Monday, October 7, 2013

Congressmen Drink and Asia is on the line as half of US Companies Plan to Dump US Treasuries

10/7/2013 Portland, Oregon – Pop in your mints…

We recently saw reports that a number of Congressmen reeked of alcohol as they exited the chambers the night the Government shut down. Apparently the only thing worse than the pressure of public office is these days is having to face it sober.

We have been here before, you can read our commentary from the days when the minority in Congress realized they could hamstring the majority because the country lacked fiscal disciplineback in 2011, and all of this innocent bickering began:

US Debt Ceiling Vote to Ignite Armageddon in Bond Markets?

This time, as both sides appear to be playing a dangerous game of chicken, the dire warnings of what will happen should the government default appear to be reaching a deafening crescendo. The Chinese and Japanese governments, both large holders of US Treasury paper, are both pressuring Washington for some sort of assurance on their “Investments.”

US Financial Executives are also beginning to worry.  In a recent survey on the perceived effects of a hypothetical debt ceiling breach, the Association for Financial Professionals summarized the survey responses as follows:

“A default would make U.S. Treasury securities, an investment vehicle used in many companies’ short-term investment portfolios, far less attractive. The survey found that one-sixth of U.S. organizations currently holding U.S. Treasury securities would shift out most or all of those investments if the debt ceiling isn’t raised in time. Another 36 percent of organizations would hold onto their current holdings of Treasuries, but would not purchase these securities going forward. 

Meanwhile, half of the respondents say that a government default would harm their organization’s access to, and raise their cost of, capital. An increase in the cost of bank credit and higher cost of debt financing were each cited as possible outcomes by 27 percent of financial professionals.”
In other words, a default would cause a nearly instantaneous shift in short-term investment preferences away from US Treasuries.  While this in and of itself would not be a concern under current monetary policy, even the Federal Reserve would be hard pressed to come up with a program for purchasing Government securities that have not yet come into existence.

Further, Joe Weisenthal over at the Business Insider presents a Goldman Sachs chart which refutes the argument floated by some that the US Treasury could continue to pay interest on its debts once it hits the debt ceiling.
Treasury Payments
It appears that once Halloween passes and the Federal Employees and Social Security recipients come calling on November 1, the well will be dry.
The well has been dry for some time now, and while it makes for great theater, it is difficult to see why it is in the interest of the government and its direct dependents to let it play out. If it does, it can only mean that a new monetary system will be imposed, for the Mushroom Shaped Dollar Debt Sponge will have been squeezed.
However, should the US default on its debt, we reiterate our position that it “matters not,” for while the US Government and its dependents will be in a world of hurt, there will be a flood of new money available to private enterprise. For, contrary to popular belief, Federal spending acts as a damper on the Federal Reserve’s loose money policies, and a US default may represent the ultimate in monetary stimulus, if not true economic growth.
Stay tuned and Trust Jesus!
Stay Fresh!
Key Indicators for October 7, 2013
Copper Price per Lb: $3.28
Oil Price per Barrel: $103.03
Corn Price per Bushel: $4.49
10 Yr US Treasury Bond: 2.63%
Mt Gox Bitcoin price in US: $137.00
Gold Price Per Ounce: $1,322
MINT Perceived Target Rate*: 0.25%
Unemployment Rate: 7.3%
Inflation Rate (CPI): 0.1%
Dow Jones Industrial Average: 14,936
M1 Monetary Base: $2,556,500,000,000
M2 Monetary Base: $10,726,300,000,000