportunities. If anything, I was trying to talk very "smart" people off the selling cliff. But most sold anyway.

For the record at that time I sold some of my mutual funds and bought BRK thinking Buffet would have a buying spree during that time. How could he not, right? But I was wrong. It wasn't a horrible reallocation, but not one that was very beneficial, either.

Definitely did some buying then and made quite a bit of money.

It is always the same, have to buy the pain. Hold your nose and buy.

 

[FI_RElater]

... you're missing the bigger fish

The agreement is largely outlined by the PPACA, as adjusted over the years. The broad outlines were that "everyone" "had to" buy health insurance, the ICs have to provide policies which meet certain requirements, the ICs rates would be regulated to some degree by the exchanges, the insureds "had to" buy policies through the marketplace, and the government would provide subsidies on a sliding income scale.

Whether and to what degree the ICs evaluated the risk of non-payment of premiums due to the debt ceiling is unclear to me. My guess would be that some may have given it some thought, any that did probably thought it would be a small, temporary problem.

ICs do, of course, have the option of not participating in the ACA, and they have some freedom in terms of plans and pricing. They also can adjust from year to year. My state has been relatively stable AFAICT - same insurers, similar plans, similar pricing, similar market shares. I think we actually had a new insurance company join our marketplace for 2023.

I'm fairly sure that if the premium isn't paid via some combination of subsidies and by the insured, that the coverage will cease. If it happened en masse and over time, then I could imagine some ICs going bankrupt. But this would just be one rather small effect of the debt ceiling situation. Other effects would be far larger and more consequential.

To get this subthread back on topic, my plans regarding my ACA coverage are to do nothing based on this time being no different. (I still haven't received any messages saying what's different this time - I'm still interested.) Virtually all of my premium is paid via APTC. If we go over the waterfall then I, like everyone else, will watch and adjust as needed.

Rather than just considering the ACA plans, a far more serious risk is Medicare payments to IC's.
Remember that most other retirees are largely living month to month with a significant portion of their income due to SS. Now imagine that SS stops (insufficiency clause) and Medicare payments to IC's also stop (most retirees are already having SS by Medicare age, so normally their premiums are being withheld by SS).... how do they pay their premiums otherwise... and what are the effects to IC's vs-a-vs reimbursement?

As for the question by Donheff as to where the equities, I think I already said-- developed markets. The big effect is the drop in the dollar vs the other currency (so this would likely be a short term effect only); don't use emerging markets as, just like the earlier cases, if the US has the sniffles the emerging markets get the flu .... or in this case, if the US gets indigestion then the emerging markets get a heart attack.

As I've noted before, we've already let our treasuries mature and have gone CD only (at relatively good rates relative to the overall income from equities and at far lower risk). I've got tranches of CD's maturing over the next quarters and would look into developed markets (with a possible underweight to the UK, due to their current situation... so that does indicate mostly Euro with a helping of SK and Taiwan) for a bit of the maturing CD's and the rest into CD's at potentially even higher rates. (fortunately, we have enough cash to ride out short term effects.... we'd assume that SS and pension would be on hold, so have many K on deposit at local CU's to cover that ongoing cash needs.

 

[MuirWannabe]

The strategy mentioned above of buying an S&P put to hedge against market collapse from a debt ceiling standoff is the recommendation in this thread that seems the most logical to me.

However, I’m not very informed on options trading, other than it’s high risk obviously. I do favor the idea of investing say $25K or so in a S&P put to hedge my normal holdings. I just spoke with a Vanguard representative about it. Apparently, it requires a form be completed and approved by them to allow me to trade in options. My intention is only to purchase this one option. Certainly not interested in going further with it.

The more I understand about options trading the more I realize I don’t know. Not sure how or if I’ll proceed. I like the idea. I did my usual ‘do nothing’ approach as I watched Covid coming. Sure enough my positions cratered when it finally hit. Now, there is this debt ceiling situation. The insurance of having a put offering some protection appeals to me. Even if I know that insurance could easily go to zero. But having the knowledge to purchase the right put and tracking when to sell it concerns me. If I don’t do it, and the market indeed craters in the next couple months I’ll sure be kicking myself as I was during the early days of Covid.

Just venting about my options ignorance….

 

[Montecfo]

The strategy mentioned above of buying an S&P put to hedge against market collapse from a debt ceiling standoff is the recommendation in this thread that seems the most logical to me.

However, I’m not very informed on options trading, other than it’s high risk obviously. I do favor the idea of investing say $25K or so in a S&P put to hedge my normal holdings. I just spoke with a Vanguard representative about it. Apparently, it requires a form be completed and approved by them to allow me to trade in options. My intention is only to purchase this one option. Certainly not interested in going further with it.

The more I understand about options trading the more I realize I don’t know. Not sure how or if I’ll proceed. I like the idea. I did my usual ‘do nothing’ approach as I watched Covid coming. Sure enough my positions cratered when it finally hit. Now, there is this debt ceiling situation. The insurance of having a put offering some protection appeals to me. Even if I know that insurance could easily go to zero. But having the knowledge to purchase the right put and tracking when to sell it concerns me. If I don’t do it, and the market indeed craters in the next couple months I’ll sure be kicking myself as I was during the early days of Covid.

Just venting about my options ignorance….

Understand. Buying a put or a call is relatively straightforward once you understand what each instrument is. But you also need to decide strike price and expiration which makes the most sense. A few moving parts!

But if you are uncomfortable, just use funds to buy your favorite securities on a dip. This is less risky but also provides less leverage.

You could also straddle the issue, so to speak l, by spending just a bit, say 1-5000, on an option and the rest on your favorite securities.

Ideas.

 

[SecondCor521]

The strategy mentioned above of buying an S&P put to hedge against market collapse from a debt ceiling standoff is the recommendation in this thread that seems the most logical to me.

However, I’m not very informed on options trading, other than it’s high risk obviously. I do favor the idea of investing say $25K or so in a S&P put to hedge my normal holdings. I just spoke with a Vanguard representative about it. Apparently, it requires a form be completed and approved by them to allow me to trade in options. My intention is only to purchase this one option. Certainly not interested in going further with it.

The more I understand about options trading the more I realize I don’t know. Not sure how or if I’ll proceed. I like the idea. I did my usual ‘do nothing’ approach as I watched Covid coming. Sure enough my positions cratered when it finally hit. Now, there is this debt ceiling situation. The insurance of having a put offering some protection appeals to me. Even if I know that insurance could easily go to zero. But having the knowledge to purchase the right put and tracking when to sell it concerns me. If I don’t do it, and the market indeed craters in the next couple months I’ll sure be kicking myself as I was during the early days of Covid.

Just venting about my options ignorance….

It's probable that anyone purchasing the put option from you has considered the debt ceiling also and has accounted for that risk in determining the pricing of any applicable options.

The price of fire insurance goes up and may not even be available when there is a forest fire in the national forest in your back yard and your house has a higher than normal chance of burning down. Similar thing with the debt ceiling.

 

[Montecfo]

It's probable that anyone purchasing the put option from you has considered the debt ceiling also and has accounted for that risk in determining the pricing of any applicable options.



The price of fire insurance goes up and may not even be available when there is a forest fire in the national forest in your back yard and your house has a higher than normal chance of burning down. Similar thing with the debt ceiling.

Sure. But debt ceiling has not affected equities to this point. Looks like we rally this am on a lower inflation rate. So today might not be a crazy time to execute that strategy.

 

[donheff]

Sure. But debt ceiling has not affected equities to this point. Looks like we rally this am on a lower inflation rate. So today might not be a crazy time to execute that strategy.

I am about 3/4 of the way to my goal. I will finish today if the market stays up.

 

[tulak]

I didn't have that much money in them, maybe $30,000. My purchase timing was near perfect but I sold them for a $10,000 gain or so (would have go go back and look up exactly what it was). Two weeks later the ones I had were selling for $1,400,000.

I had almost 10k and only 1k of that was purchased at the near perfect time (1.07/contract). That one had a gain of 2600% at its high. I was just shy of quarter a million total. Paralysis hit me though and I sold too late, netting around 80-90k.

It was a surreal time when the value would change +/- 50k in a day.

 

[Koolau]

I think gold is about the only safe haven and I’m not sure that will even work. Seems like gold should have performed much better with all the inflation, but it didn’t. It didn’t because the dollar stayed strong. I doubt if we go into default that the dollar will stay strong. So, gold might be a good bet, but I don’t expect it to happen. It would be in no one’s self interest to let this happen.

I know everyone hates gold because it has historically been a lousy investment. I have a little gold and plan to hang onto it for just such a situation as a default. I think under those circumstances, gold might explode in value - for a short time until inevitably the debt ceiling is raised and we print more money to cover our debt.

Gold can't be created, so has an interesting history vs fiat currencies. When folks trust fiat currency, gold does very little. When there are even doubts about fiat currency, Gold takes off. I won't go out and buy more Gold, but I'm kinda happy I've got a little. I honestly don't think of Gold as "end of the world" investment but more for when major disruptions in world economies and currencies occur. Gold is an insurance policy for want of a better term. YMMV as always.

 

[Free bird]

Hope we don’t get a new thread titled “Debt ceiling tragedy “

 

[luckydude]

I know everyone hates gold because it has historically been a lousy investment. I have a little gold and plan to hang onto it for just such a situation as a default. I think under those circumstances, gold might explode in value - for a short time until inevitably the debt ceiling is raised and we print more money to cover our debt.

Gold can't be created, so has an interesting history vs fiat currencies. When folks trust fiat currency, gold does very little. When there are even doubts about fiat currency, Gold takes off. I won't go out and buy more Gold, but I'm kinda happy I've got a little. I honestly don't think of Gold as "end of the world" investment but more for when major disruptions in world economies and currencies occur. Gold is an insurance policy for want of a better term. YMMV as always.

Fellow gold owner here. I've always thought gold as a hedge against inflation is hogwash, and this latest round of inflation proves it as gold hasn't appreciated much. It's lousy as an investment or even a stable store of value, but physical gold is a nice insurance policy in case of unforeseen financial and political upheavals.

 

[luckydude]

Hope we don’t get a new thread titled “Debt ceiling tragedy “

Well, if debt default happens, at least we've got a great thread title picked out already!

 

[donheff]

Hope we don’t get a new thread titled “Debt ceiling tragedy “

Well, if debt default happens, at least we've got a great thread title picked out already!

If we get a brief sell off or even a very short "default" or unilateral exercises of executive branch options that lead to a deeper sell off, we may need to start a Debt Ceiling Buyback strategies thread to share thoughts on when and how to get back in. It is easy to sell but choices on return will be tricky.

 

[arcyallen]

Gold can't be created, so has an interesting history vs fiat currencies.

Something I discovered recently is the world is mining/discovering increasingly record amounts of gold. While we're not creating it, we are constantly finding more and more of it. I'm not sure if there's much of a difference between the two from an experience standpoint.

https://elements.visualcapitalist.com/200-years-of-global-gold-production-by-country/

 

[Montecfo]

Fellow gold owner here. I've always thought gold as a hedge against inflation is hogwash, and this latest round of inflation proves it as gold hasn't appreciated much. It's lousy as an investment or even a stable store of value, but physical gold is a nice insurance policy in case of unforeseen financial and political upheavals.

Physical gold?

 

[Freedom56]

The Treasury should consider a debt swap deal where the treasury buys back low coupon long duration treasuries (20 and 30 year) that are trading as low as 55 cents on the dollar at market prices in exchange for current rates but at principal amounts equivalent to current NAV. This would effectively lower the national debt below the current the limit and avert a self made crisis.

 

[Free bird]

The Treasury should consider a debt swap deal where the treasury buys back low coupon long duration treasuries (20 and 30 year) that are trading as low as 55 cents on the dollar at market prices in exchange for current rates but at principal amounts equivalent to current NAV. This would effectively lower the national debt below the current the limit and avert a self made crisis.

How much time does that buy? How much does it cost in the long run? Don’t the books ever have to be squared? Seems like the pandemic response on the back of zero rates has an economy smoking hot. Is the fed looking at the debt ceiling as being a face saver? Let the politicians look like the undisciplined villains. Let them look like the cause of a recession that gets wages down unemployment up & puts inflation back in the target area. Then the Fed can ride to the rescue with lower rates. It’s a pretty complicated situation isn’t it?

 

[luckydude]

Physical gold?

Yes. 30 ounces in gold coins we bought mid-2003 for around $350 as I recall. I remember driving to a dodgy-looking warehouse in downtown to pick up the coins from a man seated behind bullet-proof glass window. DW and I had maybe $500k NW at the time so the coins represented around 2% of our NW. Needless to say, I was more than a little nervous driving home.

I have another 5 ounce gold bar that DD left me when he died. I stuffed it in a drawer years ago and totally forgot about it, and only found it again last year when I was clearing out my desk drawers. The darn thing was in an old envelope that I nearly threw out by accident. Happened to look inside and lo and behold, there's gold inside!

DM tells me that when I was born, my GGF gave me some gold as a gift but after all these years, DM can't remember where she put it. So maybe I'll get lucky again and find more gold when I clear out her stuff.

 

[Montecfo]

Yes. 30 ounces in gold coins we bought mid-2003 for around $350 as I recall. I remember driving to a dodgy-looking warehouse in downtown to pick up the coins from a man seated behind bullet-proof glass window. DW and I had maybe $500k NW at the time so the coins represented around 2% of our NW. Needless to say, I was more than a little nervous driving home.

I have another 5 ounce gold bar that DD left me when he died. I stuffed it in a drawer years ago and totally forgot about it, and only found it again last year when I was clearing out my desk drawers. The darn thing was in an old envelope that I nearly threw out by accident. Happened to look inside and lo and behold, there's gold inside!

DM tells me that when I was born, my GGF gave me some gold as a gift but after all these years, DM can't remember where she put it. So maybe I'll get lucky again and find more gold when I clear out her stuff.

Is this as inflation hedge? Or as emergency currency. Seems to not work well as emergency currency.

Thanks for the details. Just curious.

 

[copyright1997reloaded]

Is this as inflation hedge? Or as emergency currency. Seems to not work well as emergency currency.

Thanks for the details. Just curious.

You won't know if it works as emergency currency....until there is a true emergency. No, a hurricane or loss of power doesn't qualify.

However, 1 oz. gold coins are problematic in terms of being a lot of buying power. That is why many people buy silver or fractional. On the fractional front, I happen to like things like the 50 x 1 g Valcambi Gold CombiBar.

However, the premiums are higher on these...but considerably lower than buying 1 gram at a time.

I guess like fiat money, if you were going to keep a lot of wealth in something like gold, one approach is to have some big bills (e.g. a kilo bar of gold is about 65-66K $), some medium sized denominations (e.g. 1 oz coins), and then some "spending money" in fractional (e.g. combibar, 1gr maple leafs, or perhaps silver coins).

ETA: Here is the 10x 1/10th oz combi:

and 1 gr Maple Leaf's: (25x 1gr, cute little things!):

 

[luckydude]

You won't know if it works as emergency currency....until there is a true emergency. No, a hurricane or loss of power doesn't qualify.

However, 1 oz. gold coins are problematic in terms of being a lot of buying power. That is why many people buy silver or fractional. On the fractional front, I happen to like things like the 50 x 1 g Valcambi Gold CombiBar.

However, the premiums are higher on these...but considerably lower than buying 1 gram at a time.

I guess like fiat money, if you were going to keep a lot of wealth in something like gold, one approach is to have some big bills (e.g. a kilo bar of gold is about 65-66K $), some medium sized denominations (e.g. 1 oz coins), and then some "spending money" in fractional (e.g. combibar, 1gr maple leafs, or perhaps silver coins).

ETA: Here is the 10x 1/10th oz combi:

and 1 gr Maple Leaf's: (25x 1gr, cute little things!):

These are great recommendations. Thank you!

 

[luckydude]

Is this as inflation hedge? Or as emergency currency. Seems to not work well as emergency currency.

Thanks for the details. Just curious.

No, it's not for inflation hedge. I think gold is a terrible inflation hedge. It's more for emergency/sh*t-hits-the-fan/gotta-get-outta-town-in-a-hurry kind of currency.

I remember back in the late 70s and early 80s when there were stories of Vietnamese refugees using gold to buy passage on boats to escape communism. I figure gold would be useful in situations like that, not that I expect it would happen here in the US. But one never knows, so it's good to have them around just in case.

Right now of course my gold coins just sit around collecting dust, but I remember a few years back when my kids were really into Monopoly, I would take them out and use them as $500 Monopoly money for our games. It was loads of fun to play with real gold and my kids got a huge kick out of it.

 

[SecondAttempt]

A default will damage the USA's credit rating and wouldn't that negatively affect what we pay on the interest of our debt? Given the astronomical magnitude of current debt, I can't imagine either side would let this happen. However, spending beyond our means cannot go on indefinitely and major reduction in spending is inevitable.

It is disappointing that it has come to this. I wonder how the 14th amendment would come into play?

"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. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void."

I would not be surprised to see the administration sue Congress if there is shortage of money to pay debts. I can't recall any time any administration has sued Congress but there are plenty of times Congress or even a committee has sued an executive agency so I suspect it is possible.

I think the experiences in 2011 and 2013 demonstrated the Congress will get the blame in the end.