Is anyone hedging against a US default?
Is anyone hedging against a US default?
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.
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.
Re: Is anyone hedging against a US default?
No.
We've been here before. There's basically zero chance they allow a default to happen. There is already the emergency funding bill ready to go to keep the lights on and push their signature budget bill down the road a bit. Absolute worst case the government goes into shutdown mode (again, been here before) and we do that drama until either the big budget is passed or some half-measure. In any case the US is NOT going to default no matter what the bluster is coming out of Washington to the contrary.
We've been here before. There's basically zero chance they allow a default to happen. There is already the emergency funding bill ready to go to keep the lights on and push their signature budget bill down the road a bit. Absolute worst case the government goes into shutdown mode (again, been here before) and we do that drama until either the big budget is passed or some half-measure. In any case the US is NOT going to default no matter what the bluster is coming out of Washington to the contrary.
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Re: Is anyone hedging against a US default?
We will allow this thread as long as it sticks to the OP's point. Please do not post political comments in the replies.
Re: Is anyone hedging against a US default?
I am holding a diversified portfolio which for me includes gold and miners. Were it within my ability to do so I would also own direct real estate.
Moving to hold more USD cash because you're afraid of a US default seems a bit strange to me. I mean really think about it. If there are "problems" with US institutions, why would USD be the solution?
Moving to hold more USD cash because you're afraid of a US default seems a bit strange to me. I mean really think about it. If there are "problems" with US institutions, why would USD be the solution?
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Re: Is anyone hedging against a US default?
No. 0 chance of a default. But for anyone who is a Fed gov worker, make sure you have an emergency fund, you might not get a few pay checks paid on time.
Re: Is anyone hedging against a US default?
For those who think this can’t happen, I refer you 1979 when the US failed to make interest payments on its debt. The first time the US defaulted on its sovereign debt: https://www.forbes.com/sites/beltway/20 ... 09dda030ad
According to the article, the effect was a .6% higher interest rate on US debt for months afterward. This was during a time of 10%+ US interest rates. Unclear what would happen today with rates so low.
I have been thinking of selling some bonds into cash just in case this happens and interest rates shoot up. I see it like a RBD, only on bonds. The last time, it was small scale and over quickly. If it went on for a while, who knows what would have happened!
According to the article, the effect was a .6% higher interest rate on US debt for months afterward. This was during a time of 10%+ US interest rates. Unclear what would happen today with rates so low.
I have been thinking of selling some bonds into cash just in case this happens and interest rates shoot up. I see it like a RBD, only on bonds. The last time, it was small scale and over quickly. If it went on for a while, who knows what would have happened!
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
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Re: Is anyone hedging against a US default?
IMO, it's a waste of time and money to respond to this hypothetical situation. It's extraordinarily unlikely for Congress to allow this to happen. And even if it did, the Executive Branch and Fed have the ability to keep an actual default at bay for a short time while market and public pressure force Congress to resolve the issue.
But if you want to assume the worst, rather than selling your equities a far better way to hedge a specific risk on a specific day is to buy appropriate puts.
But if you want to assume the worst, rather than selling your equities a far better way to hedge a specific risk on a specific day is to buy appropriate puts.
Re: Is anyone hedging against a US default?
You mean like owning international equities and bonds instead of US equities and bonds?
Re: Is anyone hedging against a US default?
No, I would not take any action other than perhaps increasing the size of my emergency fund if I was receiving a federal government paycheck.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Is anyone hedging against a US default?
This is a fair point. Devils advocate though, put options cost money, perhaps cash an investor doesn’t have. Rebalancing my 401k and Roth IRAs towards cash costs nothing beyond future opportunity and maybe 7 minutes of my time. Why would options be a better hedge?Alex Frakt wrote: ↑Wed Sep 22, 2021 6:38 pm IMO, it's a waste of time and money to respond to this hypothetical situation. It's extraordinarily unlikely for Congress to allow this to happen. And even if it did, the Executive Branch and Fed have the ability to keep an actual default at bay for a short time while market and public pressure force Congress to resolve the issue.
But if you want to assume the worst, rather than selling your equities a far better way to hedge a specific risk on a specific day is to buy appropriate puts.
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Re: Is anyone hedging against a US default?
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?
I actually thought about doing something today. I thought maybe I should rebalance into more bonds. Then I looked and saw the market was way up and decided that I know nothing about what might happen, so I'm sitting on my hands.
Bogle: Smart Beta is stupid
Re: Is anyone hedging against a US default?
If you rebalance your portfolio over every unlikely negative future scenario the opportunity cost will be huge over the decades. Stay the course!
[edit]
Oh, and stop with the financial porn (that's what many here call the financial newsmedia).
Last edited by David Jay on Wed Sep 22, 2021 7:01 pm, edited 1 time in total.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Is anyone hedging against a US default?
Isn’t default inevitable, barring passage of new legislation which may be proposed?
Re: Is anyone hedging against a US default?
Yup, it is pretty much guaranteed by the debt limit structure.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Is anyone hedging against a US default?
Although clearly deep risk is there I'm not sure that that would "almost certainly" happen. Most institutions are diversified into corporate and foreign bonds.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)'.
And, "default" is a technical term that can mean anything from missing an interest payment to total bankruptcy. By the most technical pedantic definition, US Government has already defaulted before in history.
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Re: Is anyone hedging against a US default?
Fair point on 'default'. By some definitions, the U.S. has already defaulted numerous times. I believe that the OP means 'total bankruptcy'.000 wrote: ↑Wed Sep 22, 2021 7:05 pmAlthough clearly deep risk is there I'm not sure that that would "almost certainly" happen. Most institutions are diversified into corporate and foreign bonds.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)'.
And, "default" is a technical term that can mean anything from missing an interest payment to total bankruptcy. By the most technical pedantic definition, US Government has already defaulted before in history.
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.
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Re: Is anyone hedging against a US default?
Interesting - don't think I'd ever heard this before...Raybo wrote: ↑Wed Sep 22, 2021 6:36 pm For those who think this can’t happen, I refer you 1979 when the US failed to make interest payments on its debt. The first time the US defaulted on its sovereign debt: https://www.forbes.com/sites/beltway/20 ... 09dda030ad
According to the article, the effect was a .6% higher interest rate on US debt for months afterward. This was during a time of 10%+ US interest rates. Unclear what would happen today with rates so low.
Which sort of begs the question - what happens if/when we "default"?
Presumably it would be like was stated in this article, the government will still be able to "pay debts" - just not 100% of those it has - "when" they are due... (But its not like they'll pay $0 after the debt limit is reached...) And presumably the treasury would prioritize paying the debts of the things most likely to impact the overall economy. And public pressure would mount until congress fixes the problem.
There would obviously be impacts - such as "non-essential" (whatever that means) federal government agencies/workers getting shutdown (unable to meet payroll). And logically, our credit rating would go down and future interest of "borrowed" money might end up higher as a result (as stated in the article). But maybe the impacts wouldn't be as sudden or as "doom and gloom" as is oft told to us by the media... That isn't to say that their couldn't be some sort of market panic/sell-off/etc. as a result... I've long since given up trying to understand why the markets do what they do on any given day... But this sounds less "systemic" and/or "unrecoverable" than has otherwise been presented - as clearly we have "defaulted" (even if in a limited capacity) before...
While I'm hopeful it won't come to a default - this oddly (and perhaps naively) makes me feel better that its impact will ideally be short lived...
Re: Is anyone hedging against a US default?
The holder of the world's reserve currency might default by not taking action in time to prevent it?
ZZZZZZ . . . wake me up when it's over.
Dittoes to the mention of "financial porn." (coined by Jane Bryant Quinn?)
I've never watched any of those channels, not even sure if they're available to me.
ZZZZZZ . . . wake me up when it's over.
Dittoes to the mention of "financial porn." (coined by Jane Bryant Quinn?)
I've never watched any of those channels, not even sure if they're available to me.
"There are no new ideas, only forgotten ones." -- Amity Shlaes
Re: Is anyone hedging against a US default?
SnowBog wrote: ↑Wed Sep 22, 2021 7:11 pm .. I've long since given up trying to understand why the markets do what they do on any given day... But this sounds less "systemic" and/or "unrecoverable" than has otherwise been presented - as clearly we have "defaulted" (even if in a limited capacity) before...[/i][/size]
"There are no new ideas, only forgotten ones." -- Amity Shlaes
Re: Is anyone hedging against a US default?
I know this is a commonly held view but I'm not sure I follow. Can you explain the causative relationship?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.
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.
Re: Is anyone hedging against a US default?
Other than higher interest rates, there's nothing to hedge against. Ie, higher interest rates are all that'll come out of missing a payment. Once it's missed the electorate will stop the brinkmanship and pass the limit. It's all for show. No actually meaningful legislation is involved.
Re: Is anyone hedging against a US default?
The US government played this game in 2011.
The resolution was that the US bond rating was cut from AAA to AA+, this (and the standoff) precipitated a bit of a global financial panic and, because of the financial panic, US government bond yields DROPPED (which means that prices went up ...).
Yep ... the risk of the US government defaulting on bonds made those bonds MORE DESIRABLE because in a global financial crisis there is a "flight to quality" and that flight tends to put a lot of money into safe US government bonds.
So ... to hedge against the risk of the debt ceiling not being raised you might want to consider investing in US government bonds.
Re: Is anyone hedging against a US default?
We have a TIPS LMP portfolio with the distribution rung for 2022 maturing in February. I chose to cash it in today on the outside chance the Congress gets even more stupid. I’ll forgo the 30 bucks of interest due over the next few months.
Also have plans to move 5-10% of our US equities (DFAC) to foreign equities (DFAX). Have been considering this for some time, but acting now.
Also have plans to move 5-10% of our US equities (DFAC) to foreign equities (DFAX). Have been considering this for some time, but acting now.
Re: Is anyone hedging against a US default?
Total bankruptcy? US debt obligations are denominated in dollars. The US can also create an unlimited supply of dollars out of thin air. It is not going to go bankrupt.000 wrote: ↑Wed Sep 22, 2021 7:36 pmI know this is a commonly held view but I'm not sure I follow. Can you explain the causative relationship?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.
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.
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Re: Is anyone hedging against a US default?
The interconnectedness of the U.S. with all other major world economies is strong. I see something like 'total bankruptcy' leading to something worse than the Great Depression. If the U.S. stops all imports due to an inability to pay for them, that would have a cascading effect on nations around the globe. Add to that all of the trillions of USD of U.S. debt that would suddenly become worthless, and it's hard for me to see the rest of the world coming through it without very grave hardship. From what I've seen, the GFC nearly resulted in a collapse of the U.S. financial system, which would have caused major global issues, and 'total bankruptcy' would be much worse than the GFC.000 wrote: ↑Wed Sep 22, 2021 7:36 pmI know this is a commonly held view but I'm not sure I follow. Can you explain the causative relationship?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.
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.
But all of this is conjecture about something that seems like a rather remote possibility to me. It's certainly not worth arguing over.
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Re: Is anyone hedging against a US default?
True, but if no one wants US dollars, the outcome would be basically the same.
The Sensible Steward
Re: Is anyone hedging against a US default?
I agree that total bankruptcy is not likely but was responding to a hypothetical. Anyway, no, the US Government - which is the borrower we're talking about here - cannot create an unlimited supply of dollars out of thin air. The Federal Reserve can, but doing so might mean the rest of the world doesn't want to use USD anymore which would be even more catastrophic than a default.
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Re: Is anyone hedging against a US default?
No I am not. At all. I would not convert any of my equity to cash as I do not need the cash, which is the only time I would sell my equities. What you are proposing is market timing and a belief that you have an edge over other investors as to the future reaction of the markets if the debt ceiling is not raised. I do not believe I have any special knowledge over other investors.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.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
Re: Is anyone hedging against a US default?
Ok, sure, but the US Government isn't importing goods. Private entities are, possibly with credit from US banks part of the Federal Reserve system.willthrill81 wrote: ↑Wed Sep 22, 2021 7:57 pm The interconnectedness of the U.S. with all other major world economies is strong. I see something like 'total bankruptcy' leading to something worse than the Great Depression. If the U.S. stops all imports due to an inability to pay for them, that would have a cascading effect on nations around the globe. Add to that all of the trillions of USD of U.S. debt that would suddenly become worthless, and it's hard for me to see the rest of the world coming through it without very grave hardship. From what I've seen, the GFC nearly resulted in a collapse of the U.S. financial system, which would have caused major global issues, and 'total bankruptcy' would be much worse than the GFC.
But all of this is conjecture about something that seems like a rather remote possibility to me. It's certainly not worth arguing over.
Anyway, like you said if such a thing were to happen we won't know the full impact until it does.
Re: Is anyone hedging against a US default?
They are an agency of the US government, but not really worth quibbling over. I agree that the loss of the USD as the world's reserve currency would be a big event. The connection of that scenario to the latest debt ceiling politicking is pretty murky.000 wrote: ↑Wed Sep 22, 2021 8:01 pmI agree that total bankruptcy is not likely but was responding to a hypothetical. Anyway, no, the US Government - which is the borrower we're talking about here - cannot create an unlimited supply of dollars out of thin air. The Federal Reserve can, but doing so might mean the rest of the world doesn't want to use USD anymore which would be even more catastrophic than a default.
Re: Is anyone hedging against a US default?
The market will crash 30%-50% someday.
Maybe even tomorrow.
This is always true.
And then it will recover. (This isn't guaranteed but pretty likely)
Maybe the reason will be a U.S. default (although probably something else). But you should always be ready for it.
And then you don't have to worry about it.
Don't try to avoid it. That's really hard.. You'll probably guess wrong, and end up with less money over the long run.
Just accept the market will crash 30%-50% someday... Maybe even soon, but in the long run, you'll be okay.
If you're young, you have the long run... If you're closer to retirement, you should have more in safer investments to spend while you wait for the long run recovery.
It's really this easy.
Maybe even tomorrow.
This is always true.
And then it will recover. (This isn't guaranteed but pretty likely)
Maybe the reason will be a U.S. default (although probably something else). But you should always be ready for it.
And then you don't have to worry about it.
Don't try to avoid it. That's really hard.. You'll probably guess wrong, and end up with less money over the long run.
Just accept the market will crash 30%-50% someday... Maybe even soon, but in the long run, you'll be okay.
If you're young, you have the long run... If you're closer to retirement, you should have more in safer investments to spend while you wait for the long run recovery.
It's really this easy.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Re: Is anyone hedging against a US default?
My wife and I discussed this today before seeing this thread. Each month we move some money from our higher interest online savings account to our brick and mortar bank checking account to cover our monthly expenses. Our next transfer will be larger than others in case our October Social Security payments are delayed. It is sad that our Congress is so dysfunctional to create this level of uncertainty.
Re: Is anyone hedging against a US default?
I reallocated this morning from about 52 pct equity to 44. I normally wouldn’t care, but I just retired and this time feels different.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.
Re: Is anyone hedging against a US default?
This, but importantly to answer the subject line question...MarkRoulo wrote: ↑Wed Sep 22, 2021 7:41 pmThe US government played this game in 2011.
The resolution was that the US bond rating was cut from AAA to AA+, this (and the standoff) precipitated a bit of a global financial panic and, because of the financial panic, US government bond yields DROPPED (which means that prices went up ...).
Yep ... the risk of the US government defaulting on bonds made those bonds MORE DESIRABLE because in a global financial crisis there is a "flight to quality" and that flight tends to put a lot of money into safe US government bonds.
So ... to hedge against the risk of the debt ceiling not being raised you might want to consider investing in US government bonds.
Be prepared to opportunistically rebalance. Best done with an AA that is not 100/0.
From a VTSAX near-high on 7/22/2011 to a near-term low on 8/8/2011 (the game of debt default chicken was played around 8/2/2011) VTSAX fell 18% then went up/down/up/down repeatedly to a low on 10/3/2011, VTSAX having lost 22% since the carnage started.
So the "flight to quality" referred to above was from stocks -> bonds. In that 7/22/2011-10/3/2011 timeframe were lots of rebalancing opportunities from bonds -> stocks. When the market started recovering one ideally rebalanced in the other direction.
I was relatively new to the BHs then and still learning about rebalancing so missed out on the opportunity.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
Re: Is anyone hedging against a US default?
The world appears very different as a decumulator than it did as an accumulator. When I was working, especially early on, major threats to my retirement portfolio meant little; job security was indeed front and center. Now retired, that equation has indeed flipped. Point is that one’s time in life makes all the difference in just how one answers such a question.
Re: Is anyone hedging against a US default?
Ding! Ding! Ding!
We have a winner...
It doesn't matter what's going in the world.
There is ALWAYS a crisis... Seriously... ALWAYS. Government shutdown from years ago. Greek debt crisis. Brexit. Pandemic. Government shutdown in one week. There is ALWAYS a possible crisis on the horizon.
What matters is your personal situation
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: Is anyone hedging against a US default?
I am hedging, but only incidentally. My personal opinion is that the risk is extraordinarily low. Treasuries are boring for a reason.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.
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Re: Is anyone hedging against a US default?
I benchmark allocation against the Vangaurd target date fund. For me, the 2035 retirement. That is 38 percent international. Although I do use different funds. Obviously, international hedges against us specific risk to some degree but not totally as large companies are global.
Re: Is anyone hedging against a US default?
Pfff, I hope it does and welcome the s-show
Get rich or die tryin'
Re: Is anyone hedging against a US default?
Are you looking for an excuse to market time without "actually market timing"?TJat wrote: ↑Wed Sep 22, 2021 6:21 pm 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.
"Ambiguous 'the market is a bubble' concerns" have more credence than the possibility of an upcoming US default.
A US dollar is a Federal Reserve Note. You think that's a hedge against US default? Come on. Nobody thinks that.
If you want to derisk, then derisk. Acknowledge why you are actually thinking of converting equities to cash: you're scared of a stock market decline and you don't like bond yields. Accept that you are responsible for your decision made by you based on whatever your real reasons are.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: Is anyone hedging against a US default?
Perhaps we mean different things by hedging. To me, hedging means taking actions to prevent a specific risk from materially damaging your financial position. For example, let's say you are waiting out a vesting period when you have a large holding in company stock. You could try to do this through your equities allocation, perhaps by reducing your exposure to your company's market sector. But that's not going to reduce company risk and it's unlikely you have enough other holdings to effectively hedge more then a small party of your position The most straightforward alternative is to use options. You know the vesting date, so you pay some money now or give up some potential upside to guarantee you'll get a price you can live with on that date.TJat wrote: ↑Wed Sep 22, 2021 6:50 pmThis is a fair point. Devils advocate though, put options cost money, perhaps cash an investor doesn’t have. Rebalancing my 401k and Roth IRAs towards cash costs nothing beyond future opportunity and maybe 7 minutes of my time. Why would options be a better hedge?Alex Frakt wrote: ↑Wed Sep 22, 2021 6:38 pm But if you want to assume the worst, rather than selling your equities a far better way to hedge a specific risk on a specific day is to buy appropriate puts.
Likewise, here you are concerned about a possible market crash that would begin at some point in October. What is your estimate of the size of the crash? 30%? 50%? How is shuffling your holdings going to hedge this? Say you start 70/30 and go to 50/50. In a 40% equities crash, all you have done is reduced your losses from 28% to 20%. OTOH, if the market continues at historical rates, you are giving up around .2 percentage points per month until you reverse your allocation.
In contrast, if you use out of the money puts, you can put a floor on your losses for a relatively small upfront cost. Something like .25% of your portfolio value to ensure a drop of no more than 10%.
So you can cut your potential loss in half for around 5 basis points net (remember you are giving up an expected 20 basis points per month with your allocation change).
Note that I am not recommending this. 20 or 25 basis points per month adds up to serious money over time. Instead, you should be evaluating your overall allocation versus your need and willingness to take risk. If you are asking these questions, maybe it is time to do a permanent allocation from equities to bonds or cash.
Or maybe it's just an indicator that you need to cut your intake of financial "news". Remember the goal of the media is to get your attention so they can sell you something. Alarmism is a very effective way to do that.
Re: Is anyone hedging against a US default?
I'm indexing my news intake by equally ignoring all of it. That way, Mr. Bogle's advice of "stay the course" is easier to follow.Re: Is anyone hedging against a US default?
The media need to attract your attention in order for them to be profitable-->if A, then B, then C do happen, D! could occur!!!
As an investor, I get paid to tolerate risks AND the mere threat of those risks.
These days, I'm forty years past my initial purchase of index shares, and so far, that is still good, in spite of the amount of bad news since then.
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Re: Is anyone hedging against a US default?
I am less concerned about a debt ceiling default because that type of default is more akin to “We aren’t paying you” rather than “We can’t pay”. Assuming those who rely upon treasury payments are liquid or have access to dollar denominated credit, which the Federal Reserve can create rapidly and without limit, I’m somewhat skeptical that a short term default would be as catastrophic as some fear.
I’m far more concerned about the reverse situation, ie creditors being unwilling to continue lending to the United States or (worse) the world attempting to divest itself away from the dollar and towards a more diversified body of assets.
Regardless of which scenario is most likely, I don’t think it’s sound to put all your eggs in one basket. 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 am continually baffled by those who are comfortable holding only US equities and only US bonds (especially if it’s only US treasuries) or onl dollar currency bonds. Those are a lot of nondiversified bets placed only on the US. Regardless of how one estimates the long term prospects of the US as a whole, I don’t think anyone can seriously look at the US’s political system in recent years or its public financial management and say that either are trending in a sound direction.
I hedge by diversifying, but if I were to bet for or against US markets over a 30 year time frame, I’d bet against their equities relative performance (so still positive, but less positive than non US markets) because of mean reversion, the US lower growth rates compared yo many markets, and the the correlation between QE balance sheets and the equity markets, which suggests that some portion of market value is solely attributable to QE. I’d bet against the relative performance of bonds because rates are at historic lows due to the Federal Reserve’s market manipulation, which i don’t think it can continue due to inflationary pressures, and my concern that the world will shift away from the dollar for many reasons, such as unstable finances of the treasury and constant long term, worsening structural deficits, a shrinking share of global GDP, and competitors who are in my view increasingly getting their houses in order and will become more competitive options in the future. For similar reasons, I’m not bullish on the dollar. As such, I expect higher rates in the future and an accompanying devaluation in bonds.
I’m far more concerned about the reverse situation, ie creditors being unwilling to continue lending to the United States or (worse) the world attempting to divest itself away from the dollar and towards a more diversified body of assets.
Regardless of which scenario is most likely, I don’t think it’s sound to put all your eggs in one basket. 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 am continually baffled by those who are comfortable holding only US equities and only US bonds (especially if it’s only US treasuries) or onl dollar currency bonds. Those are a lot of nondiversified bets placed only on the US. Regardless of how one estimates the long term prospects of the US as a whole, I don’t think anyone can seriously look at the US’s political system in recent years or its public financial management and say that either are trending in a sound direction.
I hedge by diversifying, but if I were to bet for or against US markets over a 30 year time frame, I’d bet against their equities relative performance (so still positive, but less positive than non US markets) because of mean reversion, the US lower growth rates compared yo many markets, and the the correlation between QE balance sheets and the equity markets, which suggests that some portion of market value is solely attributable to QE. I’d bet against the relative performance of bonds because rates are at historic lows due to the Federal Reserve’s market manipulation, which i don’t think it can continue due to inflationary pressures, and my concern that the world will shift away from the dollar for many reasons, such as unstable finances of the treasury and constant long term, worsening structural deficits, a shrinking share of global GDP, and competitors who are in my view increasingly getting their houses in order and will become more competitive options in the future. For similar reasons, I’m not bullish on the dollar. As such, I expect higher rates in the future and an accompanying devaluation in bonds.
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Re: Is anyone hedging against a US default?
I think this is sound, but how are you doing this? Curious.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.
Re: Is anyone hedging against a US default?
People said there was a zero chance a lot of things would happen.ClassII wrote: ↑Wed Sep 22, 2021 6:24 pm No.
We've been here before. There's basically zero chance they allow a default to happen. There is already the emergency funding bill ready to go to keep the lights on and push their signature budget bill down the road a bit. Absolute worst case the government goes into shutdown mode (again, been here before) and we do that drama until either the big budget is passed or some half-measure. In any case the US is NOT going to default no matter what the bluster is coming out of Washington to the contrary.
And then they happened.
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Re: Is anyone hedging against a US default?
This. It’s best not to worry about such stupidity. If you are worried about something like this, but you get into an automobile everyday you need to get your head checked.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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