Cramer Says a Default Could Cause a 10% Crash in the Market

The question is, if the USA does not increase its debt ceiling who WILL it pay and who won't it pay?

If, as we are often told, the USA borrows 60% of the money it spends every year, (the other 40% they pay from revenues) then, sans the ability to issue new debt, in THEORY, the government will have to stop paying for 60% of its current obligations.

Now what exactly can the government stop doing that will amount to a 60% decrease in its operating budget?
They borrow 40%. They will have to furlough employees, eliminate programs. Cut back on the military. Stop paying for silly shit like scientific studies of shrimp running on treadmills! The glory days of spend, spend, spend are over. Spending needs to match revenue, it ain't rocket science!

In other words, add more people to the unemployment rolls. Not very sensible in a crumbling economy.

Either way, we have to face the music. So we can make the hard choice now or later. Politicians have been choosing the "later" option for the last 70 years. It doesn't seem to be working.....
 
I totally disagree. If the US doesn't increase the debt ceiling they become a more attractive borrower, not less. It shows that the US is serious about reining in it's debt.

The existing bondholders will be paid. The US will not default. The misinformation and fear mongering over this issue is mind blowing.....

We cannot say with certainty that the US will not default. I think the probability is low but it is not zero. And I also believe quite strongly that if we do default, then the risks of a financial catastrophe are quite high, given that Treasuries underpin the global financial system. Few thought allowing Lehman to go under would have such a profound affect on the global economy. A default would likely hit the global financial system in ways few have imagined.

The economy will also slow, perhaps dramatically, if the debt ceiling is not raised. We could repeat what happened in 1937-38.
 
They borrow 40%. They will have to furlough employees, eliminate programs. Cut back on the military. Stop paying for silly shit like scientific studies of shrimp running on treadmills! The glory days of spend, spend, spend are over. Spending needs to match revenue, it ain't rocket science!

In other words, add more people to the unemployment rolls. Not very sensible in a crumbling economy.

Either way, we have to face the music. So we can make the hard choice now or later. Politicians have been choosing the "later" option for the last 70 years. It doesn't seem to be working.....

I do agree with this. However, the best option is to start fundamentally reforming entitlements long term. Contrary to the mythology out there, the deficits are not because of Obama. They are because of automatic stabilizers built into law over the decades. Those are what have to be reformed. And about half of the deficit us due to growth below capacity Taking $1,500,000,000,000 out of the economy right now does nothing to reform entitlements and acts countercyclically to the economy, making things worse, not better.
 
I totally disagree. If the US doesn't increase the debt ceiling they become a more attractive borrower, not less. It shows that the US is serious about reining in it's debt.

The existing bondholders will be paid. The US will not default. The misinformation and fear mongering over this issue is mind blowing.....

We cannot say with certainty that the US will not default. I think the probability is low but it is not zero. And I also believe quite strongly that if we do default, then the risks of a financial catastrophe are quite high, given that Treasuries underpin the global financial system. Few thought allowing Lehman to go under would have such a profound affect on the global economy. A default would likely hit the global financial system in ways few have imagined.

The economy will also slow, perhaps dramatically, if the debt ceiling is not raised. We could repeat what happened in 1937-38.

I agree and disagree.
The largest affect this will have on the markets is that yet another veil has been lifted revealing more of how our entire system is built on sand while resting on ice.
A 10% fall would only get the markets to a more realistic level. I have been saying all year that we are absolutely going to have a second crash - it is impossible to believe otherwise - look at it! The markets are at pre-recession levels and going higher...that is nuts.
If it wasn't this - it would be something else. This is what happens when a market is crazy-over invested.
 
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Three major points:

If the president gets his wish the US credit rating will be downgraded before election and he is opposing that.

If the GOP get their way, entitlement reform now, then the reduction of overseas garrisons will happen on a Republican watch causing the EU to collapse.

If the IMF, World bank et al get their way and the US shifts from a corporate income tax to a VAT that will cause the Far East to collapse.

Cramer is not looking at the big picture of the US propping up the developed world in order to win the cold war. There are consequences of victory as well as defeat.
 
it is my belief that the us tres. will always be the safe bet, there just isn;t another vehicle that provides that security, period, other than gold, and let me tell you it is also my firm belief that if gold hoarding really took off, ala Roosevelt and every gov. in the G-20 would put their foot down, fast.
 
In other words, add more people to the unemployment rolls. Not very sensible in a crumbling economy.

Either way, we have to face the music. So we can make the hard choice now or later. Politicians have been choosing the "later" option for the last 70 years. It doesn't seem to be working.....

I do agree with this. However, the best option is to start fundamentally reforming entitlements long term. Contrary to the mythology out there, the deficits are not because of Obama. They are because of automatic stabilizers built into law over the decades. Those are what have to be reformed. And about half of the deficit us due to growth below capacity Taking $1,500,000,000,000 out of the economy right now does nothing to reform entitlements and acts countercyclically to the economy, making things worse, not better.

Cutting $1.5 Trillion in deficit spending will lower GDP for a one year. That is the medicine we have to take. Propping up GDP with more government spending is merely delaying the pain and it doesn't work anyway. The stimulus didn't do much except add to the debt. Personally, I'd rather rip the band-aid off all at once. Get it done with. Cap the debt first, then reform entitlements.

I agree with the rest of your post.
 
I totally disagree. If the US doesn't increase the debt ceiling they become a more attractive borrower, not less. It shows that the US is serious about reining in it's debt.

The existing bondholders will be paid. The US will not default. The misinformation and fear mongering over this issue is mind blowing.....

We cannot say with certainty that the US will not default. I think the probability is low but it is not zero. And I also believe quite strongly that if we do default, then the risks of a financial catastrophe are quite high, given that Treasuries underpin the global financial system. Few thought allowing Lehman to go under would have such a profound affect on the global economy. A default would likely hit the global financial system in ways few have imagined.

The economy will also slow, perhaps dramatically, if the debt ceiling is not raised. We could repeat what happened in 1937-38.

I agree and disagree.
The largest affect this will have on the markets is that yet another veil has been lifted revealing more of how our entire system is built on sand while resting on ice.
A 10% fall would only get the markets to a more realistic level. I have been saying all year that we are absolutely going to have a second crash - it is impossible to believe otherwise - look at it! The markets are at pre-recession levels and going higher...that is nuts.
If it wasn't this - it would be something else. This is what happens when a market is crazy-over invested.
P/E Ratios are very high- I agree with you. Stocks are overvalued.
chart


Current S&P 500 PE Ratio: 22.98 -0.07 (-0.32%)
Mean: 16.40
Median: 15.78
Min: 4.78 (Dec 1920)
Max: 44.20 (Dec 1999)
 
We cannot say with certainty that the US will not default. I think the probability is low but it is not zero. And I also believe quite strongly that if we do default, then the risks of a financial catastrophe are quite high, given that Treasuries underpin the global financial system. Few thought allowing Lehman to go under would have such a profound affect on the global economy. A default would likely hit the global financial system in ways few have imagined.

The economy will also slow, perhaps dramatically, if the debt ceiling is not raised. We could repeat what happened in 1937-38.

I agree and disagree.
The largest affect this will have on the markets is that yet another veil has been lifted revealing more of how our entire system is built on sand while resting on ice.
A 10% fall would only get the markets to a more realistic level. I have been saying all year that we are absolutely going to have a second crash - it is impossible to believe otherwise - look at it! The markets are at pre-recession levels and going higher...that is nuts.
If it wasn't this - it would be something else. This is what happens when a market is crazy-over invested.
P/E Ratios are very high- I agree with you. Stocks are overvalued.
chart


Current S&P 500 PE Ratio: 22.98 -0.07 (-0.32%)
Mean: 16.40
Median: 15.78
Min: 4.78 (Dec 1920)
Max: 44.20 (Dec 1999)

That's using the 10-year trailing average annual earnings. It includes two massive write-offs in the technology and financial sectors which are unlikely to be repeated any time soon. Thus, it understates structural profitability.

I do agree that profit margins are high and likely to come down over time, and thus stocks are more expensive than appears, but I would be a bit skeptical of that graph.
 
I agree and disagree.
The largest affect this will have on the markets is that yet another veil has been lifted revealing more of how our entire system is built on sand while resting on ice.
A 10% fall would only get the markets to a more realistic level. I have been saying all year that we are absolutely going to have a second crash - it is impossible to believe otherwise - look at it! The markets are at pre-recession levels and going higher...that is nuts.
If it wasn't this - it would be something else. This is what happens when a market is crazy-over invested.
P/E Ratios are very high- I agree with you. Stocks are overvalued.
chart


Current S&P 500 PE Ratio: 22.98 -0.07 (-0.32%)
Mean: 16.40
Median: 15.78
Min: 4.78 (Dec 1920)
Max: 44.20 (Dec 1999)

That's using the 10-year trailing average annual earnings. It includes two massive write-offs in the technology and financial sectors which are unlikely to be repeated any time soon. Thus, it understates structural profitability.

I do agree that profit margins are high and likely to come down over time, and thus stocks are more expensive than appears, but I would be a bit skeptical of that graph.
The chart shows Schiller's PE-10 as of this afternoon's close. I think it is a good intermediate forecasting tool.
The 125-year U.S. index price/earnings record compiled by Yale economist Robert Schiller implies long-term mean reversion to an index PE10 ratio of about 16, where PE10 is defined as current price divided by the average of inflation-adjusted earnings over the past 10 years.
In the intermediate term, reversion to mean of 16 seems far more likely to me. With earning likely to stall or decrease, I think we are going to see lower stock prices in the next year or so. I may be wrong though! :lol:
 
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anyway....

S&P, Moody's U.S. Downgrade Irrelevant
What ratings firms say about Treasurys matters less than many suppose

To hear politicians, the fate of modern finance is now being decided by perhaps a dozen Manhattan bond geeks. Their job at Standard & Poor's and Moody's is to paste letter grades on governments so bond buyers can decide which are good for the money. Even America's president fears them. "A six-month extension of the debt ceiling might not be enough to avoid a credit downgrade," he warned the nation in an address Monday night, having already listed some of the consequences: "Interest rates would skyrocket on credit cards, on mortgages and on car loans."

Someone forgot to tell the investors who stake actual money in Treasury bonds, however. The closely watched 10-year Treasury has gained since the beginning of the year, dropping its yield from 3.4% to 3.0%. That means interest rates on the things the president mentioned aren't expected to "skyrocket" soon--not even if the rocket he had in mind is only one of those backyard balsa-wood-and-gunpowder fliers.

Maybe financial markets are waiting for the actual downgrades. But that would contradict an investment law as basic as gravity: Markets are forward-looking. At any given moment, they anticipate information that's known or even suspected. S&P announced a negative outlook on the U.S. (warning of a possible downgrade) in April, and Moody's announced something similar earlier this month. By now, anything that would have happened has happened.

It's not that investors doubt the judgment of raters, although the latter have attracted plenty of jeers in recent years, partly because their pay-me-to-rate-you business models are inherently awkward, and partly because they have missed some colossal collapses. Enron had an investment-grade credit rating four days before it went bankrupt. During the recent housing bust, mortgage securities that were sold as Parmigiano-Reggiano turned out to be a notch below Cheez Whiz. That has led some outside analysts to mutiny. In December, Meredith Whitney, who made her name covering banks, told CBS's "60 Minutes" that 50 to 100 "sizeable" municipalities could default on amounts totaling "hundreds of billions of dollars," directly contradicting the ratings agencies, who expect that municipal defaults will be isolated and manageable.

So far, the ratings agencies have been right on municipalities. I suspect that they've taken recent criticism to heart and are working hard to produce good research. And in fairness, creditworthiness is a complicated thing to judge, depending as it does on human behavior, and the agencies get plenty of calls right. If they say the U.S. is bucking for a downgrade, I'll take their word for it. I'm unfashionably bullish on America, but I'm not sure anything deserves a perfect credit rating, least of all something that can make its own money.

But I also think the opinions of S&P and Moody's (and Fitch, which says it will decide its opinion of the U.S. in August) are irrelevant when it comes to Treasurys. These firms add value by tracking a universe of bond issuers too vast for most investors to watch. Their opinions on Ford Motor or the city of Rochester, N.Y., matter greatly to bond buyers.

The world doesn't need help analyzing Treasurys, though. No entity in the world is more closely watched than the United States government, not even Lady Gaga. And none publishes more and better information on its financial condition. The sort of investors who decide Treasury prices--foreign governments, giant mutual funds, the Social Security Trust Fund--don't wait for S&P or Moody's to tell them whether to buy. They do the math themselves.

They also have limited choices. In a recent report for Wells Fargo Securities, economist Jay Bryson writes that investors aren't likely to dump Treasurys, simply because Europe has no unified debt security and most Asian capital markets are small and illiquid, save for that of Japan, which is in worse shape than the U.S. What about the fear that large investment funds, bound by prospectus to buy only AAA-rated bonds, would be forced to sell? Bryson calls this "overblown" for two reasons. Mutual funds hold just 7% of Treasurys. Also, Bryson's team reviewed prospectuses for the largest ones and found no such mandate.

more at-
S&P, Moody's U.S. Downgrade Irrelevant - SmartMoney.com
 
I totally disagree. If the US doesn't increase the debt ceiling they become a more attractive borrower, not less. It shows that the US is serious about reining in it's debt.

The existing bondholders will be paid. The US will not default. The misinformation and fear mongering over this issue is mind blowing.....

Thanks Zander, but I'm going to continue listening to Big Media on this one. They've never let me down. :)
 
Thus far, Cramer has been correct. The past few days have seen a sell off in stocks due to this nonsense going on in Washington.

Did you consider the possibility that Cramer and others who have been putting out this fear have influenced the decline themselves?

The fact is, no one really knows what will actually happen if the debt ceiling isn't raised. It's only anyone's guess.
 

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