What If We Default? What If We Don't?

George Brooks |

No one on earth seems to doubt the United  States  will avoid default. Clearly, investors here don’t, the stock market was up Monday for the fourth straight day inspite of  ominous headlines yesterday before the open:  “No Deal in Sight….”, Debt Ceiling Showdown Enters Final Stretch With Default Looming.”

   This morning, the global news brimmed with optimism with reports that stock markets in U.K., Japan, Europe, Germany and the emerging markets were up, just another indication default is dismissed as impossible.

   But, the U.S. Congress has a flair for the dramatic (in addition to the absurd, unpredictable, inefficient, moronic ….), so odds favor this is going down to the wire, possibly  the weekend.

   I can’t believe U.S. Treasury Secretary Lew can’t cut the system a few days of slack to accommodate an agreement that passes the deadline he himself set.  He had to pick a date. If it was Nov. 1, the debate would rage until Nov. 1, so he picks the 17th knowing he has a tiny bit of slack.


   Very few on the Street have given thought to what happens to global markets if Thursday, October 17 comes and no decision has been reached?

   And  if no decision is made Thursday?

   It is beyond comprehension that the debt ceiling will NOT  be raised by Thursday, but we are dealing with an ideological divide not seen since the Vietnam years, and possibly not seen since the Civil War.  Anything is possible.

   Did anyone believe Lehman, Merrill, Bear, Washington Mutual, etc. would vanish in the unbelievable Great Recession of 2007 – 2009?

  Front-running the outcome here is risky.


   I still believe there is a good chance a decision on the debt ceiling will exceed the deadline by a couple days. If so, the stock market will take a hit, possibly a huge hit before rebounding Friday or Monday.

   Currently, it looks like the Street is buying in anticipation of a “deal” and will run stocks up sharply on an announcement. That happened briefly in 2011 after an agreement was reached on the debt ceiling, prior to the market plunging.



On October 3,  I said the Oct. 17 debt ceiling deadline would be breached, but a deal would be reached the following weekend, the 19th and 20th. I reasoned that Treasury Secretary Lew can find ways to stretch the deadline several days without defaulting.

   Additionally, I said I expected the DJIA to hit 12,760 intraday (S&P 500: 1,430) on the Friday the 18th which, but that would be a big buying opportunity.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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