Posts tagged: Default

Why I’m Not Worried About a Default

The United States Government is shut down and the risk of defaulting on U.S. debt service grows stronger every day. Republicans and democrats are engaged in a fight with each party trying to come out looking like the victor. The media is writing and reporting worst case scenarios, causing fear amongst many investors. Meanwhile, the market has been declining modestly while the political posturing continues.

Granted, this is a big story and could have huge ramifications if the U.S. defaults, but investing is all about probabilities, not certainties. I believe the probability of default is exceedingly low for a few reasons. As a result, a market pullback in response to debt negotiations presents a buying opportunity for investors with a long time horizon. 

No One Wins if the U.S. Defaults
This is an important factor to remember. Despite the almost child-like bickering going on in our dysfunctional government, nothing changes the fact that a default would be bad for Americans, Investors, every politician in D.C. and the U.S. and global economies.
What is happening is both parties are trying make the other one believe they are willing to walk away from the negotiations and let a default happen. If one party can get the other one to believe they are willing to let a default happen, they will get more concessions from the other side. The ramifications of this will be that the market could extend its pullback as each side tries to gain leverage over the other.

Because this is a no-win situation for all parties involved, I do not believe we will default. This arguing about the debt ceiling is just more noise for investors to deal with. The ramifications of a default would be far reaching and negative for the markets and the economy. Both Democrats and Republicans are just trying to figure out how to settle this and claim victory. But make no mistake, if there is a scenario in which no one wins then the likelihood of that scenario taking place is very low. It’s basic human nature. Read more »

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CDS: How to Make Money off a Default

Lately the credibility of countries and companies is defined not only by the rating agencies but by the market itself. The new invention that made this possible was made by Blythe Masters, a mathematician and a Cambridge graduate, working for J.P.Morgan Chase Bank. The name of the invention is the credit-default swap (CDS) and the first CDS agreement was signed in 1997 to manage risks.      Read more »

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