Tuesday, July 26, 2011

Fear Mongering Tuesday.

Last night I read an interesting theory.

If the debt ceiling is not raised, then bonds get downgraded. People sell bonds and move the money to equity. If the debt fiasco is sorted out, then we have a rally in any case because of higher asset allocation in shares. It seems stocks and bonds are going to move in tandem. 
Not sure I buy into this theory.

However, one thing I am sure, USA cannot afford higher interest rate on its bonds. So the moment 10 year rate crossing 4%, we can be sure of a market crash. So that people panic and go back to bonds. In any case, we are getting closer to a major crash when the rich Banksters will shout QE 3.

For now, month end asset allocation is coming up. I think 27th July to 2nd of August will be quite interesting period of the stock market.

Market is assuming that the real showdown is next year and so it is not yet that much worried about the debt ceiling issue. Assuming the worst, in the short run, where will all the money go? In stocks or bonds of other countries?  Not a chance by long shot. Perhaps the yields will go up, but then life continues. At least in the short run.

From Bloomberg : The U.S. government can avoid a default for at least a month after the Aug. 2 deadline to lift the debt ceiling set by the Treasury Department, said John Silvia, chief economist at Wells Fargo Securities LLC.
“The Federal Reserve and the Treasury can work together to generate enough cash probably for the next two or three months to avoid any kind of automatic default on the Treasury debt,”

Greater-than-forecast tax revenue might give the Treasury until Aug. 10 before it runs out of cash, Barclays Capital said in a report last week.
So you see, August 2, is just a self imposed deadline by the politicians for the game.
More from Bloomberg: “It’s very unlikely that we’re going to default,” Silvia said. The Treasury already has “cash flow that’s available” to last two weeks after Aug. 2, before resorting to any special measures.
Even if the two parties fail to reach an agreement to raise the debt ceiling in time, officials will still be able to stave off a default for at least a month, Silvia said. Bond investors have realized they will probably still get paid in the event the impasse goes past the deadline.”

Michael Feroli, chief U.S. economist for JPMorgan Chase & Co., said a Fed contingency plan could allow banks and other financial institutions to temporarily lend their Treasury securities to the Fed in exchange for cash. Such a move would be aimed at easing any credit strains caused by a default, he said.
“In general, I think they’d want to temporarily substitute the Fed’s credit in place of the Treasury’s credit,” Feroli said.

The long and short of it, what you hear is not the complete truth. There are many shades of gray which we don’t see or know. But the people with serious money have already thought about it. If they have not panicked yet, why would you? I am not saying that you do not have serious money, but I am sure your investment advisor has already told you what I am telling here.

As I keep telling people, this is not an investor’s market. We have to be nimble to get out at a short notice. Things can turn ugly very quickly. But bear markets are not televised in real-time. Therefore I am still long and will remain long for a while more.

I wrote last night, I do not expect much of fireworks today. Perhaps from tomorrow onward. In the mean time just sit tight and let the fear pushers do their daily job. The US $ is down and Euro is up. Can I say, I told you so!

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Be safe out there.