David Kotok, Chairman and Chief Investment Officer of Cumberland Advisors (and our host at “Camp Kotok” for the annual “Shadow Fed” fishing expedition), leads off today’sOutside the Box by meticulously dissecting the roadkill that is our federal government’s process for deciding whether they will continue to pay their bills and federal employees’ wages.
Will the US default? David doesn’t think so, and neither do I; but oh, the foolishness, even to tempt the economic fates (read: the markets) this way. David notes that global investors think differently about US default risk than we US-centric types do. Well, David Zervos is with me here at Barefoot, and we just heard that one foreign prime broker (and now maybe two?) is calling hedge funds to say they will not take short-term T-bills as collateral and will mark T-bills down to zero in the event of an actual default. The ultimate risk-free asset is now full of risk? REALLY? This is an unthinkable event. This broker is a Primary Dealer, and I assume they will very shortly get some irate phone calls; but these things start with one bank and then it turns into a herd.
David Zervos, Managing Director at Jefferies, gives us his own slant on the ups and downs and ins and outs of default in today’s second OTB selection. He fills us in on some key constitutional history regarding default and makes it clear what is legal, what is illegal, and what is downright perverted about the process playing out in Foggy Bottom. David remains confident that the Fed is the “one adult in the room that can (and will) put a stop to the madness if we go down the highly unlikely path to default.” We’ll see.
As we confront that possibility, let’s note that Social Security is a trust fund, so the money is set aside in bonds. Not to make Social Security payments would be an administrative decision, not one due to a lack of funds. Other entitlements, you can argue. It will be interesting to see what gets priority if it comes to that, as money comes into the Treasury every day, so there is plenty to cover the interest on the debt, and rollovers could be done under the limit.
However it shakes out, we can only hope that the parties who made the decision to close down the public memorials as a way to demonstrate the “costs” of the government shutdown will not be allowed to come anywhere near the decisions on prioritizing payments. Those idiots should be fired and barred from ever having any level of public responsibility. It cost far more to put up barricades and man them than it would have cost simply to leave the memorials open. To tell WW2 veterans that they cannot see their own public memorial when they have come, perhaps for the last time, to acknowledge the lives of those with whom they served, is beyond appalling. The Tomb of the Unknown Soldier? The Lincoln Memorial? These are public places that could and should have been left open. To barricade them was a petty, punitive act with the most venal of political motives.
It is one thing to disagree on budgets and process and the constitutional order of things. I know that many of my readers are very passionate about which side the bulk of the blame belongs to. But I come down on both sides with almost equal frustration. I understand the American political process and know some of the history of how business gets done in Washington, but some things are just beyond the pale. I would say to our “leaders,” cultivate some perspective and get a grip.
And since we’re getting all the nitty-gritty on federal sausage-making today, I just had to toss in a note from the incomparable, indomitable Joan McCullough, who dredges up for us an esoteric but not irrelevant gem called the Feed and Forage Act of 1861. I will let Joan explain, as only she can.
I get to spend the next three days at the Barefoot Ranch, partaking of an intensive economic/investment festival (calling it a conference simply misses the energy in the room). All hosted Texas-style by Kyle Bass. His connectivity is astounding: the people gathered represent some of the finest thinking anywhere – and he has managed to get them in one room. Some of the names are old friends to this letter (Lacy Hunt, Niall Ferguson, Anatole Kaletski, Jon Sundt, Mark Yusko, Larry Lindsey, and David Zervos), and others are names that ride under the radar, yet run some of the best trading funds in the world. I can’t tell you how excited I am to be allowed in the room. I will report back this weekend on what I learn.
And now I’m off to try to figure out where the world is going, eat a lot of BBQ and chuckwagon food, and just have some fun. Life can be so good at times.
Your forever amazed at the US political process analyst,
John Mauldin, Editor
Outside the Box