WatchIf the unexpected happens, if Congress fails to balance the budget or raise the debt ceiling by August 2, where should investors put their money and what should they avoid?
Obama has stated that he'll veto any attempts to delay balancing the budget and postponing the debt ceiling decision.
Assuming that talks fail, and the U.S. at least temporary "defaults" or misses a payment on its loans, which assets will rise and which will fall?
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Patrick says
In many ways I can see democracy as being better than a republic. However, I would have one concern. Even a slight majority in such a system could greatly abuse minority positions and the rights of individuals.
For example, in the 1960s would desegregation have been allowed if it were up to a popular vote? What if popular vote said that creationism (or its new name Intelligent Design) should be taught instead of evolution?
Perhaps a democracy with severe limitations on government would be better. Let's say that the government derives his authority from the people. If so, the people can't give government any rights that the people don't themselves posses. After all, you can't give someone something you don't have.
So, the government can't do anything that ordinary civilians can't. If I don't have the right to kill you (except in defense and only if necessary), I can't give that right to the government. Ergo, the government isn't allowed to kill (except in defense and only if necessary). Thus capital punishment would be illegal.
So would just about any search and seizure, eminent domain, prohibitions on drugs, imposing tariffs, and pretty much most of what our government does.
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common_sense says
What's the Canadian government's stance on inflation (money printing)? Do they just follow the U.S. or are they more sensible?
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Greek Debt. Currently paying about 25% for 1 year maturation. Germany will pay it, because it's a pretty small price tag.
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I'd have to say the only place I feel confident in putting new money into right now is gold and real estate.
I still have stock positions, but they are about 50% of what I had 6 months ago and 30% of what I had a year ago.
The US bond market is being held up by flight from all other bond markets. Eventually it will be our turn so I will continue to believe bonds are death.
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rocketjoe79 says
What's the cost to Germany to bail out Greece, Spain, Portugal, Ireland, and Italy?
Who's going to bail out United States banks who hold billions of dollars of credit default swaps on all the above nations?
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Argument for buying Greek debt: Germany will bail out Greece regardless of how reckless doing so is.
Argument against buying Greek debt: It's all a Ponzi Scheme and you're a late investor.
It seems that most economist believe that Greece will "restructure" it's debt. I.e., Greece will partially but not completely default on its debt by paying N cents on the dollar, paying a lessor interest rate than promised, or both.
So don't expect 24% return as promised. There is no guarantee that the return won't even be negative after a "restructuring".
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iwog says
THAT is the question of the decade.
Answer to that is happening already right now. More stimulus is on the way. Banks will be in the way of the stimulus and take all the money up front from the Fed and continue their rampant speculation, without doing anything meaningful for economic recovery.
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Hugh Manatee says
Ummm, gold at about $275/oz when Bush took office and almost $900/oz when he left. That's a 227% increase vs. 75% for Obama. What is your point?
Troy says
Worked out quite well for our economy.
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Patrick says
Patrick makes a very good point. It is quite risky to make an investment you don't understand.
Patrick, my guess would be that the price of the fund tracked EXACTLY what was promised. TBT tracks the DAILY price change in Treasuries. Actual quote from ProShares: "This ETF seeks a return of -200% of the return of an index (target) for a single day." [emphasis in original source]
What people try to do instead is try to make longer term investments in these sorts of funds. That is exactly the wrong thing to do because it will cause tracking error, and you are almost guaranteed to lose money relative to the intended index even if Treasuries tank. The more volatile the trading in that commodity, the more you will lose. Look at this article -- there are many others on this principle:
http://seekingalpha.com/article/70585-proshares-ultra-and-ultrashort-sector-etfs-does-2-2
What these funds are intended to do is to provide liquidity to someone making a daily transaction. As such, if you are an institutional trader, you can use it for a daily hedge.
Ultrashort funds are not designed for long-term investments unless you are willing to eat the losses of tracking error. You may still end out ahead if you make the right bet, but you will not get 2X or 3X what you think you're getting.
Just to give an alternative viewpoint, this dude likes them:
http://seekingalpha.com/article/126765-leveraged-etfs-is-tracking-error-really-so-troublesome
However, even he admits that the tracking error means you won't get 2X or 3X. In fact, the longer you hold the investment, the more you will deviate from 2X or 3X.
Read your prospectus!
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Dan8267 says
Are you joking?
http://www.fintrend.com/inflation/images/charts/M3%20Money%20Supply/M3_Money_Supply_chart.htm
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thunderlips11 says
I realize you were trying to make some sort of decentralization argument with the stuff about direct democracy and Jefferson, but you can't be serious about Wikipedia. It is HIGHLY HIGHLY regulated by a small group of dictators. Nothing arises spontaneously and pedantic points about formatting are debated incessantly and highly regulated with arcane terminology.
Also, what Troy said. If you are trying to use Wikipedia as an example of populism, you don't know Wikipedia.
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Patrick says
But Patrick, Switzerland has BETTER direct democracy, than say California. The Economist recently did a special section about this. Here is an article from it:
http://www.economist.com/node/18548119
In fact, for those of you who think our Founders knew best and that the englightenment was the pinnacle of thinking and that libertarianism is awesome, the Swiss direct democracy system better incorporates the principles espoused by our Founders than California's flawed direct democracy system.
The problem is that the Swiss designed a better system from the start, to avoid tyranny of the majority (to avoid the problems that dan8267 mentioned) and to avoid entrenching bad decisions that can't be changed easily. Switzerland has safeguards, such as requiring a majority of cantons to agree as well. In addition, after an initiative is passed, the legislature has an opportunity to make a counter-proposal, so that the process encourages compromise in a manner that must still maintain consensus. Sometimes the counter-proposal is so good that the original proponents withdraw the ballot proposition! Could you ever imagine that happening here?
California's system was designed specifically to be *reactive* instead of proactive, by reacting to the perceived tyranny of Southern Pacific. As such, the California system is quite short sighted and has a lot to do with why we're in the mess we are today. It's almost impossible to reverse a bad decision without another flawed proposition (so that Southern Pacific couldn't beat back something it didn't like easily), and the system has been captured by the exact special interests it was meant to defeat! Fail-fail!
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iwog says
Aren't those opposite bets? It seems like your concern is that our government will lose control and die in fiscal hell. This might make gold prices go up, but won't it tank real estate, given that real estate is propped up by government right now and the mortgage market on which it depends is largely run by the government? Sorry if I missed a prior thread that explains.
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@solar man
You've got that right! The debt ceilling posturing currently going on is a blip in comparison to the coming hyperinflation.
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corntrollio says
Ultimately real estate will always be a hard asset that earns a return. Up to 50% (depending on the area) of real estate is purchased with cash now. Government manipulation of the real estate market is already a much reduced factor and will be even more irrelevant as time goes on.
All wealth springs from the land. Buying real estate also allows me to short the dollar in the form of borrowing long term mortgage debt. That's a win win in my book.
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Iwog,
What do you think of REITs? Isn't it very similar to buying real estate, except you get more liquidity, diversification and you can invest a smaller amounts
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corntrollio says
I'm going to have to call into question the data you got from Shadow Statistics. I know they are like the only people trying to guestimate M3, but I find it hard to believe that the money supply has contracted by over 5% recently.
First, if the money supply was going down especially that fast, the price of gold would be going down, not up. Second, prices of almost everything is going up, not down as would be the case in a deflationary environment.
Third, as Ron Paul stated, during the stimulus we have added $5.3 trillion to the money supply since 2008.
"I look back on our past three years. What Congress has done, what the Fed has done. We've literally injected about $5.3 triillion." - Ron Paul, July 13, 2011
Fourth, Ben Bernake is continuing his policy of quantitative easing, i.e. money printing.
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xlr8 says
I think REITs are fine as long as they are invested in real estate and not mortgage bonds. I'd also be careful about when they bought most of their inventory.
The ones invested in mortgage bonds are paying sky high dividends right now because of the yield curve, but I don't think that it's going to be sustainable.
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Troy says
Yeah, this is five trillion dollars per year including unfunded liabilities according to John Williams of Shadowstats.
“The actual deficit, including the increase in the unfunded liabilities for social security and medicare that we go through each year, have us looking at an annual deficit of four to five trillion dollars. So the small cut being proposed of four to five trillion dollars over ten years is not going to do much to bring the system into balance." --John Williams
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/7/11_John_Williams_Exclusive_-_US_Dollar_Selling_%26_Hyperinflation.html
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Patrick says
A better solution would be to restrict each and every bill proposed to no more than 2 pages.
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theoakman says
Better also specify the font family and size, the size of a "page", the use of abbreviations and codes, the use of references to other bills, and perhaps other things that could turn a 2-page bill into a 100-page one when decompressed. You can bet the lawyers and lobbyists will try every trick they can think of.
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corntrollio says
I didn't mean populism for Wikipedia, but what decentralization can do. Feudal lords were decentralized, so not necessarily democratic, although I do like the two together.
I have heard about Wiki-editor elites throwing their weight around, but thought it was confined mostly to controversial topics.
Anyways, I enjoy using this site:
http://wikiscanner.virgil.gr/
Helps track where/who is making wikipedia edits. Funny, people in McLean County Virginia sure love to edit Wikipedia. :)
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Debt-free Renter says
Well, for one long-run the social security shortfall is 1-2% of GDP, about $200B/yr, not trillions a year now. Counting Medicare blowing up (as scheduled) and taking 30% of GDP or whatever is simply lying with numbers.
It is politically and financially impossible for senior health care to take that much out of our economy. Every doctor would be a billionaire and every nurse a millionaire.
We'll get reform before then and anyway "future liabilities" are not today's deficit. Technically we cannot really save for future liabilities (we cannot pre-position health care goods and services nor pre-bank future retirement checks), we have to pay them as the bills come due from the economy as it is then regardless of how we budget for them now.
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thunderlips11 says
As someone who has studied, used, and written distributed algorithms and distributed systems extensively, I would not consider Wikipedia to be a decentralized system at all. Just using crowdsourcing to a limited extent does not make a system decentralized. Crowdsourcing is an orthogonal issue as we say in the software business.
A prime example of a distributed system would be ants searching and foraging for food. Each individual ant is really dumb, but collectively they can process a lot of area efficiently. This is done by searchers reporting two pieces of data to other ants: how far away is a food supply and how rich is the supply. Through a distributed "voting" system, the worker ants then decide on which food supply to pursue and which route to take.
Another example of a distributed system is a peer-to-peer file distribution system like BitTorrent. Unlike the original Napster, there is no central server to take down, thus making BitTorrent a much harder if not impossible target for government crackdowns.
A third example of a commonly encountered distributed system is the Domain Naming System or DNS that we all use to go to websites by name instead of IP addresses. However, it is not a decentralized distributed system like the last two examples I gave because it uses a hierarchy of servers.
Wikipedia neither meets the definition of decentralized or distributed.
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iwog says
If you think government manipulation the real estate market is "a much reduced factor," then we don't even live on the same planet. The intervention in the securitization market plus rampant subsidies for various things say that's not true.
Also, real estate is typically defined as a building plus land. Land can lose value and so can a building.
Dan8267 says
You can freely call Shadow Stats into suspicion. I think some of their stats are faulty for sure. The numbers don't add up in some cases -- for example, you'd have to engage in significant ret-conning to get some of Shadow Stats' numbers to make sense relatively to history. However, the price of gold doesn't have to be correlated to money supply (sorry, gold bugs), and prices are not necessarily going up -- inflation is rather low right now. In addition, M3 is a broad measure, and the destruction of credit can result in lower M3, no?
In addition, it's not like M3 hasn't gone down before:
http://en.wikipedia.org/wiki/File:Us_proportionate_m3.svg
thunderlips11 says
Yes, feudalism is basically what libertarianism espouses. We've tried that before, and it doesn't make sense, especially on any large scale. Anyway, Wikipedia is a terrible example of decentralization. That may have been true in the early days, but it's basically run by a cabal now. Most things that are decentralized get run by lords and mafias and cartels.
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corntrollio says
Yes, the destruction of credit is suppose to be the mechanism to lower M3. In fact, the creation of credit and the destruction of credit are suppose to cancel each other out in the long run. That's how the politicians sold the creation of the Federal Reserve back in 1913. It was suppose to: preserve the value of the dollar, keep interest rates relatively constant, and maintain a business environment that ensures close to full employment. It has failed on all three parts.
Based on price trends and everything coming out of Washington, I believe that quantatitive easing and the bailouts have outpaced the destruction of credit. In effect, the government has transfered all the bad debt from the banks to the taxpayers. The losses will still occur, but they will be burdened by the poor and middle class over a long period of time instead of by bankers over a short period.
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thunderlips11 says
Any topic that talks about a person, a company, a country, or that affects the profits of a company or the politics of a nation is a controversial topic on Wikipedia. Basically, anytime public perception can affect a person's carrier or a company's bottom line, a Wiki page is going to be controlled.
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corntrollio says
You need to provide some examples if you're going to disagree with me.
For the 25-50% of modern real estate transactions that are all cash, the government has no role whatsoever.
Government mortgage insurance is currently worth about .5% on the price of a loan. That means a government backed conforming loan might cost 4.5% while a jumbo loan without any government involvement would cost 5%.
Regarding the securitization market, there is no government involvement on current loans other than guarantees. (which as I said prior is worth about .5 points) All toxic debt on the books was written 4 or more years ago. Factors that helped cause the bubble in the first place are no longer part of this economy.
As I said, government is a much reduced factor and may soon be totally irrelevant.
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You people realize that the M3 exploded off the map from 2005 to 2009, growing far faster than any other measure of the money supply at double-digit rates, and only declined 5% in 2010 before turning upward again right?
I'm not aware of any points that can be made about the M3. It's mostly a measure of cash flows in and out of the country and a very poor measure of the overall money supply. We are in a period of high money supply growth, not a contraction, and certainly nothing that would be deflationary.
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iwog says
So, in 2010, apparently 28% of transactions were all cash?
http://online.wsj.com/article/SB10001424052748704570104576124502975117950.html
Let's ignore the fact that several of those later took out mortgages, just to make this simpler.
You think government guarantees are worth 0.5 points and that's it? You're deluded if you think that. The jumbo loan has implicit backing evidenced by massive bailouts. A large part of the mortgage market is government, and without guarantees there would be a lot less securitization. Again, first source out of Google:
http://blog.alexanderhiggins.com/2011/03/02/97-of-all-u.s.-mortgages-are-backed-by-the-government-8175/
A HUGE percentage is backed by the government. If the private market went back into loans full scale with no guarantees and no subsidies, they would charge a much higher risk premium than currently being charged vis-a-vis 10-year Treasuries. Why? Because risk is higher than was being priced in before.
In addition, government action is propping up high priced markets. In San Francisco, the superconforming limit is still well above $417K and will be for the near future. This props up prices currently up to about $1.0-1.1M or so from my observation.
You are really the only person I've heard who suggests that government is in any way kicking out of the housing market.
And that even ignores obvious things like mortgage interest deductions, Prop 13 in California, etc.
In addition, we're talking about the housing market. You only need intervention on the margins because the housing market is so illiquid. It's the same way a small number of people, relatively speaking can drive up or down housing prices, because there are so few transactions in any given year, and it's not a liquid market.
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corntrollio says
Your source has nothing to do with your premise. You THINK that jumbo loans have implicit guarantees of bailout money, but you have no way to prove it. The real situation is represented by premium over bond rates. Right now there's more cash than anyone knows what to do with (ignoring anything from the government) so bond prices are at record lows.
So are mortgages. This does not change if the government pulls insurance money. Mortgages worldwide are valued according to alternate investments. They have nothing to do with Freddie and Fannie.
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iwog says
No, I'm saying in fact that jumbo loans HAVE been implicitly guaranteed and are still being implicitly guaranteed and will likely be implicitly guaranteed again. See banksters v. US Government.
So guarantees have nothing to do with risk and risk has nothing to do with reward. Got it, sir.
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corntrollio says
Right......because jumbo failures will be bailed out by the U.S. government. I don't know how it works in your world, but in my world banks don't make loans assuming they will default. I dismiss your premise entirely.
corntrollio says
You're pretending that the rest of the world conforms to the U.S. system.
I'm trying to educate you that elsewhere in the world, mortgage money can actually be CHEAPER than it is here, even without any public insurance at all.
Japan being a prime example.
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Dan8267 says
corntrollio says
Thanks guys. Definitely changed my perspective.
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iwog says
Yeah, go ahead and tell me that the government is leaving housing markets when the government actually leaves housing markets and I'll believe you. :) I think we can agree to disagree here and can talk about this 3 years from now or something and compare the situations. Deal?
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Works for me, if we still have an economy 3 years from now.......
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Um, Congress has mandated how much must be spent by law. Money was spent in accordance to law. Congress has failed to provide the revenues for the legally required spending levels.
I don't think Obama will cave. He is an incredibly shrewd risk taker and the President who risked it all to kill OBL.
Republicans will cave and a deal will be reached in mid August after the media shit storm. Republicans will not get half the deal they were originally offered.
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American in Japan says
The republican party is in a severe intellectual and logic
recession/depression.
Troy says
??
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well, oil's up 4X, cocoa's up 3X, rice's up 3X, wheat's up 2.5X, beef's up 2X, sugar's up 3X, nickel's up 3.5X, copper's up 5X.
I should have said "3-5X" I guess.
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marcus says
mebbe this is a decession now. "re" means back. "de" means down of course.
heh, I'm late:
http://globaleconomicanalysis.blogspot.com/2008/05/mike-morgan-decession-or-depression.html
Mike Morgan was a good guy. His hair was on fire in mid-2008, that's for sure. IIRC he called the S&P crash months ahead.