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What To Expect When You're Expecting... Default

Tyler Durden's picture


As markets twiddle their thumbs waiting on Washington to come up with a political solution to the Federal Debt Limit/budget debate, ConvergEx's Nick Colas decided it would be a good time to review the academic literature on how markets discount expectations in the first place. The thinking on this topic has evolved substantially over the years.

The initial thought, first developed in the 1960s, proposed that markets generally "Expected" the outcomes which subsequently occurred.  Since then, of course, Colas points out numerous market dislocations have forced a rethink. Behavioral finance posits that human nature skews perceptions of risk and return, causing everything from irrational risk aversion to asset price bubbles. Against this current backdrop of theoretical uncertainty, measures like the VIX are currently somnambulant. 

So, using the modern vernacular, WTF?  The bottom line, Colas explains, is that Wall Street thinks it has the current "Crisis" all figured out: a last minute deal with no Treasury default.  And just as we haven’t sold off materially during this drama, don’t expect a huge (+5%) lift afterwards.

Despite all this over-confidence, investors are backing away from T-Bills en masse as David Tepper is balls to the wall for a disingenuous rise in market multiples taking stocks higher... His proclamation that stocks will revert to their old normal of 18-20x P/E multiples is, however, entirely disingenuous (as @Not_Jim_Cramer points out below)...

Via ConvergEx's Nick Colas,

In light of Eugene Fama winning the Nobel Prize for Economics today, I would like to share my one personal intersection with the great man himself.  When I was an MBA student at the University of Chicago, Professor Fama taught a class in Corporation Finance/Capital Markets which was a required part of the curriculum for Ph.D. students and a popular Pass/Fail elective for the rest of us.

At the end of the first class, the following exchange occurred between Dr. Fama and a doctoral student:

Student: Professor, this may be a stupid question, but how do we really know… (Insert highly technical finance question here.  I didn’t understand it, but it sounded pretty smart.)


Professor Fama: Your initial assumption was correct.  Next question, please.  (There were no further questions, and he dismissed class.)

I didn’t take the class, even Pass/Fail.  To be fair, Gene Fama had the world by the tail when this brief conversation took place.  He had published a wide range of papers supporting the notion that markets were generally efficient and very hard to systematically beat.  His work found favor in classroom and the boardrooms of Wall Street.  Even now, his work on everything from the agency problem between shareholders and managers to risk and return in capital markets is widely cited in academic literature, to the tune of thousands of citations for scores of his papers.

The intellectual bedrock for Fama’s work that “Markets know best” actually predates him by several decades.  In the 1961 John Muth of Carnegie Mellon published “Rational Expectations and the Theory of Price Movements” which proposed that “The economy does not waste information.”  Muth’s paper centered on how businesses forecast demand, but the general principle could easily apply to investors in capital markets as well.  Markets of all kinds process information efficiently, discounting probabilities and potential outcomes, all without wasting a drop.

As with Mom’s old saying “It’s all fun and games until someone loses an eye,” economists and market observers had to change their tune after the tech stock and housing bubbles in the 1990s and 2000s.  That’s where Robert Shiller’s co-win for the Nobel today comes in, for his 1980 paper “Do Stock Prices Move too Much to be Justified by Subsequent Changes in Dividends?” and other work refutes the notion that markets tend to correctly anticipate future economic and fundamental outcomes.  His bestselling book, published in 2000, “Irrational Exuberance” isn’t just a nod to Alan Greenspan’s famous observation in 1996; it is also a challenge to Muth’s “Rational” expectations theory from 1961.

As a third axis to the discussion of market rationality/irrational exuberance, you have the work of Daniel Kahneman and Amos Tversky, with their work on “Prospect Theory”.  Yep, another Nobel for this one too, back in 2002.  Their research essentially showed that humans are lousy at working out what is statistically best for them.  One easy example: would you rather have $100 or flip a coin for a payoff of either $250 or nothing, depending on whether you correctly called “Heads” or “tails”?  The rational person would choose the coin flip, since the expected value is $125 and therefore greater than the $100 sure thing.  In reality, most people choose the $100 because the chance for a loss weighs more heavily on their decision than the potential for greater upside.

In short, how well markets “Expect” – or “discount”, if you prefer – future events is a topic which shifts with time and tide.  During strong bull markets, it is natural to think that capital markets are accurately reflecting the intelligence and wisdom of the people who invest in them and the corporate management which generates the business returns which drives stock prices.  When you get bubbles such as the dot com craze in the late 1990s or the U.S. residential housing market in the 2000s, another narrative takes hold.  The fault is not in our stars, but in ourselves, to quote Shakespeare.

The ongoing threat of a U.S. Treasury default is a useful case study on this point.  A few points here:

U.S. stocks are riding a multi-year wave of positive performance and the S&P 500 is finally higher than the two prior peaks in 2000 and 2007.  Money flows are starting to return to U.S. equity mutual funds, and exchange traded funds continue to gain assets in products dedicated to domestic stocks.


At the same time, the wounds of 2007-2008 are still fresh in investors’ minds.  Remember the lesson of Prospect Theory: losses feel worse than gains feel good.


Capital markets are therefore in a bit of a no-man’s land with respect to whether current prices appropriately reflect the risk of a U.S. Treasury default.  The pessimist will say that investors have been lured into a sense of complacency by the strong returns for U.S. equities over the last four years.  The optimist will point out that we’ve had a whole slew of rolling crises, from the 2007-2008 market meltdowns to several iterations of European banking system worries to the Fukushima nuclear disaster to constant handwringing over the true state of the Chinese economy.  Yes, the Federal Reserve has been in our corner, but the negative case for stocks is well understood. And investors have, for the most part, rejected it.


This is no academic discussion.  The price action in U.S. stocks has been uniformly good throughout the partial shutdown of the U.S. government and the threats of a default on U.S. sovereign debt later this week.  The CBOE VIX Index sits comfortably below 20, its long run average.  What expectations are built into asset prices is a critical question.

The bottom line is clear: U.S. stocks believe there is a zero percent chance of a Treasury default.  Not 1%, not even 0.1%.  No chance.  You can get to this conclusion any number of ways, using any decade’s predominant market narrative.

Rational Expectations/Efficient Markets (Muth/Fama): if there were even a 1% chance of a Treasury default, the VIX would be over 20 and stocks would be retreating, not advancing.  Too much of the world’s financial system is predicated on Treasuries as 100% reliable collateral to believe anything else.  Russian roulette with a 100 chamber revolver is still too dangerous a game.

Prospect theory (Kahneman/Tversky):  Event the remote chance of a loss due to a default would have outsized effects on risk assets like stocks, not just in the U.S. but around the world.  Remember that humans fear loss more than they celebrate the chance of an equivalent gain.

Robert Shiller’s long run P/E ratio for U.S. equities does show that stocks are overvalued (see here:  You would think that the threat of a U.S. Treasury default would be just the kind of catalyst that could cause a pullback in an overvalued asset class.   So far, no pullback, of course.

Two final points here. 

First, since stocks currently discount no chance of a Treasury default, don’t look for a 10% pop on news of a deal.  A few percent, yes, but not much more. 

Second, if Congress and the President cannot come to an agreement by Friday, look out below.  Even a one-day “Technical” default simply isn’t reflected in stocks.  Under those circumstances, a 10% decline over a day or two would be a logical expectation, regardless of which decade’s philosophy you follow.


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Tue, 10/15/2013 - 22:23 | 4059095 LetThemEatRand
LetThemEatRand's picture

I'm warming up a bowl of Gin.  Can't go wrong with that.  I'll add ice later when celebrating.

Tue, 10/15/2013 - 22:24 | 4059100 Arius
Arius's picture

gin sounds good!

the default is already priced in ... BTFD

Tue, 10/15/2013 - 22:48 | 4059197 Spastica Rex
Spastica Rex's picture

Warm gin?

Tue, 10/15/2013 - 22:54 | 4059210 LetThemEatRand
LetThemEatRand's picture

For the eating of my asshole if I'm proven wrong on the debt ceiling.  In the right bar at the right time with the right waitress, you too would consider warm Gin asshole shots.  Especially 2 for 1.  Besides, I've already lost my ass shorting this market so it's more of a snack than a meal.

Tue, 10/15/2013 - 23:08 | 4059238 Spastica Rex
Spastica Rex's picture

Did you just maybe suffer a little stroke, or something?

Tue, 10/15/2013 - 23:20 | 4059256 TruthInSunshine
TruthInSunshine's picture

They will pass some mangled bill that raises the debt ceiling & brings back the full force & inefficiency of the beast that is BigGov.Org in all its vast wastefulness & graft & union ass-kissing & banking/WallStreet goodies & MIC pork, probably just before midnight tomorrow.

Bank on it; the wankin' banksters are.

p.s. - Gotta' love how CNN, MSNBC, etc., are literally acting like it will be TEOTWAWKI if Obama doesn't get a blank check within 24 hours. A great, objective media we have in the USSA - NOT!

Wed, 10/16/2013 - 00:25 | 4059375 El Vaquero
El Vaquero's picture

Would they actually default if they waited until Monday or Tuesday to come up with some deal, or would there just be some carnage in the markets?  If it's just carnage, I wouldn't be one bit surprised if they wait until Friday or even sometime next week.  Political points must be scored!

Wed, 10/16/2013 - 01:27 | 4059397 TruthInSunshine
TruthInSunshine's picture


The lame Stream Media keeps repetitively stating that Thursday equals default day, and this is a complete lie.

Thursday is the day that the federal government has to look to the Treasury Department for cash on hand to fund operations and debt service, as it will no longer be able to borrow any amounts that would be necessitated by the fact that it continues to spend more than it takes in during any minute, hour, day, month, year or decade(s), like the out-of-control spendthrift that it has been for 43 years.

Without lifting the debt ceiling, and by cutting expenditures, and prioritizing payments due creditors, there's probably a 10 day to 14 day buffer period still before there's any actual default.


Wed, 10/16/2013 - 04:18 | 4059553 mvsjcl
mvsjcl's picture

"...regardless of which decade’s philosophy you follow."


If you follow any other philosophy excepting one that espouses the conviction that the "market" is totally rigged and manipulated, then you're either a fool or complicit in the thuggery of the fool.



Wed, 10/16/2013 - 05:10 | 4059588 Ying-Yang
Ying-Yang's picture

OFF TOPIC but important

Obamacare's Website Is Crashing Because It Doesn't Want You To Know How Costly Its Plans Are

Wed, 10/16/2013 - 06:25 | 4059613 GetZeeGold
GetZeeGold's picture



Pretty sure Obama is wanting a default here.....something about America's chickens coming home to roost.


Sometimes you just got a break a few eggs.


Barry brings default and pain to the entire begged him for be it.

Wed, 10/16/2013 - 05:58 | 4059621 rivoniaboy
rivoniaboy's picture

Well said @end the fed.

 Lets keep out eye on the ball here folks,at last count the total US debt was 16.8 Trillion.Yes thats TRILLION.How the hell can this ever end well?

Totally and utterly screwed!

Wed, 10/16/2013 - 06:13 | 4059636 negative rates
negative rates's picture

We heard that our best and brightest designed a computer model which pays all the bills or none of the bills at all because of the way it was made, it was made that way to discourage political defaults because we know better, we have the money and smart people. End of discussion, cover my ears and bang my forhead against the wall if you disagree, it works every time and besides, I always win. 

Wed, 10/16/2013 - 06:59 | 4059677 j0nx
j0nx's picture

Let them pass all they want and let the sheep bleat that the tea party are terrorists and are holding us all hostage. It's extra time for you to prep and make plans and plans for those plans and plans for when the plans don't work out because soon enough we will be right back in this situation and the shit really will hit the fan. The math don't lie and the light at the end of the tunnel is another train barreling down on us.

Tue, 10/15/2013 - 23:19 | 4059259 LetThemEatRand
LetThemEatRand's picture

"Did you just maybe suffer a little stroke, or something?"

That's entirely possible, but I also threw down the gauntlet a few days ago that I would eat my own asshole if the debt ceiling were meaningfully breached.  A Gin soaked ass would help if I lose that bet.

Wed, 10/16/2013 - 02:33 | 4059502 zhandax
zhandax's picture

Finally, a use for gin.  The only times I ever drank it was when rebuilding carburetors (it doubles as cleaner).  The last time I encountered a carburetor was on a friend's houseboat in the mid-nineties.

Wed, 10/16/2013 - 06:41 | 4059654 Zero Point
Zero Point's picture

Dude. Ice cold G&T on a hot day? That's good shit.

Dunno about stewed ass and gin though, might give that a miss.

I certainly wouldn't be getting too ready to eat my ass yet though, I can't see why the money flow would stop now.

Mind you, this is nonsensical world where nothing has to make sense, so fuck it.

Ass and gin it is, make mine a double shot of Mila Jovavich's.

Tue, 10/15/2013 - 22:52 | 4059202 dcohen
dcohen's picture

A deal is already priced in, but not slowing growth.

Tue, 10/15/2013 - 22:26 | 4059116 johngaltfla
Tue, 10/15/2013 - 22:28 | 4059125 LetThemEatRand
LetThemEatRand's picture

I reluctantly admit that I have SPXU from a few weeks ago before it killed what was left of my hope and spare change.

Tue, 10/15/2013 - 22:30 | 4059136 johngaltfla
johngaltfla's picture

You have to have large ones to play there. But I'm not at all distressed. Check out hhe 3 year SPY chart and failure to correct meaningfully and then the last times we've gone stupid like that...a la 1987....

Tue, 10/15/2013 - 22:33 | 4059145 LetThemEatRand
LetThemEatRand's picture

I keep thinking the Fed is head faking.  The shoe shine boy is buying.  At some point they must relent.

Tue, 10/15/2013 - 22:40 | 4059164 johngaltfla
johngaltfla's picture

Eventually, the technicals win.

Tue, 10/15/2013 - 22:44 | 4059175 LetThemEatRand
LetThemEatRand's picture

Yeah, after I'm doing a Rocket Man Downey Less Than Zero head fake in the bathroom!

Wed, 10/16/2013 - 01:38 | 4059443 HardlyZero
HardlyZero's picture

Mix in some MZZ and QID and you have a breakfast of champions...predict Monday will be a major stock market capituation, assuming there are no weak hands in the Congress, and they let the cards fall, and Paper Tiger stocks gets shredded.

Wed, 10/16/2013 - 02:02 | 4059482 zhandax
zhandax's picture

Isn't that a tall assumption there?  Most of these thieves only know two things to do with their hand, and the polite one is to hold it out for 'contributions'.

Tue, 10/15/2013 - 22:49 | 4059189 JFKFC
JFKFC's picture

Indeed, I was killing it with UVXY (2x leveraged VIX) until last Wednesday, when Washington figured out that saying you're close to a deal is as good, if not better, than actually having a deal.

There is nothing rational, efficient or sane about the markets today.

Wed, 10/16/2013 - 06:44 | 4059656 ParkAveFlasher
ParkAveFlasher's picture

Fuck ETFs, ETNs, 2X, 3X, etc.  Note the volume trading there.  Those exits are covered.  To hell with swinging for the fences on index moves.  Your trade will be tagged, targeted, and sheared before you can whip out your straightedge.

Tue, 10/15/2013 - 22:23 | 4059097 NIHILIST CIPHER

Expect "crisis".... DUH !   REALLY !    With a chimporama coming down on you from all sides, what do you think ?

Tue, 10/15/2013 - 22:35 | 4059103 hedgeless_horseman
hedgeless_horseman's picture



I expect our leaders to come up with a half-past-midnight bi-partisan way to kick the can down the road, for the children's sake.  They will come up with a bullshit acronym like TARP.

F.U.C.K.I.T. Spending Program

Future Usury of Children Keynesian Interstate Temporary Spending Program

Tue, 10/15/2013 - 22:43 | 4059171 knukles
knukles's picture


For Unlimited Children's Material Enhancement

Also referred to euphuistically as Expand the Free Shit Army Democratic Vote Forever Act

PS There's a NY congressman on CNBCAsia saying that Obiecare insurance rates in NY are falling by some 50%
Holy Deceitful Horseshit

Tue, 10/15/2013 - 22:52 | 4059211 adr
adr's picture

I actually applied the Fuckyo medical plan twice this year. An asshole dentist sent me a $150 bill for what was supposed to be a free consultation. He got the Fuckyo medical payment plan. ie Not a dime from me.

A doctor fucked up my insurance payment and billed the wrong insurance company and tried to stick me with a $500 bill. Not my fault his office is run by idiots. He got the Fuckyo medical plan too. I got a letter saying I'd be sent to collection. I called and said, "I don't care and I'm not paying for your mistake."

The Fuckyo medical plan is genious. About time doctors get paid what their worth. Maybe an assistant anesthesiologist won't be able to make $250k anymore.

Wed, 10/16/2013 - 00:33 | 4059382 El Vaquero
El Vaquero's picture

Collections calls are fun though.

Wed, 10/16/2013 - 01:36 | 4059432 El Vaquero
El Vaquero's picture

I got junked for that?  But seriously, they are fun.  Debt collectors are easy to fuck with, and most of them deserve it.  I haven't had a call from one for a couple of years, and I miss them (not really, becuase that means I'm about to step into a shitfest, unless they're looking for somebody who doesn't live with me, then it's good times.)  I can tell them that I'm on WebRecon and they shit a brick. 

Tue, 10/15/2013 - 23:31 | 4059290 scatterbrains
scatterbrains's picture

you're probably right but let me enjoy the fantasy that the hard corp conservatives in congress have been conspiring with the Military to stage a coup over the criminals that are destroying our country...and that by design there will be no deal.

Tue, 10/15/2013 - 22:24 | 4059112 boeing747
boeing747's picture

Let's talk about if indeed Default happens, where does .gov get emergency funding from?

a) turn Fort.Knox golds over to Fed as collateral, get special funding.

b) Withhold 10% of all saving accounts over $1 million as temp funding.

c) Immediately auction off federal buildings&lands.

Tue, 10/15/2013 - 22:32 | 4059139 fonzannoon
fonzannoon's picture

d) QE 125 bil


Tue, 10/15/2013 - 23:40 | 4059287 AlaricBalth
AlaricBalth's picture

"a) turn Fort.Knox golds over to Fed as collateral, get special funding."

Surely you meant to sarc that, right?

During USMA artillery training at Fort Knox one summer, the joke was maybe we should fire a round at the gold depository and see how large of an empty hole we could uncover.

Wed, 10/16/2013 - 04:28 | 4059560 mvsjcl
mvsjcl's picture

b) Withhold 10% of all saving accounts over $1 million as temp funding.


Savings account? What the fuck is that?

Tue, 10/15/2013 - 22:31 | 4059130 Running On Bing...
Running On Bingo Fuel's picture

Is inflation not a type of default? Oh anyway it doesn't matter everyone is so use to getting screwed it just doesn't matter anymore.

Metal on a one year downward spiral. WTF! Anyway. Whatever. Does Kyle still have his nickles?

Tue, 10/15/2013 - 22:30 | 4059138 disabledvet
disabledvet's picture

here's what i'm expecting:

Wed, 10/16/2013 - 07:33 | 4059722 Gaffing_Nome
Gaffing_Nome's picture


Summary totalé following your lead, this.:

"...The title is a phrase spoken by Winston Smith to Julia in George Orwell's novel 1984, the basis for the second half of Bowie's album. This is Bowie's interpretation of the couple's capture, and Winston's thoughts about the whole affair. He recognizes that they probably should have ended it while they could, before it was too late. However it is too late, as the song says, "...because of all we've seen, because of all we've said, we are the dead..."

Tue, 10/15/2013 - 22:36 | 4059156 Atomizer
Atomizer's picture

Let’s roll back the hands of time to 2011. Shall we?

Dow Jones Crashes 8/8/2011

Dow crashes despite debt ceiling deal


Blah, blah blah.

Tue, 10/15/2013 - 22:44 | 4059176 fonzannoon
fonzannoon's picture

that was the last good actual dip.

Tue, 10/15/2013 - 23:37 | 4059190 Atomizer
Atomizer's picture

Yes it was. Let’s see how closely Obama follows the same speech given back then.

Wed, 10/16/2013 - 03:00 | 4059511 xtop23
xtop23's picture

I can see it now;

"Let me be perfectly clear.....pays its bills....fair share......main street......right thing to do...... reach across the aisle....... for our children's future."

Is it 2016 yet? Seriously. I know nothing will change as we scream, " 'Merica, FUCK YEAH!" and Bo n' Luke jump into a brick wall of mathematical certainty.

I just want some other oligarch water carrier to do it. I'm absolutely sick of this fucking guy.

Wed, 10/16/2013 - 07:45 | 4059740 Atomizer
Atomizer's picture

We compromised last time, the Kenyan hasn’t lived up to his end of the bargain. Same rhetoric, different year.

Tue, 10/15/2013 - 22:40 | 4059170 q99x2
q99x2's picture

I expect that everyone by now expects not to get repaid. So who cares.

On the one side they have hungry EBT cardholders with drugs and guns. On the other side you have banker with a computer to print as much as anyone ever dreamed.

We know what will happen.

Same old.

Tue, 10/15/2013 - 22:47 | 4059181 adr
adr's picture

Don't expect 5% up, expect 25% up. Why the hell not.

Neflix $900 a share. Not like the price means anything anymore. Fuck, make the new benchmark $10k a share. Priceline can maybe make it there next year.

Analysts can try to claim that the market is priced correctly, or future growth justifies current p/e ratios, but they're wrong. 

The growth doesn't exist and claimed revenue is about as realistic as the DDD tits on a Vegas stripper.

You can claim unicorns exist all you want, but I'll still tell you they don't. 

In fact if I got on TV and told people unicorns exist, I'd be laughed off the stage. Yet if I got on TV and claimed Tesla is underpriced and worth $275 a share. I'd receive nods and most likely be applauded. Honestly, I'd believe the guy claiming unicorns are real over a guy claiming Tesla is worth $275 a share.


Wed, 10/16/2013 - 06:19 | 4059639 negative rates
negative rates's picture

I got a smaller violin for you use, that big one you have is about to weigh you down and perhaps bury you under it, i'll rent it to you for 5 cents a day, but you got talk to dr. lucy for an hour and keep her happy once a month. Suicide class is tonight and it's packed with all sorts of weirdo's if that suits you better.

Tue, 10/15/2013 - 22:49 | 4059187 Spastica Rex
Spastica Rex's picture

I wonder if  the past 20 years skews that dataset?

Tue, 10/15/2013 - 22:59 | 4059219 Skateboarder
Skateboarder's picture

The author has been living under a rock and doesn't know about HFT.

Wed, 10/16/2013 - 04:32 | 4059561 mvsjcl
mvsjcl's picture

Oh, he knows alright. But it's his job to perpetuate the myth of "The Market."

Wed, 10/16/2013 - 04:52 | 4059563 zhandax
zhandax's picture

Cut him some slack, he has established a case that the Nobel prize for econ is completely fraudulent.  The proponents of the Prospect Theory are either unaware of, or ignoring the St. Petersburg paradox.

Wed, 10/16/2013 - 08:02 | 4059771 Lebensphilosoph
Lebensphilosoph's picture

Human decisions are not a mathematical process and doobey any mathematical equations. Value is not quantifiable. These are facts. Behavioural economics is pseudoscience, much like the rest of the subject.

Tue, 10/15/2013 - 22:49 | 4059188 chump666
chump666's picture

Hmm, 80 on the DXY. The whole world still wants USDs for funding their crony sh*hole economics and providing backstops for their insolvent crappy banks. Lanagade is paranoid that the IMF funding will diminish. We could be at the cusp of a USD crisis.

Power is fleeting and the emperor is a naked a-hole.


"The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems — the problems of life and of human relations, of creation and behaviour and religion"  Keynes.  lol...well done commies!  You f*cked it up.

Tue, 10/15/2013 - 22:51 | 4059207 Julian
Julian's picture

"U.S. stocks believe there is a zero percent chance of a Treasury default"  QED

Tue, 10/15/2013 - 23:13 | 4059251 Teddy Tenpole
Teddy Tenpole's picture



fama will stake his nobel on it :)

Tue, 10/15/2013 - 22:54 | 4059214 Seasmoke
Seasmoke's picture

You fucked up. You trusted us.

Tue, 10/15/2013 - 23:14 | 4059255 Teddy Tenpole
Teddy Tenpole's picture



...face it Flounder you fucked up...


fixed it fer ye

Wed, 10/16/2013 - 06:20 | 4059641 negative rates
negative rates's picture

We sure won't do that again.

Tue, 10/15/2013 - 22:59 | 4059222 JR
JR's picture

The nation will not default on its debts because it violates the Constitution unless… the “I-will-not-negotiate” despot in the Oval Office, in another power grab, trashes the Constitution again, and defaults anyway.

Right Scoop on October 7th, 2013, reports that Coburn dispelled the default myth…

“Senator Tom Coburn was on with CBS This Morning today and took a moment to dispel a rumor that he says ‘you hear on every newscast’ that if we don’t raise the debt ceiling we will default. He says that’s not true, that we will go on paying our interest on the debt we’ve accumulated and that we’ll redeem current bonds and issue new bonds.”

Says RS: Here’s a video that was created a couple of years ago by Bankrupting America to help people understand the debt ceiling and it backs up what Coburn is saying.

“Basically the media has just been parroting what Obama and his yes men have been saying over the last few weeks, that if we don’t raise the debt ceiling the country will default, without even fact-checking it. And this is setting up what Mark Levin has been predicting for several weeks, that Obama will uses this ‘crisis’ to raise the debt ceiling without Congress. And the media will have carried him on their shoulders to help him do it, despite the fact that it violates the Constitution."

Says Senator Mike Lee: “A default would happen if we stopped paying the interest or principal on our national debt, and the 14th Amendment prohibits that from happening. So one way or another, default is not going to occur."

Tue, 10/15/2013 - 23:35 | 4059299 dapper_dan
dapper_dan's picture

THANK YOU.  What does it mean to default on our debt?  Not paying the interest.  Change of this: 0.  Why?  Even after the debt ceiling is hit, the U.S. will see have tax powers - which debts/obligations will they be sure to pay?  Interest on our debt?  You bet. What would they not pay?  Well, food stamps, gov't worker salaries,  .... 

Can't raise the debt limit?  Then gov't can only pay out what it takes in from tax receipts.  things get cut but it wont be the interest on our debt...   

Wed, 10/16/2013 - 00:05 | 4059351 RebelDevil
RebelDevil's picture

Take a look at this article Dan. The real concern is not the interest itself, but the ability to also pay back the principle at maturity if treasury holders increasing choose to not "roll over" their investment into new treasuries (no new debt created by roll overs). If more and more people decide they want their treasuries to mature based upon the insecurity reguarding US solvency, then more taxpayer money is paid out to matured principles instead of entitlements.

Maybe this is why food stamps may be (temporalily) cut: To make sure the treasury doesn't default on maturing principle.

Tue, 10/15/2013 - 23:02 | 4059230 ebworthen
ebworthen's picture

Default already.

This is all such a fucking Ponzi I can't believe it has gone on this long.

I suppose the biggest lies have the longest life.

Tue, 10/15/2013 - 23:05 | 4059233 Running On Bing...
Running On Bingo Fuel's picture

And you ain't seen nothing yet.


PS. don't hold breath.

Tue, 10/15/2013 - 23:05 | 4059231 Running On Bing...
Running On Bingo Fuel's picture

Thing is people actually believe that it's really her hair color. JLo is fooling them all. You go girl!


Tue, 10/15/2013 - 23:09 | 4059243 maskone909
maskone909's picture

Im short and have been for a few weeks.

Tue, 10/15/2013 - 23:13 | 4059252 Julian
Julian's picture

that must be costing you a bucket..time to cover your shorts and stop exposing your balls ;)

Tue, 10/15/2013 - 23:15 | 4059257 maskone909
maskone909's picture

No im still up. Got in perfectly. Short housing more specifically.

Tue, 10/15/2013 - 23:11 | 4059246 Teddy Tenpole
Teddy Tenpole's picture



Look you morons, there will be no default.  the ES will make new highs on the news.  When they crash it we'll know, believe me -- then sell like a fuckin madman (just like last time).

i understand what many of you are talking about but stop living in fear! 

don't be doomer boomer douches your whole lives!



















Tue, 10/15/2013 - 23:52 | 4059334 Spastica Rex
Spastica Rex's picture

Was all that white space there to add emphasis to your post?

Wed, 10/16/2013 - 00:09 | 4059355 Teddy Tenpole
Teddy Tenpole's picture





















As if.

Wed, 10/16/2013 - 01:53 | 4059468 zhandax
zhandax's picture

Regardless of your demographic, you certainly present evidence of elevating the douche thing to an art form

Tue, 10/15/2013 - 23:30 | 4059285 smartstrike
smartstrike's picture

US Treasury has bankroll of $35 billion, so who gets paid? MIC contractors?

Tue, 10/15/2013 - 23:31 | 4059288 NDXTrader
NDXTrader's picture

I'm not sure why you say "don't expect them to soar either." Given the last 4-5 years as a guide I don't see why not. They've got Yellen at the printer. The pattern since S&P 666 is to be at point X with no crisis, crisis happens and it goes down 50-100 points, crisis averted it goes up 100-200 points...and eclipses where we were w/o the crisis in the first place. As long as the market is priced in $ and they keep pumpin more of them we are going up, until we go hyperbolic or there is rampant inflation

Tue, 10/15/2013 - 23:33 | 4059294 Dr. No
Dr. No's picture

"The rational person would choose the coin flip, since the expected value is $125 and therefore greater than the $100 sure thing."

Typical accounting Econ BS. The value is Zero 50% of the time.

Wed, 10/16/2013 - 00:23 | 4059373 NDXTrader
NDXTrader's picture

Indeed. That one quote is a big reason we are in the mess we are in today. Taking the safe, sure thing can be a rational choice as opposed to all or nothing gambling

Wed, 10/16/2013 - 00:06 | 4059347 Escapeclaws
Escapeclaws's picture

"One easy example: would you rather have $100 or flip a coin for a payoff of either $250 or nothing, depending on whether you correctly called “Heads” or “tails”? The rational person would choose the coin flip, since the expected value is $125 and therefore greater than the $100 sure thing. In reality, most people choose the $100 because the chance for a loss weighs more heavily on their decision than the potential for greater upside."

The rational person would also choose the coin flip if the choice is between getting nothing and getting $201. Oh, and he needs the money because his foodstamps have been cut off.

Wed, 10/16/2013 - 01:05 | 4059409 nevket240
nevket240's picture


interesting perspective. the dogfuckers get free"money" to buy up Federal enterprises.

under this scenario Gold is fooked. the dogfuckers will simply sieze all financial interests under the guise of National Interest.

Vale USA, welcome United Stasi States of Kenya.


Wed, 10/16/2013 - 01:41 | 4059444 EconoIdiot
EconoIdiot's picture

Why all the excitement?  With this group we do not need a budget or a debt limit...

Are all you folks this perplexed?  If so you may need to tune in to KBROKE-7 news at 6pm and catch the evening money doesn't matter anymore segment.

Wed, 10/16/2013 - 01:45 | 4059457 HardlyZero
HardlyZero's picture

Or checkout this...nearly daily of these days...(like a broken clock)..prepare, sooner than later.



Wed, 10/16/2013 - 01:58 | 4059479 Julian
Julian's picture

<=== up 5% by Tuesday 22 October?

<=== down by 20% Tuesday October 22?

Wed, 10/16/2013 - 02:36 | 4059505 Uber Vandal
Uber Vandal's picture

After reading this artilce, this sentence stuck a chord with me:

The bottom line is clear: U.S. stocks believe there is a zero percent chance of a Treasury default.  Not 1%, not even 0.1%.  No chance. 

The chord it struck is the same one I felt when I read this line a over a month ago:

The Primary Dealers Have Spoken: Taper Begins September With $15 Billion Trim; QE Ends June 2014

My point is I get a bit nervous when EVERYONE is on one side of the boat.

Wed, 10/16/2013 - 03:18 | 4059515 darkstar7646
darkstar7646's picture

I'm actually thinking 15%, and I'm not sure it wouldn't come starting ON Friday, rather than wait until Monday. They've got the 500 to give back off the hopium too.

Wed, 10/16/2013 - 04:23 | 4059558 Squeezedshorts
Squeezedshorts's picture

What to expect when you're expecting?

Stitches from the V to the A.

Wed, 10/16/2013 - 05:05 | 4059584 Flammonde
Flammonde's picture

I wonder how market theory works with massive fraud.  I am not an economist but I do understand that it is the model that matters and not the primary set of realities  the model represents.  

Money manager Catherine Austin Fitts says, “You are seeing a tug of war between the new system that’s coming up and the old system that’s struggling and dying.” Fitts explains it by saying, “Let’s pretend we have a company called USA, and we create a new company called Breakaway Civilization.
We move all of our assets out of USA and put them in Breakaway Civilization. We leave union obligations and pension funds . . . in the old USA economy.” Fitts warns, “I think bail-ins are coming . . . the big question is not will we be able to get out insured deposits. I think the big question is how violent will things get?” Fitts biggest worry is not financial collapse. Fitts contends, “I don’t think the people who run the U.S. military or run the United States government are going to say we’re happy to collapse rather than go to war. They are going to go to war. They’re going to shake somebody down.” Fitts goes on to add, “I think gold is the greatest form of insurance you can have during this transition period.”

Wed, 10/16/2013 - 05:32 | 4059604 GFORCE
GFORCE's picture

'Don't expect a huge lift'. Yeah right!

Once the debt ceiling/shutdown mess is cleared up, capital will flow back into u.s. equities in a big way. zh has been talking the market down for what? 6 years now? The equity bull market hasn't started yet.

Safe havens are disappearing and big money will have nowhere else to go.

I used to be a contrarian myself. But I realised that it was constantly losing me money in the markets. Now I'm just a realist. There will be no crash for a few years minimum.

Gold is still in a bear market and is about to head for 1200, then 1000. It will bottom and head for maybe 2500 but not a lot more. Gold is not workable as a monetary system.



Wed, 10/16/2013 - 06:45 | 4059657 J Pancreas
J Pancreas's picture

Lol! All-knowing soothsayer, let me gaze into your crystal ball, even for a moment...


"Gold is not workable as a monetary system."


Please call your local Chinese/Russian/Indian consulate and voice your opinion. Better still, you are more advanced in your monetary understanding than the founding fathers, please call your local congresspig and ask the Constitution which established sound money as law be modified to fit your view as well

Wed, 10/16/2013 - 06:47 | 4059661 surf0766
surf0766's picture

A deal is done. I hope all those that voted for O'care get all those wonderful increases. 1 party rule. We are the new Amkeria

Wed, 10/16/2013 - 08:57 | 4059889 chicken alfredo...
chicken alfredo u broke my heart's picture

As soon as obama is gone from the white house......

the country will get back to operating.....

get rid of the pot stirring community agitator and the constant turmoil will end....

obama is the problem.......the al sharpton potus.....

Wed, 10/16/2013 - 09:29 | 4059985 RaceToTheBottom
RaceToTheBottom's picture

I think this guy misses the point, the reason the markets have not really been affected has nothing to do with how stocks will be affected by a shutdown, it has to do with how QE will be affected by a shutdown. 

The shutdown is really a separate thing than the QE.  Most people have figured that QE cannot stop, at least for a middle range, therefore the stock slowly ratchets up its PE.... 


There is no market, only QE.

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