Shares of Casinos in Macau, Iraqi stocks & Physical Gold an Insurance against Mischief

President Obama announced today that he is nominating Janet Yellen, currently the Vice-Chairman of the Federal Reserve Board, to role of Chairman.

Yellen has been on my radar screen since the Clinton Administration when she served as Chairman on Clinton’s Council of Economic Advisers. She is a known entity.

In 2008, she spoke at the CFA (Chartered Financial Analyst) Institute’s Annual Conference which happened to be held in Vancouver that year. At the time she was serving as President of the Federal Reserve Bank of San Francisco (one of the 12 regional Federal Reserve Banks). During her presentation, she struck me as a potentially autocratic leader. Prior to listening to her in person, my sense was that she was might have been a more diminutive personality and a wide consensus builder.

In the Q&A session, she came across as extremely confident in what the Fed was doing and that it had done a great job during the decade during which she held on-and-off roles within the Federal Reserve System. This was about four months before the Lehman Brothers collapse which might tell you that there was some over-confidence present. However, during the Q&A she also exhibited some tone deafness as some extremely well qualified delegates had some great but serious questions. Her answers suggested that either she did not grasp the importance of some of the question topics, or dismissed them because they did not fit her perspective or beliefs.

My impression at the time was that she was especially concerned with maintaining economic growth at almost any cost. She appeared to be more concerned about Americans enjoying a high standard of living, even if it resulted from financial engineering. She didn’t seem especially focused on traditional central bank issues such as the general stability of the financial system and the things that could disrupt that. To be fair, Alan Greenspan and Ben Bernanke also fell into this category of central banker. Generally, these central bankers have pushed and pushed for wider powers and much more broad mandates. They see themselves more as general economic guardians as opposed to strictly central bankers.

Yellen will almost certainly be friendly to the current presidential administration and its ambitions for greater spending and bigger government. These ambitions are facilitated by low interest costs on the Federal debt and Yellen is just the person to fight for that.

That said, monetary has lost much of its potency over the last five years with respect to spurring employment and economic growth. If she maintains the rate of money-printing, or Quantitative Easing, well into next year, we could see a situation where the market not longer believes in the efficacy of the policy. It will be very interesting to see what she does in this case which would be an extremely challenging period for someone who sees themselves as an economic guardian.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.  

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

The news over the last two weeks has suggested that if U.S. lawmakers are unable to pass an increase to the federal debt ceiling, the U.S. will default on its Treasury bond obligations.

Not so fast.

There is no law that stipulates that there will be a halt on maturing bonds being redeemed and on interest paid to current bondholders.

Instead, the scenario would be more like this:

The U.S. Treasury Department has three agencies which make payments to cover the cost of running the government. This covers almost everything including the wages of government workers, wages of military personnel, civil and military procurement, and interest on the bonds that it issues. Since they have not had to prioritize in the past, there is no existing method of prioritization. Because the debt ceiling has been perpetually higher than the amount of outstanding debt in the past, all these payments have been on autopilot over the years.

So, in the event of hitting the debt ceiling, the U.S. Treasury will probably have to manually prioritize expenditures. Jack Lew, the Secretary of the Treasury, and his staff will have to carry out these decisions. Jack Lew’s boss is President Obama. Therein lies the source of Obama’s panic. Hitting the debt ceiling would be akin to a hot, flaming ball landing in his half of the court. He will be forced to decide whether to keep things like the National Parks open, or to pay interest to the bondholders. Considering that some of America’s largest trading partners are significant bondholders, and that the Treasury will have to roll-over $3 trillion in maturing bonds over the next twelve months, they certainly don’t want to upset those bondholders.

So, with that, what are the chances of a default? Low.

That does not mean that it cannot happen. Back in the late 1970s, the U.S. bumped into the debt ceiling for a short-period of time but the ceiling was quickly raised. However, there was a glitch with some word processing software that bungled the administration of the interest payments and those payments were delayed. The bond market got hit has investors became unnerved. And, it took a number of months before bond prices rose back to where they were before the problem.

Barring some similar glitch, a default will probably be avoided at all costs and bonds should sail relatively smoothly through this period.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.