I have a bunch of friends and coworkers whose opinions I value, and I like to poll them sometimes on issues like the Debt ceiling debate and the odds of default. These guys are all institutional investment professionals and don't generally allow their opinions to be influenced by their personal politics as much as by their desire to turn a profit. I find them to be highly insightful on issues like this.
I spoke to 16 guys on this particular topic. That is by no means everyone I speak to about this stuff, but I think it represents a pretty good cross section. Their titles rank from the position of "Trader" on the low end to "Hedge fund CEO' at the high, and in aggregate, they have direct control over a total open market position measured in the Billions. As I've said before, 95% of the people I know are geniuses. That would describe every one of these guys. Every one of them knows more about how the US Economy really works than Paul Krugman, or anyone on CNBC.
The broadest consensus was that the people in Washington make their way in the world by abandoning their principles (if they had any in the first place). To them that meant that eventually, someone somewhere will get sold out to make a deal, thus avoiding default. Since the Democrats have the media on their side, most felt the Republicans would be the ones to break, but that they would stop short of allowing any new taxes. It was also the consensus that the net effect would be temporary, and that the plan that the Democrats are promoting will lead to a default eventually - just not now. If Obama gets reelected, they view an eventual default as an extremely high probability - in excess of 95%.
That was the 'more or less' consensus view, but there were a few notable exceptions.
For instance the guy whose opinion I hold most valuable above all others on issues pertaining to fixed income and debt was firmly in the "there will be no deal and we're getting a default" camp. So too was the man with the loftiest title of the group, and the guy who controls the largest amount of investment capital, who is also a fixed income investor. One other guy who I think is brilliant in the High Frequency space, but is usually a negative indicator for issues pertaining to macro economic forecasts, thinks everything will work out fine.
All this discussion has pushed my personal opinion closer to the 'we will default' view than it was before. But even thought my personal odds now say that it's more likely than not, I'm not completely convinced of it's inevitability yet.
Make of this what you will.
18 comments:
In light of that more or less consensus view, were there any broad takeaways as to how they're positioning their portfolios in the short-term (through the Aug) default date, and intermediate (if/when BO) gets re-elected? Obviously this isn't the first rodeo for most, esp. the fixed income guys, but if we're talking historical default scenarios, and a cascade decline across asset classes, they've got to be thinking about some out-year insurance against the tail event, no?
In my world asking someone about how they're position a book is sort of like asking how their wife is in bed. If he volunteers the information it's fine to talk about, but it's a little rude to be too inquisitive on the topic.
Of course. Apologies, my question was worded clumsily. Meant it more in the generic "Treasuries are going to get killed", "USD is tapioca", "We're stocking up on precious metals, farm land, and water, etc."
Decent slug of hedgies (primarily equities) are clients of mine. Speak when spoken to on positions.
Actually, I wasn't chastising you for asking (how are you supposed to know). I was only explaining why I didn't ask.
As for what happens, the vote itself, or a downgrade won't matter all that much. a bigger question is what Obama decides to actually pay for. If he puts all the money into Education funding, green energy and funding for Dodd Frank,and doesn't pay the debt, then expect the worst case scenario. But if he funds debt interest and the army letting everything else go, it will be less severe.
The consequences will revolve around how irrational he becomes when he no longer has money for everything and must make choices.
but if you want to hedge, I'd say precious metals are an excellent bet at these levels.
@Bzod: Next, are you going to ask for pin #'s for credit cards? Are you based in Burkina Faso?
If these guys are geniuses, especially in the areas they work in, they certainly wouldn't be telling you what they are really thinking. They'd be using those thoughts to make financial bets.
you said the Media is on the Democrats side! Really how?
Oh boy... that sounds like a really interesting discussion. No one has ever brought up the idea of media bias before.
What are you 13 years old?
I have one more comment for the leftists who are reading this.
The people I spoke to are my friends, my peers and my co-workers. We’re all part of a community that must be right more often than we are wrong, or we end up unemployed. That’s the big difference between us and academia. If you’re an academic there are no direct consequences of being wrong, so your thinking can remain much more sloppy than ours.
As a consequence then, by the time you’ve been at this job for two decades or so, you know more about how an economy really works than any theoretician. This is why academic economists have subordinate positions on Wall Street. If they really knew how things worked better than anyone else and they got it right all the time, then they would be in charge.
One commenter implied that the people I spoke to would probably be clever enough to keep secret from me their true opinions in order not to tip me off a profit generating idea. This is the childish attitude of someone who doesn’t understand even the beginnings of what any of us do. There are very few secrets on Wall Street in the first place, and my friends would be very unlikely to keep one from me so long as it was legal to share it.
My point is, you leftists aren’t talking about the real Wall Street, but the imagined Wall Street of Hollywood. And since that’s o, I see little point in arguing with you about it.
Like most things a liberal believes, their impressions of Wall Street are all a fiction. They’re invented from whole cloth in their imagination. And rather than being populated by smart, hard working guys who are trying to provide a return to investors by seeing the real world a little more clearly than the next guy, its instead staffed with ‘fat cats’ who exploit the weak and the poor for a living.
But here is a newsflash… you don’t have to be a ‘true believer’ if the thing you’re looking at is objectively verifiable as reality. And that’s the only pond we swim in.
I guess you and your brilliant friends don't realize that the president doesn't set the budget or control the purse springs, Congress does.
You're also clueless about what "lefties" think or what motivates them.
But carry on. Don't forget to stock up on duct tape.
"The people I spoke to are my friends, my peers and my co-workers. We’re all part of a community that must be right more often than we are wrong, or we end up unemployed. That’s the big difference between us and academia. If you’re an academic there are no direct consequences of being wrong, so your thinking can remain much more sloppy than ours."
Yes, when the financial industry makes mistakes they get a taxpayer funded bailout.
Gee Lucy, with a rapier wit like that you might as well have called me a 'doodie head'. It's always like being back in third grade with you people.
I actually do know precisely what motivates liberals. I haven't actually discussed it here, but since you brought it up, it's the concept of self congratulation.
"I'm a good person because I believe _____________." is the sole motivation for about 90% of all leftist social policy. And that is usually driven by that horrible insecurity that liberals feel.
But even when that isn't the sole motivator, one thing they never do is weight cost and benefit like grownups. Nor do they ever look at past examples or think about the results of polices - only the 'alleged' motivation for them.
But if you really want to understand what motivates liberals, you should try reading a book called "The closing of the American mind".
There are no pictures so so you'll probably want to take your time with it.
The Hedge fund community got exactly zero from that bailout. But I guess it's all the same to you people right?
When you aren't penned in by reality, I guess it doesn't make much difference.
""I'm a good person because I believe _____________." is the sole motivation for about 90% of all leftist social policy."
Honestly, that is the silliest thing I've ever read. Don't you believe that you're a good person because of the things you believe in?
Yee gods.
" Nor do they ever look at past examples or think about the results of polices - only the 'alleged' motivation for them."
You mean like the invasion of Iraq? Bush tax cuts? Medicare Part D? All unfunded, all the money added to the debt to pay for those three things. What were the results of these policies, Tom?
"But if you really want to understand what motivates liberals, you should try reading a book called "The closing of the American mind".
There are no pictures so so you'll probably want to take your time with it."
This is my first, and probably my last visit to your little blog, but an attitude like yours doesn't foster honest discussion of the issues. But you may not be interested in honest discussion.
It's your blog.
I'm always interested in honest discussion with grownups, but I have no interest in rehashing a liberal agenda that hasn't changed since the Carter administration. Nor am I interested in the "I know you are but what am I" school of liberal debate.
Unless of course you were being serious, in which case, I'm sure something like this will help you out greatly in the future sko:
http://www.amazon.com/Reading-Comprehension-Success-Minutes-Day/dp/1576856763/ref=sr_1_1?ie=UTF8&qid=1310863488&sr=8-1
I've got to tell ya, I find it kind of funny that an innocuous post like this one is causing so many liberal temper tantrums. I just reread it and I really don't see it as inflammatory at all.
I'm certainly capable of being partisan on occasion, but I genuinely don't believe this is one of those times. I'm not talking about what I think is right or wrong, or who I think is responsible for anything. I'm not pointing fingers or casting blame, or talking about causes at all. All I'm doing is reporting the results of a few conversations I had with some people I know who analyze political risks as a part of their job. And even those conversations were specifically apolitical.
No one's view is being challenged here so I don't know what all the liberal fuss is about.
They all must be much more insecure than I ever imagined to get so worked up over a simple piece like this.
Actually, if you read my post, I was not responding to your blog post, but to your attitude in your responses.
I enjoy the occasional back and forth with right wingers and have found a few that are fun to debate, don't add silly ad hominems to bolster their egos and sometimes we agree on more than we disagree.
Obviously you're not interested in that, and judging from your blog post, you aren't really prepared for such debate.
Maybe I'll see you at the shore sometme.
"It's Bush's Fault!"
"It's Bush's Fault!"
"It's Bush's Fault!"
"It's Bush's Fault!"
"It's Bush's Fault!"
"It's Bush's Fault!"
"It's Bush's Fault!"
That about sums it up.
Or maybe not.
Once again, louder:
"IT'S BUSH'S FAULT!!!"
"IT'S BUSH'S FAULT!!!"
"IT'S BUSH'S FAULT!!!"
"IT'S BUSH'S FAULT!!!"
"IT'S BUSH'S FAULT!!!"
"IT'S BUSH'S FAULT!!!"
There... the liberal idea about "debate".
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