“Default” isn’t really the issue, even though that is the term that the Administration and media use to describe October 17, the estimated date when the debt-ceiling is reached.
The executive Branch (Treasury) piles fuel on the fire by
claiming (from CNBC) that “…1) their payment system isn't set up to choose
which bills to pay and 2) they have no legal authority to allocate money to pay
bond investors and not, say, Social Security beneficiaries. That's Congress's
job.” Quote from CNBC at…http://www.cnbc.com/id/101087349
While that may be partially true, it is also true that
when the Government hits the debt-ceiling, Treasury does retain the authority
to pay its obligations on previously issued debt; but it loses the ability to
borrow more and increase the debt. I suspect that “default” to existing bond
investors is illegal given that those obligations have already been incurred in
“contracts” (treasury bonds/notes) with mostly foreign Governments. These treasury debts would not be subordinate
to other debts not yet incurred such as existing contracts. We’ve seen Treasury use this philosophy
throughout the recent banking crisis as Bond holders were spared from losses
during the bank bailouts. I’m not alone in this belief. ZeroHedge says Treasury
probably does have the ability to prioritize payments. See ZeroHedge
at…
http://www.zerohedge.com/news/2013-10-07/prioritization-payments-would-they-could-they)
I’ve seen other discussion about how the Executive Branch
could simply ignore the Debt ceiling and continue to borrow. The argument here is that Congress’ failure
to increase the debt-ceiling creates a Constitutional conflict since the
Congress has passed laws directing programs to be accomplished, but has
withdrawn funding by not raising the debt-ceiling. With this “conflict” (so the argument goes)
the President could choose how to violate the Constitution, since both
alternatives (do the work or continue to issue new debt) supposedly violate the
Constitution. That is not entirely
correct: it takes two acts of congress to accomplish anything. Congress must grant Authority through an
Authorization Bill and later, funding through an Appropriations Bill. If funding is not forthcoming, the Executive
branch can’t do the authorized work.
(This happens all the time – projects are authorized, but not funded or
partially funded.) A failure to raise the debt ceiling is the same as failing
to appropriate sufficient funds, except that it covers the entire budget, so
there is only one legitimate alternative.
If Government can’t borrow more, it must instantly
balance the budget. That has a certain appeal to some budget extremists, but
the impacts to the economy would be huge if the government were to balance its
budget instantly. All sorts of contracts
from planes to aircraft carriers would be suspended; most Government employees
really would go home; Government research would stop; mass hysteria; dogs and
cats living together…you get the idea.
Estimates are that GDP would drop (I think I saw an
estimate of minus 4%) and create a sharp recession probably worse than the
Great-Recession.
BANK OF AMERICA REPORT – 2-WEEK SHUTDOWN AND CUTS GDP
FORECAST (ZeroHedge)
“The bank's base case now calls for "either a
two-week shutdown or for multiple shutdowns." Additional, BofA has now cut
its Q3 GDP forecast from 2.0% to 1.7% and from 2.5% to 2.0% for 4Q. It gets
worse: "Much worse outcomes are
possible. In our view, agreement is almost impossible as long as the Affordable
Care Act is on the table." Finally, and what ties it all
together, is that as a result of the lack of "government data", BAC
now expects the Fed to delay tapering to their January meeting, or later.”
Story at ZeroHedge at…http://www.zerohedge.com/news/2013-10-05/depressed-bank-america-predicts-agreement-almost-impossible-long-obamacare-table
WHEN WILL THE NEXT US RECESSION COME? (CNBC)
“The overwhelming majority of mainstream economists
predicts that the world's biggest economy should have at least another two
years before it runs into six months of negative growth (the official
definition of recession). After 2015, however, the date for the next recession
could be any time between the end of 2015 to 2018, according to economists'
forecasts…"Ben Bernanke may be a remarkable man, but we are asking a bit
much to assume he has abolished the business cycle and created the nirvana of
never-ending growth," Robertson added….Historical data show a recession in
the U.S. on average every 6-7 years since 1947, and double-dips within eight
years of big recessions like the Great Depression.” Story at CNBC at…http://www.cnbc.com/id/101090773
MARKET REPORT
Monday, the S&P finished down 0.9% to 1676 (rounded) at the close.
VIX rose 16% to 19.41 as the level of fear continues to
rise.Monday, the S&P finished down 0.9% to 1676 (rounded) at the close.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks advancing on the NYSE
fell to 47% Monday from 49% Friday. (A
number below 50% for the 10-day average is generally bad news for the market.)
New-highs outpaced new-lows Monday, leaving the spread
(new-hi minus new-low) at +10 (it was +114 Friday). The 10-day moving average of change in the
spread is minus 3. That just means that over the last 10-days, the spread has
been getting worse.
Market Internals are Negative on the market for this
short term indicator.
NTSM
Monday, the overall long-term NTSM analysis remains HOLD at
the close. MY INVESTED POSITION
I remain about 20% invested in stocks as of 5 March (S&P 500 -1540). The NTSM system sold at 1575 on 16 April. (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!) I have no problems leaving 20% or 30% invested. If the market is cut in half (worst case) I’d only lose 10%-15% of my investments. It also hedges the bet if I am wrong since I will have some invested if the market goes up. No system is perfect.
