Credit Suisse: "Debt Ceiling Hike Delay: Market Down 15%; Default: Market Down 30%+"

Tyler Durden's picture

In the past week, almost every single sellside bank and their mother has released a report on "what happens to the US if there is a [default|debt extension|compromise|zombie apocalypse (if one believes Tim Geithner)]. Sure enough, here is Credit Suisse with its three scenarios. This is notable as it presents the binary outcomes for the stock markets as a result of what develops in Congress. The scenarios are: i) debt ceiling extension (market up 3%); ii) debt ceiling not extended (market down 15%); iii) default (market plummets by at least 30%). Of course, if there is really is a default it is game over for equity markets but that is a moot point. Either way, any report that has zero mention of the word gold when contemplating the impact of a US default goes straight into the garbage. Such as this one.

Here is Credit Suisse's scenario summary :

And a brief and largely irrelevant summary of the key outcomes.

What happened during the previous debt ceiling crisis?


We have already had a debt ceiling crisis between November 15, 1995 and 29 March 1997 (with two short episodes of government shutdown, in November 1995 and December 1995 to January 1996), when  the Republican party agreed on raising the ceiling to $5.5trn after Secretary Rubin informed Congress that he would stop mailing out Social Security cheques. During those periods bonds yields, the dollar and the S&P all rose a bit.


The difference this time around is that the US is running a budget deficit of 11% of GDP, not of 2% of GDP. Hence, the required fiscal tightening to balance the books if the debt ceiling is not raised is a lot higher. Moreover, this time there is also more fiscal tightening on at the state and local level. [as we presented yesterday]

On to the market impact of the various outcomes:

No debt ceiling agreement: equities markets down 15%


If there is no increase in the debt ceiling for a prolonged period (say 3 months) with no agreement in sight, we believe stock markets could easily fall 15%. As above, we believe we get very close to recession – and if say ISM fell to 40 and credit spreads rose to 4%, the warranted equity risk premium would rise to 5.8%. At the same time, EPS on our model could fall 15%, leading to equity risk premium to fall 5%. This would give equity markets some 12% downside.


We believe that the fall in markets would give politicians a strong incentive to compromise – and we would likely get an agreement (as it was the case with TARP, when the first rejection of the bill on 29th September 2008 triggered a 9% fall in markets and the bill was then passed in a second vote on October 3rd).


In Europe, this would happen at a time when the long-term bank funding market is still almost closed, recent PMIs have been particularly weak (suggesting GDP of just 0.2% quarter on quarter). We believe this makes Europe more vulnerable than normal, especially if the Euro, as seems likely, would strengthen a lot in this scenario. Clearly, weaker global growth and a generalized risk-off trade would make funding issues in peripheral Europe worse.


Overall, we would expect the sharp decline in growth expectations to lead to lower bond yields, as the impact of weaker growth more than offsets investors’ concerns about the credit downgrade. On our fair value bond model, each 10 points decline in the ISM reduces the fair value of bonds by 75bps. In this case, investors should focus on secular growth (as it is long duration and benefits from the fall in the discount rate) and noncyclicality (healthcare, telecoms, food retailing, regulated utilities). In addition, we would greatly increase our underweight of cyclicals and with the exception of software (which should prove defensive as in 2007/8). In particular, we would go short of corporate spending related areas, given that corporate spending is typically the high-beta component of growth.


The sectors that have low cyclicality (negative correlation with the ISM) and low leverage (net debt to EBITDA) are pharma, health care equipment, food retailers and software.


In case of default, just be overweight defensives [ZH advice: in case of default, run]


If there was a default, we would simply focus on non-cyclical companies with high FCF yield and low leverage (as we assume that funding markets would dry up and the cost of debt would rise).


Focus on companies safer than governments


Regardless of the outcome of the negotiations over the debt ceiling, we think investors should focus on ultra-safe corporates (those that offer a CDS spread below that of the average G7 sovereign in combination with a dividend yield above the average G7 government bond yield). To the extent that the debt ceiling negotiation in the US and the worries about peripheral Europe drive home the uncertain outlook for government  finances, the strong financial position of these corporates will appear increasingly attractive.



Our US screen highlights Pfizer, Merck, Kraft and Philip Morris.


And more drivel in the full worthless report which according to a simple word search mentions the word gold precisely zero times.

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SheepDog-One's picture

You better print some more unrepayable DEBT up in this joint or else bad things is about to happen to ya'lls!!

Signed- Wu Tang Clan, Obamas senior advisory staff.

PS- Memo to the media, Old Dirty Bastard has changed his name to 'Old Dirty Chinese Restaruant'.

PPS- Diversify yo bonds, bitchez!

baby_BLYTHE's picture

Timmah's worried about a default/downgrade only because it puts the cashflow to his primary dealer butt-buddies at risk

caerus's picture

LOL that shows not on anymore

BrianOFlanagan's picture

no mention of gold?  So let's discuss it here.

I say, no debt deal = gold plunges.  Rationale: the resulting forced austerity would be highly deflationary.

SheepDog-One's picture

I never look at PM's as a daytrade like most people do, wondering if it will be up a couple bucks or down, its for LONG after the USD fiat piece of trash is defaulted, and we somehow or other rise from the ashes. And even then, theres no guarantee it will do you any good, in fact likely to make you a target of the New World Govt.

Ahmeexnal's picture

Even more dangerous:  golddiggers

There's a reason they're called gold diggers and not creditcard diggers or dollar diggers.

some women do know gold is money


BrianOFlanagan's picture

this has nothing to do with day trading.  If the US ends up putting steep austerity measures in place, either as a result of default or politicians coming to terms with the long-term issues that got us to this point - that will be the end of the gold bull market.

The dollar can still be saved, but only if dramatic changes are taken or forced upon us right now.

Transitory Anomaly's picture

"politicians coming to terms with the long-term issues that got us to this point"

LOL good one, that a joke right?


el Gallinazo's picture

The Owners overrule the politicians.  Case in point, when Volker hit the economy over the head with a 12 pound sledge to kill runaway inflation in its tracks, it killed any chance that Carter would have a second term.  It's the economy, stupid.  Remember, the politicians are sock puppets to the Owners.  And if people don't like starving or freezing to death, there is always the $1T+ military / DHS.  Their budget is off the table.  I see a sixth front coming in the Long War - the USA.  To quote that weird astronomer on late night PBS, "keep looking up!"  But not for (yo)Uranus - rather for  Preditor drones.

Reptil's picture

"Steep Austerity Measures" ????
pffff go visit Athens see how that works out. you'll see a bunch of greek working hard....................... making molotov cocktails.

the problem is a loss of production capacity, because of outsourcing in the eightties and nineties. part of the global economy, the american so feverishly advocated, and still do... saving cost by not having to pay workers' pesky healthcare, or worry about environmental concerns. Granted, taxation in the USA suffocated the business that decided to stay (mostly small - medium). And guess what.... outsourcing... it also has a downside. it means the USA is destined to become a wildlife reservation. get used to it, or move to a country that kept it's production intact despite globalist pressure.

Moreover, to think that this can now be "fixed" somehow is "pie in the sky" thinking. The looting will continue, until the looters are thrown out, just like in Argentina almost a decade ago. Even if you'd roll out the guillotines, and restructure the banks overnight, it would still mean collapse, I'm sorry to say.

It's the jobs.

rufusbird's picture

You say, "no debt deal = gold plunges." I have to disagree because you are making an assumption that the US Problems is the only reason why Gold is higher. The rest of the world does not look so hot either...

r101958's picture

Gold down to 1609 right now. Silver down over a $1. Something is up or some are taking profit to pay for those treasuries.

caerus's picture

healthy retracement imho...

malikai's picture

It means the fix is in. "Smart" money is repositioning and we should see $36/slver, $100+/oil, and 13500/dow imminently. After that, "deflation" for maybe a month or two so that outright QE can be justified. After that, who knows..

mayhem_korner's picture

Options settlement.  Normal this time of month.

swissinv's picture

a typical banking idiot forecast - forecasting the unforecastable

packman's picture

I don't understand.  Option 2 is simply not possible.  At this point we either extend, or default.  Those are our only legal options, at least.


Biggvs's picture

That's what I thought too. Curious. Maybe because Obama might pull the 14th amendment trick instead of defaulting.

Cognitive Dissonance's picture

This all reminds me of those YouTube videos where one monkey starts screaming and quickly every other monkey is hollering his or her head off.

SheepDog-One's picture

I laugh at suckers daytrading gold, cashing it in for margin calls or whatnot. Bunch of bitchez.

TSA Thug's picture

CS is the new Lehman. I give them 6 months till they collapse. They defiantly do not know how to make the news like a uber strong maketmaker Goldman.


--You WILL Obey!

MobBarley's picture

Tyler you're being unfair. You know full well that in the new rules

of doing business Gold remains strictly unmentionable like a

Lady's silky underclingings. In other news, I had a vision

of Obama on TV telling the nation that starting as of now,

Foodstamps may be used to purchase Liquor and Cigarettes.





Bastiat's picture

I had a vision of Obama on TV telling the nation


Was he wearing those "Lady's silky underclingings?"

slewie the pi-rat's picture

the PMs are ok, here, Au has found the bid, Ag, bouncing off ~~ $39.50.

the miners are soft, tho, for DAY 2, now, down 1-2%.  i guess we have "risk on" today, but lacking feeling.  tired?

our goobermint continues to do the Keystone Kopz both justice and homage.  who coulda known how expensive clowns cars would become?

i would like to declare tomorrow and monday FEDERAL H0LeeeDAZE.  postal workers can rest, and the FBI can stop trying to catch grannies cheating on their food stamp applications and draining the Treasury.

in related food stamp news, granny is tooling up the lobbyists to get vitamins & cat chow food stamp-approved BEFORE the FBI gets any more raises and free ammo, cars, trucks, choppers, jets, and new motor homes.  she joins me in encouraging the gendarmes to just hava nice slewie-approved howl-e-deyZ and enjoy the wealth!

steady, boys.  hold 'er true, now.

Dr. Engali's picture

Not that I believe it's going to happen , but I never thought I would see the day where there is serious talk about default. I've prepared for it... but like insurance I hoped I never had to use it.

CTgoldcoast's picture

Unless Obama raises the debt ceiling using a clause in the 14th amendment - this is his last ditch plan, the debt ceiling would be treated as unconstitutional, so no need for a vote to increase it.  I guess this course is little known or discussed, so the "analysts" have not baked this event into thier calculations...

Dr. Engali's picture

Then we have a costitutional crisis. I wonder if the Republicans will challenge him on that or just roll with it.

CTgoldcoast's picture

I don't think it would be a constitutional crisis.  Obama raises the debt ceiling.  Then congress can work on what they should be working on.  Reducing spending.  They hold the purse strings, so, in effect, are they not at least partially responsible for the debt?  How about cutting defence, and reducing/eliminating entitlement payments to the rich - read means testing before benefits are paid out. 

Dr. Engali's picture

Sure and let his majesty usurp more power. No my friend it would be a constitutional crisis. The 14th amendment does not allow the president to raise the debt ceilig. Congress and congress alone has the power of the purse strings. It's too bad there are people such as yourself who would back his dictator and chief in cosolidating more power.

SheepDog-One's picture

Well thats our problem as a people, hardly anyone with a spine to just say no, they'll do anything for another hit of crack just a nation of wobbly addicts.

CTgoldcoast's picture

Correct, the 14th amendment does not allow the president to raise the debt ceiling.  But that is because (and try to follow along here pumkin) there is no constitutional basis for a debt ceiling in the first place.  The 14th amendment contains a provision that says: 

"the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

CTgoldcoast's picture

Correct, the 14th amendment does not allow the president to raise the debt ceiling.  But that is because (and try to follow along here pumkin) there is no constitutional basis for a debt ceiling in the first place.  The 14th amendment contains a provision that says: 

"the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

caerus's picture

prob is nothing's unconstitutional until SCOTUS says so...but before they can, someone has to file suit...maybe my JD wont go to waste after all

Strider52's picture

Oh, it's definitely "baked in." See, the story will unfold like this:

1. Make it look like it's a dem / republican mexican standoff. Since it's a sensitive subject to our loyal subjects, don't make it look too easy to just raise the ceiling.

2. At the last minute, our Superbamahero comes crashing through the window just in the nick of time to avoid the dreaded default, saving Polly Purebread and her Social Security checks, and her vote to re-elect Oh!Bummer.

3. Ole Bammy gets re-elected.

 Why do you think Bammy will veto anything that doesn't fund the U.S. past the election?  

Pure Evil's picture

zero mention of the word gold when contemplating the impact of a US default

If the US defaults and the dollar becomes mere "garbage"

How will the zombies be able to pay for their drugs, surely the drug cartels aren't going to start expecting to be paid in gold or silver?

Oh, the humanity!

Hedgetard55's picture

No doubt Reid and Boner have gotten together to short the market and make a killing, THEN cut a deal. Insider trading is perfectly legal for them.

jkruffin's picture

Just goes to show you how corrupt Wall Street and this government have become:


Stocks are green with 3 trading days before default, and Treasury yields are down as if people are buying defaulted Treasury notes?

It doesn't get any more scam than this....Any other country yields would be over 10% on a 5yr note, except for in ScAmerica!!!!'s picture

So they can calculate all that, but were unable to predict that lending money to deadbeats is going to collapse the system? Indeed, some "talent".

rubearish10's picture

Let's take the 9% chance and see the brick wall they kick the can in to. Although, it would be truly heartwarming to see a default and flush out the Squid completely. There's at least a better than 0% chance that happens, hey?

fishface's picture

and all these Healthcare stocks...


just wondering

if the US is broke and with it the health care system... hmmm

wouldn't the prices for healthcare come down to 'normal' levels as in other countries

and then profits go down and finally share prices



gold mentioned 4 time err. 5 times

no2foreclosures's picture

Let the fun and games begin!

SheepDog-One's picture

Imaginary scramble to lay out all options for what will happen if this or that isnt done, as if it wasnt all planned out from the start. Just a bunch of scare tactics to put the last nail in the coffin. Personally I think theyre a bit behind schedule for the big takedown, certain things arent quite in place yet so they need a bit more time. Cold feet.

BTW is it just me or is ZH working quite slowly now? It used to hang up a bit here or there, but now Im getting 30 second page load times? 

RobotTrader's picture



No doubt a deal is probably being hatched as we speak.

Probably see a huge rotation out of gold and into bank stocks if there is a deal struck.

Virtually every time King World News posts a sensational headline about gold going to $8,500, the Cartel comes in and stomps the gold bugs and smushes them on to the pavement.

SheepDog-One's picture

Poor Robo, still lamenting his poor decision to clown gold since well under $1,000.

'Huge rotation out of PM's to banker stocks'...I'll happily buy that bottom from those suckers any day. If people are so stupid to sell their gold for worthless banker stocks, I'm all for it. Get the losers out of PM's.

caerus's picture

green press for use of the word "smushes"