Is anyone hedging against a US default?

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Coltrane75
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Re: Is anyone hedging against a US default?

Post by Coltrane75 »

Nope.
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Re: Is anyone hedging against a US default?

Post by KlangFool »

OP,

If you worried enough, keep some physical gold. If not, do nothing. I have some gold coins.

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Re: Is anyone hedging against a US default?

Post by Whitecap »

willthrill81 wrote: Wed Sep 22, 2021 6:51 pm If the U.S. defaulted, it would almost certainly cause cascading failures across the entire global financial system. The only real hedges I see against that are 'beans, bullets, Band-aids, and bars (of gold)'.
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Re: Is anyone hedging against a US default?

Post by runninginvestor »

Just opened a Treasury Direct account. Which means we'll probably default if I buy any bonds in the next week or two.
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Re: Is anyone hedging against a US default?

Post by wolf359 »

How would you even hedge against a US default?

If you're following a Bogleheads portfolio, the bulk of your assets are in US stocks, or US treasuries (more than half of Total Bond is treasuries.) Even the major international companies in Total International Stock Market would be impacted by problems in the US. The US dollar is a reserve currency, impacting the pricing of commodities.

A US default would change the US credit rating, raising the cost of US debt. This would, at the minimum, raise interest rates.

Any meaningful actions to hedge against a US default involve tax consequences in the taxable portfolios. Most retirement accounts don't have any choices that could be a meaningful hedge.

Even buying direct gold or real estate isn't a hedge unless you make significant moves. Changing your portfolio to that degree in reaction to a potential US default would be market timing.

1. I'm not sure what you can possibly do that would be a meaningful hedge.
2. I'm not sure the cost of taking such a hedging action is offset by the benefits. There are immediate tax consequences. Exiting the market also has consequences.
3. I don't believe there's a high probability that the default will occur (but it's higher than I would have assumed in the past, because US politics has gotten so crazy and contentious in the last few years.)

Therefore, I'm staying the course. I see no alternatives.
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Re: Is anyone hedging against a US default?

Post by bottlecap »

No. It won't happen now. At least not on purpose. This is all media hype designed sell news first and produce a particular outcome second.

Very few believe this could happen at all, least of all those who comprise "the government." When the United States government truly defaults, it will be unanticipated by anyone from within or in the media. They will be the last to know and the least to understand. It will be unfathomable for them.

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Re: Is anyone hedging against a US default?

Post by nisiprius »

I think this is some version of the "narrative fallacy."

1) A US default would be one of many low-probability, high-consequences event.

2) For unknown reasons deep in the human psyche, we are attracted to stories about the detailed unfolding of low-probability, high-consequences events, particularly ones that seem especially horrifying or poignant.

3) The problem is that we latch on to selected ones that resonate with us, and are completely oblivious to a thousand others just as bad. I wonder what the current best estimate is, now, of the probability that the Cumbre Vieja tsunami hazard will materialize and hit the US east coast with a 60-foot-high tsunami? The probability that Congress will repeal the provision of the Investment Company Act of 1940 that allows mutual funds to pass through dividends instead of being taxed as income made by the company? The probability that an IT disaster or cyberattack will create a flash crash lasting weeks instead of minutes? And you can be sure that the ones which do happen will be ones we didn't imagine.

4) Because of unpredictable knock-on effects, a meaningful default (not like the technical one that occurred decades ago) it is difficult to imagine what an effective "hedge" could even be--unless you mean a silly technicality like losing 89.9% of your money when your friends are losing 90.1%. Last week showed how interlocked things are. (Probably) as a reaction to the Evergrande collapse, the fully globally allocated VT fell -3.91%--but US-only VTI fell -3.53%. The loss experienced by an investor who avoided international stocks entirely was 90% that of the fully-globalized investor. The US has a larger GDP and ten times a large a stock market; the global financial effects of US financial crises will be just as large.

The difficult thing about black swans is that each of them is unlikely, but collectively the chance of one of them occurring isn't all that unlikely. But since they are so expensive and difficult to protect against, it is as if there were 1000 catastrophes, each of which cost 1% of your portfolio for effective protection. Great opportunity for someone to choose one that seems particularly horrifying and compelling and offer to sell you protection against that one.
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Re: Is anyone hedging against a US default?

Post by Whakamole »

Depends on what you mean by default.

I consider starting up the printing presses a default of sorts - if one of the $25 i-bonds I got from a tax refund is only good for a loaf of bread, we'd be in serious trouble. If I'm carting wheelbarrows of money to buy that same loaf of bread - is there a functional difference between that and a government default?

Debt can be restructured. Interest rate can be lowered, duration can be extended. There is little you can do.

The government refusing to pay anything? I suppose it is possible. It's happened before.

If other governments are in comparatively good shape when it comes to debt, buy unhedged foreign bonds. Precious metals should do well.

Some say it will be doomsday if this happens, and maybe it will, but you can also protect yourself and at least some of your assets.
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Re: Is anyone hedging against a US default?

Post by BogleFan510 »

Market forces means that the risk of this is priced into the current market values for equities, bonds and treasuries, so there you go, we are hedged.
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Re: Is anyone hedging against a US default?

Post by willthrill81 »

BogleFan510 wrote: Thu Sep 23, 2021 9:34 am Market forces means that the risk of this is priced into the current market values for equities, bonds and treasuries, so there you go, we are hedged.
The risk may be priced into the market value, but that doesn't mean that we're hedged against a U.S. default.
A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset.
https://www.investopedia.com/terms/h/hedge.asp

Simply owning an asset does not in any way hedge against its value dropping.
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Re: Is anyone hedging against a US default?

Post by Trader Joe »

TJat wrote: Wed Sep 22, 2021 6:21 pm I’m sure this is Boglehead heresy (but I hope allowed as a post), but is anyone concerned about Congress not raising the debt ceiling this time, which would lead to a default situation, and thinking of doing something about it?

Outlandish catastrophic events are warned about near daily in the financial press and this might be no different, but many articles broke today about what might happen if Congress doesn’t extend the debt ceiling. Basically the consensus seems to be that it would cause an immediate recession and “30-50% crash” in the equity markets. It might be political posturing, but what if it has teeth?

Would it be crazy/stupid to convert some equities to cash in tax advantages accounts and wait out until a decision is made in October? One would risk missing out on some gains (or potentially a major market surge), but would protect against a major decline, however improbable. Is this different than buying option contracts or setting stop loss orders to hedge against risk? Is it market timing when it’s an explicit action to protect against a specific event (vs ambiguous “the market is a bubble” concerns?)? Interested in thoughts from the BH community.
No I am not.
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Re: Is anyone hedging against a US default?

Post by BogleFan510 »

willthrill81 wrote: Thu Sep 23, 2021 9:36 am
BogleFan510 wrote: Thu Sep 23, 2021 9:34 am Market forces means that the risk of this is priced into the current market values for equities, bonds and treasuries, so there you go, we are hedged.
The risk may be priced into the market value, but that doesn't mean that we're hedged against a U.S. default.
A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset.
https://www.investopedia.com/terms/h/hedge.asp

Simply owning an asset does not in any way hedge against its value dropping.
I know what a hedge is, so it was a tongue in cheek comment.

In a sense, hedging is occuring both within the instruments and in the surrounding systems that maintain the economy. Companies hold real assets (a hedge), the ability of other entities to meet their debt obligations, even if a govt fails is a hedge, a 'to big to fail' regency currency for global commerce incentivizing other govt to step in, if needed, is a sort of hedge.
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Re: Is anyone hedging against a US default?

Post by JackoC »

000 wrote: Wed Sep 22, 2021 7:36 pm
willthrill81 wrote: Wed Sep 22, 2021 7:08 pm Fair point on 'default'. By some definitions, the U.S. has already defaulted numerous times. I believe that the OP means 'total bankruptcy'.

I have a hard time seeing the U.S. going belly up without the rest of the world following suit. Heck, the Fed has known for many years that a failure of any of the mega-banks would likely lead to a cascading failure of the banking system.
I know this is a commonly held view but I'm not sure I follow. Can you explain the causative relationship?

Why would the US refusing to raise its debt ceiling and then refusing to pay out on its debt cause foreign governments to default too? Why would it cause the world to suddenly place zero value on publicly traded equities, corporates, and commodities? Although obviously there is deep risk with unknown possible consequences here, couldn't the rest of the world just decide - perhaps after major deleveraging and panic selling - that all of those other things still are valuable and it's just "tough luck" for UST holders?

Now, if we're talking about total bankruptcy caused by some event other than being unable / unwilling to raise the debt ceiling, I suppose it would depend on what the causative event is.
I think your explanation points to an element of contradiction in the parochial (what it is IMO) argument that very bad things happening to the US automatically mean it would happen worldwide just as much, so never worth diversifying out of the US. The same people will usually immediately point out the 'US can't default' because it prints $'s. Which is clearly not literally true. The 'technical' situation of 'debt ceiling' is one obvious case it isn't true. As somebody pointed out tongue in cheek above, according to the dictum 'you must assume current law or have your post removed' the US *will* default soon because the Treasury will lack the legal authority to issue more bonds to pay off existing ones (which it must do, current tax revenue does not cover it). I view that as unlikely, as are all kinds of other things you'd assume under the dubious concept of 'current law'. But it can't be called impossible.

Same goes for more distant possibilities I'd actually think more seriously about taking into account in my asset allocation. Russia defaulted on Ruble debt in 1998. Per the sunny theory of 'you can never default on own currency debt' that was impossible. The reason it's not is simple. If you 'run the printing presses' to pay off maturing debt, the buyers of the debt aren't generally stupid and will require higher and higher nominal yields to buy new debt to roll over the old debt. It only cleanly works to 'run the presses' and say 'hah, hah, suckers' to the debt holders if the debt maturity is very long. But US average debt maturity is only around 5 yrs. And very high inflation has real costs to your citizens and economy. At a certain point the path of least resistance can become not a disorderly total refusal to pay, but a forced exchange where you offer the short term debt holders a choice to either roll over into longer bonds at an easy to pay coupon *you* set, or nothing. That lets you stop destroying your economy with runaway inflation, but is also a default. And it could greatly harm the financial credibility of the country doing it, with costs to pay over time for that loss, without 'the world coming to an end', even if it happened in the world's second largest economy (as the US economy might well be at market exchange rates by the time any such thing happened, already No. 2 on PPP basis). Is that likely in the US? Not IMO, but it's become much less inconceivable IMO due to developments of recent times. And it's just nonsense to say 'it's impossible' as an analytical statement (as opposed to an emotional patriotic exclamation).

Hedging the near term possibility of a market damaging technical default? I would not. SPX put prices are not that high (have bumped up recently but whether that's due to 'debt ceiling' or the general environment is hard to say and silly to argue about IMO). But, buying short term hedges sometimes in reaction to headlines isn't usually a good strategy, any trading in reaction to headlines. Longer term I think it's worth some thought how 'riskless' US debt is in the long term future. Which isn't saying I have a solution, it's a vexing issue.
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Re: Is anyone hedging against a US default?

Post by TurtleBeatsHare »

Lynx310650 wrote: Thu Sep 23, 2021 1:37 am
TurtleBeatsHare wrote: Thu Sep 23, 2021 1:00 am As such, I hedge generally against the US by holding non US equities and bonds with non US creditors and in non dollar payment terms.
I think this is sound, but how are you doing this? Curious.
https://investor.vanguard.com/mutual-fu ... file/VTABX

If you read the description, all of the bonds are issued in non-dollar currencies outside the US. It’s low cost and geographically diversified among developed markets, but uses currency hedging and therefore isn’t an effective dollar hedge itself I’ve never investigated the 2-4% in the US, but presume those are the short term liquid holdings of $280M or so. This is acceptable to me for now because I have limited exposure to bonds at my age. But I do think there’s a reasonably strong argument that this underweights emerging markets and should be supplemented with an EM bond fund and would need to be supplemented with a currency hedge or an international fund that doesn’t currency hedge. But again, given the relatively low percentage of my assets in bonds as a whole, I likely won’t implement this for another 10 years.
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Re: Is anyone hedging against a US default?

Post by secondopinion »

TJat wrote: Wed Sep 22, 2021 6:21 pm I’m sure this is Boglehead heresy (but I hope allowed as a post), but is anyone concerned about Congress not raising the debt ceiling this time, which would lead to a default situation, and thinking of doing something about it?

Outlandish catastrophic events are warned about near daily in the financial press and this might be no different, but many articles broke today about what might happen if Congress doesn’t extend the debt ceiling. Basically the consensus seems to be that it would cause an immediate recession and “30-50% crash” in the equity markets. It might be political posturing, but what if it has teeth?

Would it be crazy/stupid to convert some equities to cash in tax advantages accounts and wait out until a decision is made in October? One would risk missing out on some gains (or potentially a major market surge), but would protect against a major decline, however improbable. Is this different than buying option contracts or setting stop loss orders to hedge against risk? Is it market timing when it’s an explicit action to protect against a specific event (vs ambiguous “the market is a bubble” concerns?)? Interested in thoughts from the BH community.
They could default, but how good would the recovery of that default be? My guess is very good. And they can always print a lot of money, after all.
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Re: Is anyone hedging against a US default?

Post by gogreen »

willthrill81 wrote: Wed Sep 22, 2021 6:51 pm If the U.S. defaulted, it would almost certainly cause cascading failures across the entire global financial system. The only real hedges I see against that are 'beans, bullets, Band-aids, and bars (of gold)'.
I started to watch 'The Walking Dead' 1st season again to be better prepared :sharebeer
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Re: Is anyone hedging against a US default?

Post by willthrill81 »

secondopinion wrote: Thu Sep 23, 2021 10:38 amAnd they can always print a lot of money, after all.
There are many posts along these lines, and while the statement is obviously true, it presupposes that the money that would be 'printed' would be accepted by the market. In the event of a 'total bankruptcy', that may not be true.
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Re: Is anyone hedging against a US default?

Post by secondopinion »

willthrill81 wrote: Thu Sep 23, 2021 11:42 am
secondopinion wrote: Thu Sep 23, 2021 10:38 amAnd they can always print a lot of money, after all.
There are many posts along these lines, and while the statement is obviously true, it presupposes that the money that would be 'printed' would be accepted by the market. In the event of a 'total bankruptcy', that may not be true.
I doubt it will be a total unacceptance of the printed money; there is a buyer for everything. Recovery is more than doable; so a total bankruptcy will not happen.
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Re: Is anyone hedging against a US default?

Post by willthrill81 »

secondopinion wrote: Thu Sep 23, 2021 11:53 am
willthrill81 wrote: Thu Sep 23, 2021 11:42 am
secondopinion wrote: Thu Sep 23, 2021 10:38 amAnd they can always print a lot of money, after all.
There are many posts along these lines, and while the statement is obviously true, it presupposes that the money that would be 'printed' would be accepted by the market. In the event of a 'total bankruptcy', that may not be true.
I doubt it will be a total unacceptance of the printed money; there is a buyer for everything. Recovery is more than doable; so a total bankruptcy will not happen.
It has happened in many other countries, so I don't share your confidence that it's impossible to occur in the U.S., though I believe it to be extremely unlikely, at least as of now.
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Re: Is anyone hedging against a US default?

Post by Wannaretireearly »

Not default specifically. But, probably one of the many low probability high impact events will play out according to my crystal ball.
Don't things usually fall in fall :twisted:

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Re: Is anyone hedging against a US default?

Post by secondopinion »

willthrill81 wrote: Thu Sep 23, 2021 11:56 am
secondopinion wrote: Thu Sep 23, 2021 11:53 am
willthrill81 wrote: Thu Sep 23, 2021 11:42 am
secondopinion wrote: Thu Sep 23, 2021 10:38 amAnd they can always print a lot of money, after all.
There are many posts along these lines, and while the statement is obviously true, it presupposes that the money that would be 'printed' would be accepted by the market. In the event of a 'total bankruptcy', that may not be true.
I doubt it will be a total unacceptance of the printed money; there is a buyer for everything. Recovery is more than doable; so a total bankruptcy will not happen.
It has happened in many other countries, so I don't share your confidence that it's impossible to occur in the U.S., though I believe it to be extremely unlikely, at least as of now.
Given how much the US owns, there is a lot of collateral. It is not like the US is without resources. How many times do these countries with the bad currency have a lot of collateral?
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Re: Is anyone hedging against a US default?

Post by drk »

I don't remember where I saw it, but "Investors flock to Treasurys on US default" will make for an incredible headline.
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Re: Is anyone hedging against a US default?

Post by Actin »

That's not something I would worry about. Not raising the debt ceiling would undo all the money printing by the fed. There will be some political theater, but both political parties are forced to do it at this point.

It's far more likely another major bank in the US will go down, similar to 2008 or the current evergrande. Good luck timing that though.
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Re: Is anyone hedging against a US default?

Post by 000 »

JackoC wrote: Thu Sep 23, 2021 9:55 am I think your explanation points to an element of contradiction in the parochial (what it is IMO) argument that very bad things happening to the US automatically mean it would happen worldwide just as much, so never worth diversifying out of the US. The same people will usually immediately point out the 'US can't default' because it prints $'s. Which is clearly not literally true. The 'technical' situation of 'debt ceiling' is one obvious case it isn't true. As somebody pointed out tongue in cheek above, according to the dictum 'you must assume current law or have your post removed' the US *will* default soon because the Treasury will lack the legal authority to issue more bonds to pay off existing ones (which it must do, current tax revenue does not cover it). I view that as unlikely, as are all kinds of other things you'd assume under the dubious concept of 'current law'. But it can't be called impossible.

Same goes for more distant possibilities I'd actually think more seriously about taking into account in my asset allocation. Russia defaulted on Ruble debt in 1998. Per the sunny theory of 'you can never default on own currency debt' that was impossible. The reason it's not is simple. If you 'run the printing presses' to pay off maturing debt, the buyers of the debt aren't generally stupid and will require higher and higher nominal yields to buy new debt to roll over the old debt. It only cleanly works to 'run the presses' and say 'hah, hah, suckers' to the debt holders if the debt maturity is very long. But US average debt maturity is only around 5 yrs. And very high inflation has real costs to your citizens and economy. At a certain point the path of least resistance can become not a disorderly total refusal to pay, but a forced exchange where you offer the short term debt holders a choice to either roll over into longer bonds at an easy to pay coupon *you* set, or nothing. That lets you stop destroying your economy with runaway inflation, but is also a default. And it could greatly harm the financial credibility of the country doing it, with costs to pay over time for that loss, without 'the world coming to an end', even if it happened in the world's second largest economy (as the US economy might well be at market exchange rates by the time any such thing happened, already No. 2 on PPP basis). Is that likely in the US? Not IMO, but it's become much less inconceivable IMO due to developments of recent times. And it's just nonsense to say 'it's impossible' as an analytical statement (as opposed to an emotional patriotic exclamation).

Hedging the near term possibility of a market damaging technical default? I would not. SPX put prices are not that high (have bumped up recently but whether that's due to 'debt ceiling' or the general environment is hard to say and silly to argue about IMO). But, buying short term hedges sometimes in reaction to headlines isn't usually a good strategy, any trading in reaction to headlines. Longer term I think it's worth some thought how 'riskless' US debt is in the long term future. Which isn't saying I have a solution, it's a vexing issue.
Good explanation. I agree completely. Though I tend to believe this latest debt ceiling dance will soon be overcome and forgotten, there is some idiosyncratic risk in a 100% US portfolio that is worth consideration.
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Re: Is anyone hedging against a US default?

Post by surfstar »

another nope here
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Re: Is anyone hedging against a US default?

Post by cos »

It looks like the market is putting ~17% odds on a recession starting before the end of this year. See: https://kalshi.com/markets/RECSS-001

Do with that what you will, but I recommend cutting back on news entertainment consumption and staying the course.
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Re: Is anyone hedging against a US default?

Post by UpperNwGuy »

Actin wrote: Thu Sep 23, 2021 2:13 pm It's far more likely another major bank in the US will go down, similar to 2008 or the current evergrande.
Why do you think that?
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Re: Is anyone hedging against a US default?

Post by DB2 »

Complete non issue.
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Re: Is anyone hedging against a US default?

Post by Strayshot »

I don’t have anything to contribute, but just wanted to say I absolutely love reading the insightful posts by Alex, David Jay, Nisiprius, willthrill81, and others in threads like this :sharebeer
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Re: Is anyone hedging against a US default?

Post by traveling_salesman »

Shouldn’t a hedge against a very unlikely event be very cheap? (In theory)
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Re: Is anyone hedging against a US default?

Post by Alex Frakt »

traveling_salesman wrote: Thu Sep 23, 2021 8:08 pm Shouldn’t a hedge against a very unlikely event be very cheap? (In theory)
It is. https://finance.yahoo.com/quote/SPY/options/

Good luck on your new hobby of options trading :-)
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Re: Is anyone hedging against a US default?

Post by Metsfan91 »

No. I've got full faith and confidence in US government. In the worst case, some fed accountant will find creative way to avoid default.
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Re: Is anyone hedging against a US default?

Post by sherwink »

In a word--NO!
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Re: Is anyone hedging against a US default?

Post by Random Musings »

I am not hedging my portfolio for this particular scenario. A default is extremely unlikely as one party has the majority in both chambers.

RM
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Re: Is anyone hedging against a US default?

Post by Bluce »

Random Musings wrote: Thu Sep 23, 2021 8:54 pm I am not hedging my portfolio for this particular scenario. A default is extremely unlikely as one party has the majority in both chambers.

RM
It will never happen no matter what, unless and until it is completely unavoidable.

It is probably inevitable at some point in the future, but it is not imminent, and if it happens it would be globally devastating, considering the dollar is the world's reserve currency and the global trust and active market in Treasury securities -- which would be shattered.
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Re: Is anyone hedging against a US default?

Post by halfnine »

I don't hedge specifically for a US default. However I do invest globally and allocate a portion to gold as a hedge to crises in general. This won't protect against all crises but at that point I'll likely have bigger worries.
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Re: Is anyone hedging against a US default?

Post by learntoinvest123 »

Market is paying zero attention to this political show. You should do the same. Ignore all doomsday articles, it is not going to happen. They have a number of ways to get around this, for example budgetary reconciliation which requires simple majority.

At worst a few day Govt shutdown (which is also unlikely), followed by reconciliation or some budget maneuver to raise the ceiling. This event is not worth hedging. If you have to absolutely hedge... buy treasuries, since there will be a flight to safety, followed by a big fall. Good luck timing it.
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Re: Is anyone hedging against a US default?

Post by softwaregeek »

Lynx310650 wrote: Thu Sep 23, 2021 1:37 am
TurtleBeatsHare wrote: Thu Sep 23, 2021 1:00 am As such, I hedge generally against the US by holding non US equities and bonds with non US creditors and in non dollar payment terms.
I think this is sound, but how are you doing this? Curious.
Presumably with international index like vxus but the very largest indexed companies all tend to be highly global with few exceptions.
JackoC
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Re: Is anyone hedging against a US default?

Post by JackoC »

secondopinion wrote: Thu Sep 23, 2021 12:06 pm
willthrill81 wrote: Thu Sep 23, 2021 11:56 am
secondopinion wrote: Thu Sep 23, 2021 11:53 am
willthrill81 wrote: Thu Sep 23, 2021 11:42 am
secondopinion wrote: Thu Sep 23, 2021 10:38 amAnd they can always print a lot of money, after all.
There are many posts along these lines, and while the statement is obviously true, it presupposes that the money that would be 'printed' would be accepted by the market. In the event of a 'total bankruptcy', that may not be true.
I doubt it will be a total unacceptance of the printed money; there is a buyer for everything. Recovery is more than doable; so a total bankruptcy will not happen.
It has happened in many other countries, so I don't share your confidence that it's impossible to occur in the U.S., though I believe it to be extremely unlikely, at least as of now.
Given how much the US owns, there is a lot of collateral. It is not like the US is without resources. How many times do these countries with the bad currency have a lot of collateral?
But the whole fallacy of the back and forth on that is 'total bankruptcy'. Again Russia defaulted on own current debt in 1998. It did not 'totally refuse to pay', it forced holders of short term debt into longer term debt at much more favorable than market terms for Russia. That's a default. It's not 'total bankruptcy'. Likewise if 'collateral' means paper wealth of citizens of the nation, and which paper value importantly depends on the assumption the state can't arbitrarily seize it to pay the state's debts, that doesn't figure in very simply either.

The quite non-impossible IMO scenario is that the credibility cost of defaulting on the debt (not 'total bankruptcy' nor technical one day thing) is eventually seen by the decision makers at that point as being less than than the cost (to them) of solving the issue another way. One way being to set taxes and spending to not require continual large increase in the debt. Another being to 'run the presses', but again that only fully works if the debt is perpetual and/or need for future debt issuance is eliminated by making tax revenue=spending before you have to go back to the market you just screwed by 'running the presses' and see what rate they offer you now. In Russia's case loads of short term RUB debt, yields to roll it over spiraling out of control, no way to instantly raise lots more revenue, very high inflation hurting the economy: path of least resistance became default, via forced exchange, on own currency debt. Russia did not 'collapse' as a result. It's financial credibility suffered, yet was not high to begin with. A rich country could conceivably end up in a situation not entirely different, and it would not have to be as bad for its credibility to drop a lot, since that credibility starts out now much higher than Russia's ever was. And there could be enormous eventual costs to the loss of credibility.

I don't see how a scenario along those lines can be deemed 'impossible' for highly indebted rich countries (even aside from EUR zone where no single one fully controls the issuing currency) at some point. I don't think it's likely. But lots of risks we price for, or diversify away from total concentration in, are of unlikely bad outcomes. AA corporate credit going belly up is quite unlikely, but I assume nobody here would propose investing in just one. The standard we set for US federal credit is extremely high, often concentrating 10's of % of our wealth in that one credit. 'Unlikely' is not enough to rest entirely easy with that concentration. And I'm more uneasy about it in recent years.
sandan
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Re: Is anyone hedging against a US default?

Post by sandan »

I consider most of my purchases for durable goods / housing that are reliable, serviceable, and have low operating costs as a hedge.
cb474
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Re: Is anyone hedging against a US default?

Post by cb474 »

I'm a little surprised by some comments in this thread downplaying the risks of a default on U.S. debt or comparing it to what happened in other countries, like Russia, when they defaulted. People seem to imagine that U.S. debt is simply what it sounds like, money that the U.S. has borrowed for it's own purposes and owes to other people (and in that respect, like any other debt, there's just a lot more of it).

U.S. debt is not like any other debt in the world. It is quite literally the backbone of the global financial system. Because there is so much of it, because it is so liquid (the only more liquid asset in the world is cash), and because U.S. debt is viewed as safe in a way that no other asset is, U.S. debt is held as a safe store of value not just by the largest corporations all over the world but also by the central banks of other countries. Everyone holds U.S. debt so they can cash it in, in a crisis. This is what makes the dollar the global reserve currrency. Also U.S. debt, because of this status, is the benchmark against which just about all other assets are valued.

So if suddenly that asset does not represent something stable and dependable and (imporantly) liquid, even in the worst financial crises, then global finance will grind to a halt and it would make 2008 look like a cakewalk. So in a default scenario, where the U.S. government is literally delaying paying interest and delaying redeeming treasuries, that would undermine the essential liquidity of treasuries, which (again) not just businesses but the rest of the central banks in the world depend on. That is a catasrophe. There is nothing to step in and replace it.

And we don't have too look far to get a taste of what this might look like. A lot of people don't realize it, but in March 2020, as the world was facing up to the reality of a global pandemic, the treasury market went totally crazy and came near something like collapse. Many people in finance consider it to have been far scarier than what happened in 2008. But it went largely unremarked upon in the media.

In March 2020, as people were preparing for the consequences of the global pandemic shutting down a lot of econcomic activity, businesses started cashing in treasuries faster than the market could handle. There was a weird (and to central bankers sickening) moment when there appeared to be far more sellers than buyers of treasuries. Normally because treasuries are considered the safe asset, there are always buyers. (And a lack of buyers of treasuries is exactly what could happen if there were a default and people didn't trust them anymore.) In the end, the Fed had to step in and say, it would buy unlimited amounts of treasuries and ended up buying a trillion dollars of treasuries in three weeks (which is totally unheard of). And, because contagion was already happening in other markets (people were unloading other assets also to get cash), the Fed had to start buying mortgage back securities again (like in 2008) and buying longer term corporate debt (which it had never done before). And that all worked only because treasuries were still considered safe.

People can read more about what happened in March 2020 here (it was very complicated):

https://www.gsb.stanford.edu/insights/p ... ury-market
https://www.ft.com/content/ea6f3104-eee ... ae78d430fd

That point is, U.S. debit is central to global finance in a way that no other asset is. It cannot be compared to anything else and this is why the risks of default are so potentially catastrophic. Anyone who thinks otherwise, does not understand global finance.

That being said, this also puts me on the side of those people who say, I don't know how you would hedge against default--since a collapse in the value and liquidity of treasuries would precipitate a collapse in the value of all other asssets. As someone else said, it is the sort of thing that you would need to stock up on beans and other supplies for (but not gold, that would be as worthless as anything in a global financial collapse--what are you going to buy with your gold, when no one has anything to sell?).

I also don't agree that the risk is zero. It could simply happen by accident, because no one knows the exact date that the Treasury will run out of funds (it's hard to calculate, even for the Treasury). So if Congress pushes things up to the limit, we could go over it, without realizing we were already there. But also, I think the actors in Congress have gotten increasingly nihilistic. Pretending that they will behave rationally in the end does not seem like a good assumption, but I suppose that may be what we have to hang our hopes on.
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galeno
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Re: Is anyone hedging against a US default?

Post by galeno »

Nixon took the USA off the gold standard in 1971. Wasn't that a "default"?
KISS & STC.
Ramjet
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Re: Is anyone hedging against a US default?

Post by Ramjet »

cb474 wrote: Mon Sep 27, 2021 2:26 am I'm a little surprised by some comments in this thread downplaying the risks of a default on U.S. debt or comparing it to what happened in other countries, like Russia, when they defaulted. People seem to imagine that U.S. debt is simply what it sounds like, money that the U.S. has borrowed for it's own purposes and owes to other people (and in that respect, like any other debt, there's just a lot more of it).

U.S. debt is not like any other debt in the world. It is quite literally the backbone of the global financial system. Because there is so much of it, because it is so liquid (the only more liquid asset in the world is cash), and because U.S. debt is viewed as safe in a way that no other asset is, U.S. debt is held as a safe store of value not just by the largest corporations all over the world but also by the central banks of other countries. Everyone holds U.S. debt so they can cash it in, in a crisis. This is what makes the dollar the global reserve currrency. Also U.S. debt, because of this status, is the benchmark against which just about all other assets are valued.

So if suddenly that asset does not represent something stable and dependable and (imporantly) liquid, even in the worst financial crises, then global finance will grind to a halt and it would make 2008 look like a cakewalk. So in a default scenario, where the U.S. government is literally delaying paying interest and delaying redeeming treasuries, that would undermine the essential liquidity of treasuries, which (again) not just businesses but the rest of the central banks in the world depend on. That is a catasrophe. There is nothing to step in and replace it.

And we don't have too look far to get a taste of what this might look like. A lot of people don't realize it, but in March 2020, as the world was facing up to the reality of a global pandemic, the treasury market went totally crazy and came near something like collapse. Many people in finance consider it to have been far scarier than what happened in 2008. But it went largely unremarked upon in the media.

In March 2020, as people were preparing for the consequences of the global pandemic shutting down a lot of econcomic activity, businesses started cashing in treasuries faster than the market could handle. There was a weird (and to central bankers sickening) moment when there appeared to be far more sellers than buyers of treasuries. Normally because treasuries are considered the safe asset, there are always buyers. (And a lack of buyers of treasuries is exactly what could happen if there were a default and people didn't trust them anymore.) In the end, the Fed had to step in and say, it would buy unlimited amounts of treasuries and ended up buying a trillion dollars of treasuries in three weeks (which is totally unheard of). And, because contagion was already happening in other markets (people were unloading other assets also to get cash), the Fed had to start buying mortgage back securities again (like in 2008) and buying longer term corporate debt (which it had never done before). And that all worked only because treasuries were still considered safe.

People can read more about what happened in March 2020 here (it was very complicated):

https://www.gsb.stanford.edu/insights/p ... ury-market
https://www.ft.com/content/ea6f3104-eee ... ae78d430fd

That point is, U.S. debit is central to global finance in a way that no other asset is. It cannot be compared to anything else and this is why the risks of default are so potentially catastrophic. Anyone who thinks otherwise, does not understand global finance.

That being said, this also puts me on the side of those people who say, I don't know how you would hedge against default--since a collapse in the value and liquidity of treasuries would precipitate a collapse in the value of all other asssets. As someone else said, it is the sort of thing that you would need to stock up on beans and other supplies for (but not gold, that would be as worthless as anything in a global financial collapse--what are you going to buy with your gold, when no one has anything to sell?).

I also don't agree that the risk is zero. It could simply happen by accident, because no one knows the exact date that the Treasury will run out of funds (it's hard to calculate, even for the Treasury). So if Congress pushes things up to the limit, we could go over it, without realizing we were already there. But also, I think the actors in Congress have gotten increasingly nihilistic. Pretending that they will behave rationally in the end does not seem like a good assumption, but I suppose that may be what we have to hang our hopes on.
How about your way out of the country
UpperNwGuy
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Re: Is anyone hedging against a US default?

Post by UpperNwGuy »

galeno wrote: Mon Sep 27, 2021 4:10 am Nixon took the USA off the gold standard in 1971. Wasn't that a "default"?
No, it was not.
JBTX
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Re: Is anyone hedging against a US default?

Post by JBTX »

The biggest risk of a default, if protracted, is that since they cant deficit spend, you will have a severe spending cut, which could cause a recession. Deficits to gdp have been about 15% over the last two years. If funding for 15% of GDP disappears in an instant that's bad news.
000
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Re: Is anyone hedging against a US default?

Post by 000 »

cb474 wrote: Mon Sep 27, 2021 2:26 am Everyone holds U.S. debt so they can cash it in, in a crisis. This is what makes the dollar the global reserve currrency.
No, you are confusing cause and effect. The primary reason they hold it is they need it to buy oil, not as a crisis hedge.
So if suddenly that asset does not represent something stable and dependable and (imporantly) liquid, even in the worst financial crises, then global finance will grind to a halt and it would make 2008 look like a cakewalk. So in a default scenario, where the U.S. government is literally delaying paying interest and delaying redeeming treasuries, that would undermine the essential liquidity of treasuries, which (again) not just businesses but the rest of the central banks in the world depend on. That is a catasrophe. There is nothing to step in and replace it.
Why didn't the 1979 US technical default on interest payments lead to a catastrophe? Why didn't the 1971 US default on gold convertibility?

Why can't foreign cash and treasuries "step in and replace it"?
That point is, U.S. debit is central to global finance in a way that no other asset is. It cannot be compared to anything else and this is why the risks of default are so potentially catastrophic. Anyone who thinks otherwise, does not understand global finance.
The risks are catastrophic to those who are living in a "US is the center of universe" worldview.
(but not gold, that would be as worthless as anything in a global financial collapse--what are you going to buy with your gold, when no one has anything to sell?).
Then why are all the CBs hoarding gold?

Why would no one have anything to sell? What about local farmers, craftsmen, etc?
Last edited by 000 on Mon Sep 27, 2021 4:11 pm, edited 1 time in total.
cbs2002
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Re: Is anyone hedging against a US default?

Post by cbs2002 »

nisiprius wrote: Thu Sep 23, 2021 9:08 am
3) The problem is that we latch on to selected ones that resonate with us, and are completely oblivious to a thousand others just as bad. I wonder what the current best estimate is, now, of the probability that the Cumbre Vieja tsunami hazard will materialize and hit the US east coast with a 60-foot-high tsunami? The probability that Congress will repeal the provision of the Investment Company Act of 1940 that allows mutual funds to pass through dividends instead of being taxed as income made by the company? The probability that an IT disaster or cyberattack will create a flash crash lasting weeks instead of minutes? And you can be sure that the ones which do happen will be ones we didn't imagine.

The difficult thing about black swans is that each of them is unlikely, but collectively the chance of one of them occurring isn't all that unlikely. But since they are so expensive and difficult to protect against, it is as if there were 1000 catastrophes, each of which cost 1% of your portfolio for effective protection. Great opportunity for someone to choose one that seems particularly horrifying and compelling and offer to sell you protection against that one.
This is such a great great post. There are so many biases at play in the guise of rational preparation which is anything but.

Take the converse, a positive event with nearly no chance of happening: Imagine spending much time and mental energy researching and creating a detailed financial plan for how you would plan your life around winning a $100 million lottery, and then start to shift your investment and spending strategies now assuming that will happen at some point during your lifetime. It's as ridiculous attempting to hedge against the default of the currency that underpins the global financial system.
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Re: Is anyone hedging against a US default?

Post by Call_Me_Op »

Three things in life are certain - death, taxes, and US will not outright default on its debt.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
drk
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Re: Is anyone hedging against a US default?

Post by drk »

Ramjet wrote: Mon Sep 27, 2021 5:45 am
cb474 wrote: Mon Sep 27, 2021 2:26 am(but not gold, that would be as worthless as anything in a global financial collapse--what are you going to buy with your gold, when no one has anything to sell?).
How about your way out of the country
Seems like you'd quickly run into the wrench problem.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
JBTX
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Re: Is anyone hedging against a US default?

Post by JBTX »

cb474 wrote: Mon Sep 27, 2021 2:26 am I'm a little surprised by some comments in this thread downplaying the risks of a default on U.S. debt or comparing it to what happened in other countries, like Russia, when they defaulted. People seem to imagine that U.S. debt is simply what it sounds like, money that the U.S. has borrowed for it's own purposes and owes to other people (and in that respect, like any other debt, there's just a lot more of it).

U.S. debt is not like any other debt in the world. It is quite literally the backbone of the global financial system. Because there is so much of it, because it is so liquid (the only more liquid asset in the world is cash), and because U.S. debt is viewed as safe in a way that no other asset is, U.S. debt is held as a safe store of value not just by the largest corporations all over the world but also by the central banks of other countries. Everyone holds U.S. debt so they can cash it in, in a crisis. This is what makes the dollar the global reserve currrency. Also U.S. debt, because of this status, is the benchmark against which just about all other assets are valued.

So if suddenly that asset does not represent something stable and dependable and (imporantly) liquid, even in the worst financial crises, then global finance will grind to a halt and it would make 2008 look like a cakewalk. So in a default scenario, where the U.S. government is literally delaying paying interest and delaying redeeming treasuries, that would undermine the essential liquidity of treasuries, which (again) not just businesses but the rest of the central banks in the world depend on. That is a catasrophe. There is nothing to step in and replace it.

And we don't have too look far to get a taste of what this might look like. A lot of people don't realize it, but in March 2020, as the world was facing up to the reality of a global pandemic, the treasury market went totally crazy and came near something like collapse. Many people in finance consider it to have been far scarier than what happened in 2008. But it went largely unremarked upon in the media.

In March 2020, as people were preparing for the consequences of the global pandemic shutting down a lot of econcomic activity, businesses started cashing in treasuries faster than the market could handle. There was a weird (and to central bankers sickening) moment when there appeared to be far more sellers than buyers of treasuries. Normally because treasuries are considered the safe asset, there are always buyers. (And a lack of buyers of treasuries is exactly what could happen if there were a default and people didn't trust them anymore.) In the end, the Fed had to step in and say, it would buy unlimited amounts of treasuries and ended up buying a trillion dollars of treasuries in three weeks (which is totally unheard of). And, because contagion was already happening in other markets (people were unloading other assets also to get cash), the Fed had to start buying mortgage back securities again (like in 2008) and buying longer term corporate debt (which it had never done before). And that all worked only because treasuries were still considered safe.

People can read more about what happened in March 2020 here (it was very complicated):

https://www.gsb.stanford.edu/insights/p ... ury-market
https://www.ft.com/content/ea6f3104-eee ... ae78d430fd

That point is, U.S. debit is central to global finance in a way that no other asset is. It cannot be compared to anything else and this is why the risks of default are so potentially catastrophic. Anyone who thinks otherwise, does not understand global finance.

That being said, this also puts me on the side of those people who say, I don't know how you would hedge against default--since a collapse in the value and liquidity of treasuries would precipitate a collapse in the value of all other asssets. As someone else said, it is the sort of thing that you would need to stock up on beans and other supplies for (but not gold, that would be as worthless as anything in a global financial collapse--what are you going to buy with your gold, when no one has anything to sell?).

I also don't agree that the risk is zero. It could simply happen by accident, because no one knows the exact date that the Treasury will run out of funds (it's hard to calculate, even for the Treasury). So if Congress pushes things up to the limit, we could go over it, without realizing we were already there. But also, I think the actors in Congress have gotten increasingly nihilistic. Pretending that they will behave rationally in the end does not seem like a good assumption, but I suppose that may be what we have to hang our hopes on.
First, it's highly unlikely in a default scenario that US fails to pay its treasury debt obligations. A default means they don't have enough money to pay all obligations. They will have enough money to pay some/most. That said, trying to prioritize what gets paid and what doesn't is not a trivial task.

A spending cut of 5-15% of GDP however will have a serious economic impact, if it goes on beyond days. Whether or not it causes a collapse is mainly one of confidence and perception. There is near zero expectation that the US will permanently default. Worst likely case is payments get delayed.

However, kind of to your point, the world financial system is complex, and you never know what could get the ball rolling in the wrong direction. Rolling the dice and hoping everything works out OK is a pretty dangerous path.
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