Debt ceiling strategy

[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]

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]

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:

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/druckenmiller-warns-us-debt-crisis-185540149.html

 

[rmorris50]

US will pay its bills, and will continue to slowly default the way it always has, via inflation.

Unless I should start investing in guns, ammo, medicine and vodka I’ll say the course.

 

[copyright1997reloaded]

US will pay its bills, and will continue to slowly default the way it always has, via inflation.

Unless I should start investing in guns, ammo, medicine and vodka I’ll say the course.

You know, it isn't a binary decision. That is, one can have both guns AND butter (Econ 101 from long ago, now they use two goods like "education or hospitals".)

So buy some guns/ammo AND vodka. Just don't use both at the same time.

 

[aaronc879]

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?

I did that exact thing last week. Not saying it's the right call for everyone but I think it was for my situation. By cash I mean MMF.

 

[Car-Guy]

This was an interesting read (to me anyway) about who owns the US debt. Helped me understand some general questions I had about the debt too.


https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124

 

[Free bird]

I did that exact thing last week. Not saying it's the right call for everyone but I think it was for my situation. By cash I mean MMF.

So Aaron I’ll put you in the sell in May camp. It might be a good move.

 

[copyright1997reloaded]

This was an interesting read (to me anyway) about who owns the US debt. Helped me understand some general questions I had about the debt too.


https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124

An interesting tidbit from the article:

The Fed purchased Treasurys from its member banks, using credit that it created out of thin air. It had the same effect as printing money.

This is the game in a nutshell. The government runs deficits. The treasury borrows money to finance government (given the deficit). Banks loan money to Treasury by buying Treasuries. The banks then take the treasuries and sold them to the Federal Reserve, who paid with magic pixie dust (i.e. they simply created "money" (i.e. a credit to the bank selling them the treasury)).

All is great in the land of fiat currency! No new factories, no new food, no new goods or services. Just more money (aka QE).

It is all fun and games until the music stops. As long as those other countries who use dollars as a medium of trade go along, all is good. Use those virtual pieces of paper to buy (import) more stuff from those willing to make things for our magic paper.

p.s. I have no idea of if or when the music will stop. However, I feel/think/believe that like most end of the empire scenarios, the downfall comes slowly for a long time, reaches a tipping point, and then things happen quickly. What that tipping point is, whether it will be soon, in my lifetime, or not in many lifetimes to come...I have no (real) idea.

 

[luckydude]

IMO, in the very unlikely event that there's a default due to partisan politics, the financial market will be clobbered. There will be a lot of panic selling, and losses will be amplified for those who invest through mutual funds. In that case, it is prudent to have big pile of cash to ride out the market turmoil without being forced to liquidate into the down market.

I think non-financial hard assets will hold up relatively well. RE should hold up well (it's hard to panic sell RE unless one really needs liquidity). Gold should do quite well as an alternate store of value. Other things like artworks and collectibles should also hold up their values.

DW and I have roughly 78% of our assets in different types of RE and only 15% in the financial markets. We also recently increased our cash allocation to roughly 13x our annual expense (as part of our on-going effort to divest from some legacy RE holdings) so I think we're well-positioned to weather any market turmoil.

DW and I started getting into some foreign RE a while ago and if debt default does happen, we will certainly allocate more resources in that direction as a hedge.

 

[luckydude]

...

p.s. I have no idea of if or when the music will stop. However, I feel/think/believe that like most end of the empire scenarios, the downfall comes slowly for a long time, reaches a tipping point, and then things happen quickly. What that tipping point is, whether it will be soon, in my lifetime, or not in many lifetimes to come...I have no (real) idea.

+1

No country can stop on top forever, that's for sure. Ancient Rome, Imperial China, Ottoman Empire, the list goes on...

We in the West have come to take Western hegemony for granted given our run of economic dominance over the last couple of centuries, but history tells us that for much of the last 2,000 years, China and India had by far the two largest GDPs relative to the rest of the world. As late as the 1820s, when Industrial Revolution was in already full swing in the west, China and India were still #1 and #2 in terms of GDPs.

https://www.newgeography.com/content/005050-500-years-gdp-a-tale-two-countries

Can the US buck the historical trend and stay on top forever? I wouldn't bet on it.

 

[Free bird]

A strategy I’m using is putting money in what’s called cash deposits instead of a money market fund. It pays less but under a default scenario it is FDIC insured & the money is spread out in the banking system.

 

[Sunset]

A strategy I’m using is putting money in what’s called cash deposits instead of a money market fund. It pays less but under a default scenario it is FDIC insured & the money is spread out in the banking system.

But under a default situation, does the FDIC actually have the cash to pay you.
Where is the FDIC money, do they have it all in short term treasuries (which won't be paid during default).

Same with MMF's, if the cash in the MMF is in treasuries then it won't actually be accessible.

 

[SecondCor521]

If things do get drawn out to where the extraordinary measures don't work, I'm confident that the government will continue to pay the most critical bills.

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 don't know what they would prioritize, but I would imagine interest on the debt would rank fairly high. That's 8%.

I think Social Security would be next. That's 19%.

The difficulty lies after that. Medicare, Medicaid, national defense, and "Income Security" are all important to many people but would push the ongoing amounts over 2/3.

I don't know what they'll do. My key point is that we don't go from 100% to 0% in a day if the debt limit is reached. We go from 100% to about 67% in a day. Which is still a lot but not as catastrophic as the Treasury being unable to pay interest or principle on a Treasury note or bill.

 

[Free bird]

But under a default situation, does the FDIC actually have the cash to pay you.
Where is the FDIC money, do they have it all in short term treasuries (which won't be paid during default).

Same with MMF's, if the cash in the MMF is in treasuries then it won't actually be accessible.

The cash deposit strategy certainly isn’t perfect. Of diversification means anything it makes sense. The money is spread out among 10 banks that hold assets other than treasuries. The rate of return is less than a money market fund so if you believe you get paid for risk then it’s theoretically safer than a money market fund. The money is liquid & is not subject to being gated or being subjected to liquidity fees that a money market is subjected to. In a worst case scenario it is a strategy that is valid. There is no air tight strategy to protect against financial nuclear war.

 

[Free bird]

There is currently a 150 bp spread between the cash deposit account & the money market account at VG. That’s a big spread. The reasons for the spread are partly or all due to the current risk of default & ability to access funds in the event the US becomes a dead beat country. Cash deposit accounts have only been available at VG for four or five months. There is a demand for the product or they wouldn’t offer it.

 

[Free bird]

Apple has a savings account paying pretty good. Another way to diversify away from treasuries. As it turns out there’s a lot of places to put money if the US decides it can’t control its credit card habit.

 

[jebmke]

But under a default situation, does the FDIC actually have the cash to pay you.
Where is the FDIC money, do they have it all in short term treasuries (which won't be paid during default).

Same with MMF's, if the cash in the MMF is in treasuries then it won't actually be accessible.

if there is a real default, which seems highly unlikely, no place is safe. There may be some short term "check kiting" type stuff. Rates in the 2-3 year range where I am are pretty normal.

An interesting strategy written about (I forget where) is for them to issue some premium bonds to get around the numbers. Not sure that gets them more than a few days or weeks or even if it really works at all.

The only truly safe place is Slim Jims and freeze dried water.

 

[Free bird]

if there is a real default, which seems highly unlikely, no place is safe. There may be some short term "check kiting" type stuff. Rates in the 2-3 year range where I am are pretty normal.

An interesting strategy written about (I forget where) is for them to issue some premium bonds to get around the numbers. Not sure that gets them more than a few days or weeks or even if it really works at all.

The only truly safe place is Slim Jims and freeze dried water.

no processed meat for me. We all know the drill here. It’s the same every time. Why do we play this game? We either like it or aren’t smart enough to find another game. Money in a safe at home is a strategy that has worked in the past. No you don’t get interest or growth but if you think it will disappear or you won’t have access to it it’s an option.

 

[jebmke]

no processed meat for me. We all know the drill here. It’s the same every time. Why do we play this game? We either like it or aren’t smart enough to find another game. Money in a safe at home is a strategy that has worked in the past. No you don’t get interest or growth but if you think it will disappear or you won’t have access to it it’s an option.

When the pandemic hit, in March, 2020 I withdrew $500 and put it in my metal lock box in my closet. What an idiot I was - I still have $460 in there. It will probably be there when I die.

 

[Free bird]

When the pandemic hit, in March, 2020 I withdrew $500 and put it in my metal lock box in my closet. What an idiot I was - I still have $460 in there. It will probably be there when I die.

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

 

[jebmke]

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

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.

 

[donheff]

There is currently a 150 bp spread between the cash deposit account & the money market account at VG. That’s a big spread. The reasons for the spread are partly or all due to the current risk of default & ability to access funds in the event the US becomes a dead beat country. Cash deposit accounts have only been available at VG for four or five months. There is a demand for the product or they wouldn’t offer it.

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.