WEBVTT - This Is What Happens if the US Actually Hits the Debt Ceiling 0:00:10.160 --> 0:00:13.680 Hello, and welcome to another episode of the ad Thoughts Podcast. 0:00:13.760 --> 0:00:19.279 I'm Tracy Alloway and Joe uh debt ceiling. Oh, I'm 0:00:19.280 --> 0:00:22.520 so excited we're doing a trillion dollar coin episode. I 0:00:22.600 --> 0:00:27.120 knew you were going to say that and to annoy me. Yes, 0:00:27.400 --> 0:00:30.760 this is not an episode on the trillion dollar coin. 0:00:30.880 --> 0:00:35.640 If you are interested in that particular piece of um 0:00:35.840 --> 0:00:39.959 finance thought experiment, you can check out our previous episode 0:00:40.000 --> 0:00:42.760 on the topic. I think it was over an hour long, 0:00:43.320 --> 0:00:47.239 all about the trillion dollar coin. Yeah, okay, check out 0:00:47.280 --> 0:00:48.880 that episode if you want to talk about the trillion 0:00:48.920 --> 0:00:51.480 dollar coin. But today we're going to be discussing something 0:00:51.560 --> 0:00:54.160 slightly different. We are going to be talking about what 0:00:54.440 --> 0:00:59.720 exactly happens if the US actually does default, right, because 0:00:59.760 --> 0:01:02.800 if there's like just a lot of uncertainty about this 0:01:03.080 --> 0:01:05.800 question of like okay, like what happens if they don't 0:01:05.840 --> 0:01:09.319 raise the dead ceiling? And what are the constraints, what 0:01:09.400 --> 0:01:11.880 are the various things that could happen, Like how bad 0:01:11.920 --> 0:01:14.199 would it be if we actually, like didn't pay the debt? 0:01:14.600 --> 0:01:18.280 Does the White House have ability to pay some debt 0:01:18.360 --> 0:01:21.759 but not others? Like it's pretty uncertain, Like it seems 0:01:21.800 --> 0:01:25.040 bad right, like it is lame and defaulting was bad. 0:01:25.360 --> 0:01:29.600 Russia default was bad, and Russia is like this like tiny? 0:01:29.800 --> 0:01:32.880 You know how big was russia debt nothing? So like 0:01:34.000 --> 0:01:38.520 it is a moving feast of uncertainty, like a twirling 0:01:38.720 --> 0:01:43.720 whirlwind of chaos and uncertainty and open questions over exactly 0:01:43.720 --> 0:01:46.480 what happens. And there are all these moving parts. I 0:01:46.480 --> 0:01:49.040 think we really need to sit down and discuss them 0:01:49.080 --> 0:01:51.960 and kind of talk about it in an almost sequential way, 0:01:52.040 --> 0:01:54.800 like this is what happens if this happens, and then 0:01:54.840 --> 0:01:58.280 that happens. So we really do have the perfect guest 0:01:58.400 --> 0:02:00.680 for this. We're going to be speaking with Joe Perks 0:02:00.760 --> 0:02:03.840 and add thoughts favorite of course, he is also global 0:02:03.960 --> 0:02:07.800 macro strategist over at Bespoke Investment Groups. So George, thank 0:02:07.800 --> 0:02:10.920 you so much for coming back on all thoughts. Hey all, 0:02:10.960 --> 0:02:14.080 thanks for having me. Let's start with the basics, since 0:02:14.240 --> 0:02:16.880 we're talking about this as a sort of primer episode 0:02:17.080 --> 0:02:20.240 on the debt ceiling and the debt limit. When we 0:02:20.280 --> 0:02:24.799 talk about limits on US debt, what do we mean exactly? 0:02:25.600 --> 0:02:28.680 So the US is really unique in a very frustrating 0:02:28.720 --> 0:02:32.840 way in that not only do we have restraints on 0:02:32.880 --> 0:02:37.360 spending in terms of Congress authorizing and the President signing 0:02:37.360 --> 0:02:40.560 into law bills that create government spending um and then 0:02:40.560 --> 0:02:44.800 appropriations processes after that, you know, throughout the year, we 0:02:44.880 --> 0:02:48.000 also have this break on the total amount of debt 0:02:48.040 --> 0:02:51.480 that can be issued. So Congress can at the same 0:02:51.520 --> 0:02:56.160 time instruct the government bureaucracies to go out and spend money, 0:02:56.200 --> 0:02:58.120 but at the same time say, oh, well, you can't 0:02:58.160 --> 0:03:01.120 actually issue debt to you that spending we've told you 0:03:01.160 --> 0:03:03.000 to do. And oh, by the way, you can't collect 0:03:03.000 --> 0:03:05.160 anymore in taxes because we also control that and we've 0:03:05.200 --> 0:03:07.200 told you the amount you can collect in taxes. So 0:03:07.240 --> 0:03:10.960 it's this contradiction in terms of instructions to the executive 0:03:10.960 --> 0:03:14.920 branch and to various federal government bureaucracies from Congress and 0:03:14.960 --> 0:03:17.360 from the President, and it's it's a thing that's been 0:03:17.400 --> 0:03:21.040 around in US politics for a long time. But you know, 0:03:21.240 --> 0:03:23.120 I think the most important thing to understand about it 0:03:23.200 --> 0:03:26.079 is that it's just it's nonsensical. It doesn't make sense 0:03:26.200 --> 0:03:29.440 for there to be this extra restraint on top of 0:03:29.520 --> 0:03:33.880 the existing safeguards against you know, in a representative democracy 0:03:33.960 --> 0:03:36.720 where people are elected and then they authorize the spending 0:03:36.880 --> 0:03:39.360 on behalf of the population. We also have this thing 0:03:39.400 --> 0:03:42.000 where there's a debt, there's a debt limit that that 0:03:42.160 --> 0:03:45.400 serves as sort of a secondary veto point on government spending. 0:03:45.880 --> 0:03:49.680 Defenders of the debt ceiling law would say, look, kind 0:03:49.720 --> 0:03:52.120 of that's true, but it is good to have this 0:03:52.280 --> 0:03:56.240 debate every couple of years about our level of indebtedness. 0:03:56.280 --> 0:03:59.840 This can be used as a break of sorts for 0:04:00.080 --> 0:04:04.480 or constraining spending. In the Dead Ceiling fight, there really 0:04:04.680 --> 0:04:08.120 was cuts and the cuts to the growth of federal spending. 0:04:08.520 --> 0:04:10.200 You know, you're saying, like, okay, like this is like 0:04:10.240 --> 0:04:13.640 the sort of like maddening law makes no sense. Does 0:04:13.720 --> 0:04:16.640 the dead ceiling have a history of like being used 0:04:16.640 --> 0:04:19.320 to sort of regroup and retrain our thoughts about how 0:04:19.400 --> 0:04:21.800 much we're spending. The short answer is no. And I 0:04:21.839 --> 0:04:24.880 think that the more consistent way to think about it 0:04:24.920 --> 0:04:30.040 historically is that it's used by one factionum or another 0:04:30.120 --> 0:04:33.000 in US politics against whoever happens to sort of be 0:04:33.360 --> 0:04:35.839 the party in control. So you know, this is this 0:04:35.880 --> 0:04:37.680 is a bi partisan thing. It's used both ways. Both 0:04:37.720 --> 0:04:40.119 parties have declined to get rid of the dead ceiling 0:04:40.120 --> 0:04:42.479 on a permanent basis when they've been empowered. So I 0:04:42.480 --> 0:04:44.520 don't mean to say that this is a red versus 0:04:44.520 --> 0:04:47.320 blue you know, one side an abuser of this versus 0:04:47.360 --> 0:04:49.279 the other. But what it does is it just it 0:04:49.320 --> 0:04:52.919 creates a veto point and allows the legislative minority to 0:04:52.960 --> 0:04:55.400 extract what it wants from or some of what it 0:04:55.440 --> 0:04:59.440 wants from the legislative majority. Now that's not necessarily the 0:04:59.520 --> 0:05:01.640 end of the w old, but there are a couple 0:05:01.640 --> 0:05:03.280 of things to think about here. First, the U S 0:05:03.279 --> 0:05:05.600 system of government is already full of veto points, right, 0:05:05.839 --> 0:05:08.640 whether it's process of buils through committees, process of builds 0:05:08.680 --> 0:05:11.320 through the House, process of builds through the Senate, judicial 0:05:11.400 --> 0:05:14.720 checks on all that, the executive branch, the high requirement 0:05:14.760 --> 0:05:16.520 in the Senate to sign things in the law. There 0:05:16.520 --> 0:05:19.640 are some exceptions, but basically you need a supermajority in 0:05:19.640 --> 0:05:21.120 the Senate to get things signed in the law. So 0:05:21.160 --> 0:05:23.600 there's just we have a replete number of veto points, 0:05:23.640 --> 0:05:27.320 adding you know, just one more. The benefits are pretty 0:05:27.360 --> 0:05:31.000 negligible even if you agree that that. You know, controlling 0:05:31.000 --> 0:05:33.840 the debts size is a super important public policy goal. 0:05:33.880 --> 0:05:35.760 I don't happen to agree with that, but let's take 0:05:35.760 --> 0:05:38.560 that as given. Even then, there are costs associated with 0:05:38.600 --> 0:05:40.839 this that that are very real. And the cost is 0:05:41.240 --> 0:05:43.280 the credibility of the U. S is ability to pay 0:05:43.320 --> 0:05:46.280 its debts on time in full. And you know, there 0:05:46.279 --> 0:05:49.719 are real questions about the United States Treasuries ability to 0:05:49.880 --> 0:05:52.960 settle out coupon and interest payments on debt, let alone, 0:05:53.120 --> 0:05:58.440 payments to Social Security recipients, payments to government contractors, government employeescetera, etcetera. 0:05:58.520 --> 0:06:01.560 This year because of this death ceiling being present. And 0:06:01.600 --> 0:06:04.200 again I think it's really important to emphasize debt ceiling 0:06:04.240 --> 0:06:07.120 being present. Even though those payments, all those payments that 0:06:07.160 --> 0:06:09.160 are set to go out, all the spending, all the 0:06:09.160 --> 0:06:10.840 payments that are set to come into the treasury and 0:06:10.920 --> 0:06:13.479 formed taxes, all of that has already been approved by Congress. 0:06:13.640 --> 0:06:16.080 The debt ceiling is a secondary approval's process that has 0:06:16.120 --> 0:06:19.440 nothing to do with keeping a lid on on spending 0:06:19.480 --> 0:06:22.279 in a direct sense. So, George, you you just set 0:06:22.320 --> 0:06:26.000 out the stakes kind of perfectly there. But talk to us. 0:06:26.160 --> 0:06:31.640 You also mentioned the treasury. Talk to us about extraordinary measures, 0:06:31.720 --> 0:06:34.320 because the U. S. Treasury has already said that it's 0:06:34.400 --> 0:06:38.120 started to take these extraordinary measures in order to meet 0:06:38.480 --> 0:06:41.960 its obligations because we have in fact already exceeded that 0:06:42.080 --> 0:06:45.400 thirty one point four trillion dollar or whatever it is 0:06:45.600 --> 0:06:49.600 borrowing limit. What are the extraordinary measures and how do 0:06:49.680 --> 0:06:53.000 they actually play out here? So there are a variety 0:06:53.000 --> 0:06:55.800 of things that go into the extraordinary measures behind the scenes. 0:06:55.920 --> 0:06:58.240 I mean, the simplest way to think about it is 0:06:58.440 --> 0:07:02.800 changing timing of payments and sort of where there's flexibility 0:07:02.880 --> 0:07:06.720 to defer payments or to pay them, you know, without 0:07:06.760 --> 0:07:09.159 issuing debts, to wait for new payments to new tax 0:07:09.160 --> 0:07:12.360 payments to come in before sending out existing payments. That's 0:07:12.360 --> 0:07:14.920 one way to think about it. The most important thing, though, 0:07:15.200 --> 0:07:18.720 is spending down the balance that's recorded in the Treasury 0:07:18.760 --> 0:07:22.960 General account at the Federal Reserve. So the Federal Reserve 0:07:23.080 --> 0:07:26.040 is the United States Treasuries fiscal agent, which basically means 0:07:26.080 --> 0:07:29.120 that that payments are being made via the feed. So 0:07:29.440 --> 0:07:32.680 if you're if you're the Treasury, you don't have a 0:07:32.760 --> 0:07:34.720 checking account at a private bank. You have a checking 0:07:34.720 --> 0:07:37.960 account at the Fed. There are ways in which the 0:07:38.040 --> 0:07:41.480 government is nothing like household, but in terms of access 0:07:41.520 --> 0:07:44.200 to a checking account, that is one way the government 0:07:44.280 --> 0:07:46.680 is like a household. There is a account at the 0:07:46.680 --> 0:07:50.160 Fed again called the Treasury General Account that is essentially 0:07:50.160 --> 0:07:53.240 a cash balance, a balance available for payments that is 0:07:53.360 --> 0:07:56.800 used to settle payments owed by the Treasury to other 0:07:57.160 --> 0:08:01.200 individuals or entities throughout the economy. And what the Treasury 0:08:01.200 --> 0:08:03.920 has been able to do since whether they're able to 0:08:03.920 --> 0:08:05.640 do it beforehand, but what if they've done as a 0:08:05.760 --> 0:08:09.320 matter of course since, is build up this this Treasure 0:08:09.360 --> 0:08:12.480 General Account in the period leading up to debt ceiling 0:08:12.520 --> 0:08:16.920 limits being reached, because that allows for flexibility over the 0:08:16.960 --> 0:08:20.040 subsequent months. Basically, if you know that you're going to 0:08:20.160 --> 0:08:21.800 be without a paycheck for a couple of months, you 0:08:21.920 --> 0:08:23.960 save some cash away and your checking account. You're not 0:08:24.000 --> 0:08:25.680 going to buy a long term investment with it because 0:08:25.720 --> 0:08:27.200 you know you'll need it, but you'll have a little 0:08:27.200 --> 0:08:29.240 balance in your checking account, and then when your paycheck 0:08:29.280 --> 0:08:30.760 doesn't come through, you can still pay your rent for 0:08:30.760 --> 0:08:32.319 a couple of months. You can't do it indefinitely, but 0:08:32.360 --> 0:08:34.400 you have this sort of cushion there, and that's sort 0:08:34.400 --> 0:08:36.200 of what the charge of General Account spend down is 0:08:36.200 --> 0:08:39.120 and that's the core of extraordinary measures that that allows 0:08:39.160 --> 0:08:42.200 the Treasury to continue to make all the payments it's 0:08:42.320 --> 0:08:45.800 mandated to buy law, you know, whether that's UH payments 0:08:45.840 --> 0:08:51.480 to contractors, payments to employees, payments to beneficiaries, whatever, payments 0:08:51.480 --> 0:08:54.240 to holders of the national debt. All those can continue 0:08:54.240 --> 0:08:56.160 to go out the door as normal, in part because 0:08:56.160 --> 0:08:57.800 there's this cash balance at the t g A that's 0:08:57.840 --> 0:09:00.320 being spent down. Okay, we have these sort of like 0:09:00.640 --> 0:09:03.280 they're called extraordinary measures, but they're not like that weird. 0:09:03.320 --> 0:09:05.880 They're like little like they're more like, you know, short 0:09:06.040 --> 0:09:10.320 term cash management techniques that allow the government to make 0:09:10.320 --> 0:09:14.920 its obligations for a few extra months. Let's talk about like, okay, 0:09:14.960 --> 0:09:18.280 when those run out, what happens? Like where where do 0:09:18.400 --> 0:09:20.439 things stand? You know? People talk, I don't know, like 0:09:20.960 --> 0:09:23.360 what is your estimate for when like the sort of 0:09:23.720 --> 0:09:26.440 real debt limit is right when we no longer have 0:09:26.640 --> 0:09:29.719 these sort of drop dead Yeah, so the X date 0:09:29.800 --> 0:09:31.880 the drop dead date? Talk about like what happens as 0:09:31.880 --> 0:09:35.640 we get closer to that. I so, I personally don't 0:09:35.640 --> 0:09:37.760 think my estimate is any better than what we've heard 0:09:37.760 --> 0:09:41.080 from charity or from the Secretary Treasury yelling, she says 0:09:41.160 --> 0:09:44.200 June five, this sort of her best estimate, but one, 0:09:44.240 --> 0:09:46.160 It's important to understand that she described it as having 0:09:46.200 --> 0:09:49.160 considerable uncertainty. So, for instance, if we have a really 0:09:49.200 --> 0:09:52.079 really strong tax collection season or really really weak tax 0:09:52.080 --> 0:09:54.400 collection season over the next three months, that's going to 0:09:54.480 --> 0:09:56.760 have big implications for the timing here, right, just because 0:09:56.880 --> 0:09:59.280 a huge percentage of cash flows in and out of 0:09:59.280 --> 0:10:02.080 the Treasury take lace over over tax season. So you know, 0:10:02.160 --> 0:10:04.880 there's just all sorts of uncertainties. Also, private sector of 0:10:04.920 --> 0:10:07.760 visibility is is not great into all the timing of 0:10:07.760 --> 0:10:09.760 payments in there and their size. So I'll just make 0:10:09.760 --> 0:10:13.200 that you know, I think sometime in May June is 0:10:13.240 --> 0:10:15.199 probably the right way to think about it. Um, late mate, 0:10:15.200 --> 0:10:17.679 early June, we'll we'll hit this drop dead day where 0:10:18.320 --> 0:10:21.120 essentially there are more payments being requested from the Treasury 0:10:21.160 --> 0:10:24.200 than there is cash balance plus payments being made to 0:10:24.200 --> 0:10:26.440 the Treasury. At that point, I think it's important to 0:10:26.440 --> 0:10:28.280 stress that we don't actually know what's going to happen. 0:10:28.280 --> 0:10:31.920 Nobody knows. There may be Treasury bureaucrats somewhere that know, um, 0:10:32.000 --> 0:10:35.080 but for all intents and purposes, they're they're not saying anything, 0:10:35.559 --> 0:10:38.880 and we we can't really be sure the I think 0:10:38.880 --> 0:10:41.280 the most popular in terms of like people saying, well, 0:10:41.320 --> 0:10:43.920 why don't you just do this option is something called prioritization, 0:10:43.960 --> 0:10:45.920 which is to make some payments and not others. So 0:10:45.960 --> 0:10:48.080 what does that look like? For instance, if the Treasury 0:10:48.120 --> 0:10:50.600 sees that they have a payment due to the holder 0:10:50.679 --> 0:10:53.920 of a long term Treasury bond, they will make that 0:10:53.960 --> 0:10:56.280 coupon payment, but they won't necessarily make a payment to, 0:10:56.440 --> 0:10:59.440 for instance, employees of the federal government for their paycheck. 0:11:00.040 --> 0:11:02.680 How you assign a matrix of sort of like who 0:11:02.720 --> 0:11:05.079 gets paid and who doesn't get paid in that scenario 0:11:05.240 --> 0:11:08.840 is a super fraught political question that deserves a lot 0:11:08.920 --> 0:11:12.680 of discussion. It's all hypothetical because the Treasury has said, well, 0:11:12.840 --> 0:11:15.080 we can't actually do this, We don't have the technical 0:11:15.120 --> 0:11:18.079 abilities to do this. Now, they may be bluffing when 0:11:18.080 --> 0:11:20.080 they say that one way to sort of get a 0:11:20.080 --> 0:11:22.720 better outcome around the death ceiling from the Treasury's perspective, 0:11:22.760 --> 0:11:24.679 because if you're the bureaucrats of the Treasury, what you 0:11:24.720 --> 0:11:26.720 care about is just being able to do what Congress 0:11:26.720 --> 0:11:28.560 has told you to do in terms of making payments 0:11:28.559 --> 0:11:30.800 in and out of the Treasure General account. You don't 0:11:30.840 --> 0:11:33.360 really care about the political fight. You just want to 0:11:33.360 --> 0:11:36.400 do your job, and from that perspective, Treasury has signaled 0:11:36.440 --> 0:11:40.320 quite aggressively, Look, we cannot do prioritization. So if if 0:11:40.360 --> 0:11:42.040 we hit the X date, then we're not gonna be 0:11:42.080 --> 0:11:44.000 able to say, oh, make this payment but not that payment. 0:11:44.080 --> 0:11:46.480 Whether that's true or whether that's sort of signaling in 0:11:46.520 --> 0:11:49.640 a game that makes default very very costly for whoever 0:11:49.720 --> 0:11:53.680 lets it happen is an unclear thing, like like one. 0:11:53.880 --> 0:11:56.520 One possible explanation is that Treasury is saying that as 0:11:56.520 --> 0:11:59.640 a way to signal to, for instance, congressional Republicans that hey, 0:11:59.679 --> 0:12:01.959 y'all can't do this or it's gonna be really really bad. 0:12:02.480 --> 0:12:06.439 If Treasury is being honest around prioritization, and again I 0:12:06.640 --> 0:12:08.240 don't have any insight, and you know, I don't have 0:12:08.280 --> 0:12:10.080 a way to say like, oh, they're not being honest, 0:12:10.160 --> 0:12:13.359 but it's definitely possible that they're. They're sort of presenting 0:12:13.440 --> 0:12:16.040 a reality that's a little bit less the case than 0:12:16.200 --> 0:12:19.320 is other than than it really is. But assuming they're 0:12:19.360 --> 0:12:23.160 being honest, then when Treasury runs out of cash, you 0:12:23.240 --> 0:12:26.280 come to this second scenario called a general default, and 0:12:26.360 --> 0:12:28.440 that is basically saying we're not going to make any 0:12:28.480 --> 0:12:30.760 payments to anybody because everyone's on an equal footing. We 0:12:30.760 --> 0:12:33.120 can't tell payments apart, and we are just not going 0:12:33.200 --> 0:12:36.520 to make payments until the debt ceiling is lifted. That 0:12:36.559 --> 0:12:40.840 would be enormously disruptive and would obviously involve an outright 0:12:40.880 --> 0:12:43.880 default on certain US securities. There would probably be make goals, 0:12:44.000 --> 0:12:46.160 but there would be a default. There would also be 0:12:46.200 --> 0:12:48.720 a default on everything from Social Security checks to government 0:12:48.720 --> 0:12:51.560 employe paychecks. The military wouldn't get paid, Military contractors don't 0:12:51.600 --> 0:12:54.959 get paid, any government contractor would get paid. Cash out 0:12:55.000 --> 0:12:57.400 of the Treasury would entirely stop. So I think in 0:12:57.520 --> 0:13:00.400 terms of the first two options around like what Treasury 0:13:00.440 --> 0:13:02.640 can do in terms of making payments, like the rest 0:13:02.679 --> 0:13:04.600 pull in terms of making payments, those are the two extremes. 0:13:04.760 --> 0:13:07.720 Absolute prioritization would be they have this matrix of different 0:13:07.800 --> 0:13:10.480 priorities and they make them as they're able to, and 0:13:10.640 --> 0:13:13.160 some people don't get the payments their owned, but Treasury 0:13:13.160 --> 0:13:15.560 is able to finally tune that to like reflect what 0:13:15.559 --> 0:13:18.040 they want to do. That's one spectrum, and the other 0:13:18.040 --> 0:13:20.240 spectrum is general fault. Nobody gets anything until the debt 0:13:20.480 --> 0:13:41.400 gets a little bit, so Obviously, general default of the 0:13:41.520 --> 0:13:45.640 US sounds very, very bad and dire. But one of 0:13:45.679 --> 0:13:49.920 the things we've seen in previous debt ceiling dramas is 0:13:49.960 --> 0:13:52.680 that as we get closer and closer to that prospect, 0:13:53.280 --> 0:13:57.800 we tend to see market participants buying US government debt 0:13:57.840 --> 0:14:00.760 as a sort of flight to safety play. So what 0:14:00.800 --> 0:14:04.400 would it mean for the actual treasury market if we 0:14:04.520 --> 0:14:07.560 got to that general default point? What would you expect 0:14:07.600 --> 0:14:10.320 to see? Well, that is where things get really fun, 0:14:10.520 --> 0:14:14.040 because you have to sort of competing definitions of fund 0:14:14.080 --> 0:14:20.880 may vary. Fund may not apply to the non exactly. 0:14:21.040 --> 0:14:24.880 So on the one hand, any missed payment on something 0:14:24.920 --> 0:14:29.360 that is assumed as a just a general functioning bedrock 0:14:29.440 --> 0:14:33.600 principle of financial markets to never miss payments, whether it's 0:14:33.600 --> 0:14:36.400 principal or khun having a miss payment on that creates 0:14:36.520 --> 0:14:39.600 all sorts of headaches. Not only is are are you 0:14:39.640 --> 0:14:42.520 maybe creating four sellers of people who are not allowed 0:14:42.680 --> 0:14:45.280 to hold securities that have defaulted? And we can come 0:14:45.280 --> 0:14:47.400 back to that later, but let's assume that there's some 0:14:47.400 --> 0:14:48.960 segment of the market that says we're not allowed to 0:14:48.960 --> 0:14:51.120 hold these. We we we just can't be seen holding these, 0:14:51.320 --> 0:14:53.480 So we have to sell them. On the other hand, 0:14:53.560 --> 0:14:55.880 some segment of the market would say, look, this is 0:14:55.880 --> 0:14:58.320 a political fight. It's not a it's not a lack 0:14:58.360 --> 0:15:00.680 of ability to pay, it's a lack of willingness to pay. 0:15:00.720 --> 0:15:03.080 That's going to be temporary. So we will accept some 0:15:03.360 --> 0:15:06.680 trivial risk premium to hold these securities because at some 0:15:06.760 --> 0:15:08.760 point we trust that we're gonna be made whole. You know, 0:15:08.800 --> 0:15:10.800 we might lose a little bit, but but you know 0:15:10.840 --> 0:15:13.040 we're going to be paid something for holding these defaulted 0:15:13.120 --> 0:15:15.960 securities in the meantime, so we'll hold onto those. So 0:15:16.200 --> 0:15:19.280 figuring out who has these securities, who has to sell them, 0:15:19.320 --> 0:15:21.520 who wants to sell them, what prices there the people 0:15:21.560 --> 0:15:23.600 who want to sell them are willing to trade at 0:15:24.160 --> 0:15:26.400 versus the other side of the of the demand for 0:15:26.400 --> 0:15:28.280 these of ALTI securities by people with a little bit 0:15:28.320 --> 0:15:31.120 looser risk tolerance. That's going to be a really there's 0:15:31.160 --> 0:15:34.160 been a lot of volatility. As those securities work themselves out, 0:15:34.320 --> 0:15:37.160 there will be a series of bills around the debt 0:15:37.200 --> 0:15:40.240 ceiling maturity or around the debt ceiling X state that 0:15:40.280 --> 0:15:44.680 will be probably the most impacted relative to their historical volatility. Bills. 0:15:44.720 --> 0:15:47.480 Remember don't pay coop on payments, so you know, your 0:15:47.560 --> 0:15:50.320 whole payment of interest comes with the maturity of the bill, 0:15:50.720 --> 0:15:54.440 So you know, as a percentage of of your total 0:15:54.480 --> 0:15:56.400 cash flow for the instrument, bills are going to be 0:15:56.440 --> 0:15:59.320 a lot more impacted. And they're also much less volatile historically, 0:15:59.400 --> 0:16:02.000 so you know, if you if you see for selling, 0:16:02.200 --> 0:16:04.320 you can see sort of more outside moves in those 0:16:04.440 --> 0:16:07.479 in those word are typically much safer, less volatile securities. 0:16:07.840 --> 0:16:10.200 On the other hand, you've got notes, bonds, notes and 0:16:10.200 --> 0:16:12.440 bonds which are longer term. You know, if you're thinking 0:16:12.440 --> 0:16:15.080 about a third year bond, one missed coupon payment, that 0:16:15.080 --> 0:16:17.080 that you know you probably get paid back in cash 0:16:17.120 --> 0:16:19.320 a month later. It doesn't really matter as much to 0:16:19.360 --> 0:16:21.920 the to the total value of the security. So it's 0:16:22.000 --> 0:16:25.640 plausible that you see long term securities that miss coupon 0:16:25.680 --> 0:16:29.400 payments during that period outperform the front end of the 0:16:29.480 --> 0:16:32.160 Yolker or or or or fall. You know how their 0:16:32.200 --> 0:16:35.600 yields fall, prices go up in absolute terms because of 0:16:35.640 --> 0:16:38.800 general risk of version. Now there's also a scenario here 0:16:38.840 --> 0:16:41.800 where and we're sort of getting far out into hypotheticals 0:16:41.840 --> 0:16:45.480 without really stressing what are our metrics for like this 0:16:45.600 --> 0:16:49.280 scenario are But there's also a scenario here where basically 0:16:49.560 --> 0:16:52.160 there isn't much change in the treasury market because the 0:16:52.160 --> 0:16:53.760 people who are willing to pay more and the people 0:16:53.760 --> 0:16:55.680 who are forced to sell or want to sell are 0:16:55.680 --> 0:16:58.120 relatively evenly matched, and everything kind of just trades out 0:16:58.160 --> 0:17:00.920 at equilibrium levels. That's a very real possibility, is it 0:17:01.040 --> 0:17:04.159 my expectation? Probably not, But like it's it's something you 0:17:04.200 --> 0:17:06.639 have to think about. So one of the things that 0:17:06.720 --> 0:17:11.199 makes treasuries special is that they are used for collateral 0:17:11.440 --> 0:17:15.280 in the repo market. So you know, if you're loaning 0:17:15.400 --> 0:17:17.600 or borrowing a large amount of money, you will often 0:17:17.720 --> 0:17:22.000 use treasury securities as your collateral slash security in order 0:17:22.080 --> 0:17:24.359 to do that. What would be the impact on the 0:17:24.440 --> 0:17:28.480 repo market if you had doubts over whether or not 0:17:28.560 --> 0:17:30.760 some of these bonds are in default or are in 0:17:30.840 --> 0:17:33.520 fact going to be receiving their coupon payments on schedule. 0:17:34.200 --> 0:17:36.040 I think it's probably best to think about the repo 0:17:36.119 --> 0:17:39.159 markets an extension of the cash treasury market from that perspective, 0:17:39.200 --> 0:17:41.400 And in this scenario, I think there will be some 0:17:41.600 --> 0:17:44.720 repo market makers who are willing and able to take 0:17:44.800 --> 0:17:49.320 quote unquote defaulted treasuries as collateral and maybe apply some 0:17:49.760 --> 0:17:51.880 small haircut to them, but are willing to do it 0:17:52.080 --> 0:17:55.320 for a relatively small increase in their income from from 0:17:55.359 --> 0:17:57.520 the activity. You know, just like there will be people 0:17:57.520 --> 0:18:00.000 who will be willing to pay, you know, slightly less 0:18:00.080 --> 0:18:03.600 than than typical for for a similar security because it's defaulted. 0:18:03.640 --> 0:18:07.000 But but not like you know half as much, you 0:18:07.000 --> 0:18:09.320 know that kind of thing. But we don't really know 0:18:09.640 --> 0:18:11.359 the other thing, and I think this affects both the 0:18:11.400 --> 0:18:13.760 repo market and the cash market is we don't really 0:18:13.800 --> 0:18:17.320 know how well the back end settlement systems and trading 0:18:17.359 --> 0:18:20.320 systems are going to handle being able to trade something 0:18:20.320 --> 0:18:24.440 that's already past maturity right like and hopefully their QA 0:18:24.600 --> 0:18:27.920 and DEV people at banks and at funds and at 0:18:27.960 --> 0:18:30.840 other providers who are thinking about this and have have 0:18:30.960 --> 0:18:33.400 tested this. But what happens if I have to buy 0:18:33.480 --> 0:18:35.639 on recording this February ninth? What happens if I have 0:18:35.680 --> 0:18:39.240 to buy on February ninth a bill that shows that 0:18:39.240 --> 0:18:42.400 that has a maturity data associated with it a February seven? 0:18:42.560 --> 0:18:44.200 Can the systems even accept that? Or it does it 0:18:44.280 --> 0:18:46.119 throw an error and say no, you're not allowed to 0:18:46.119 --> 0:18:47.920 do that. I'm so glad you brought this up because 0:18:48.040 --> 0:18:50.560 this is something I've wondered about exactly, which is that 0:18:50.920 --> 0:18:53.960 with most financial instruments, when we're talking about default, you know, 0:18:54.000 --> 0:18:56.520 it's just like it's kind of an economic question, well 0:18:56.560 --> 0:18:58.879 what's there when you're going to get your recovery, etcetera. 0:18:59.119 --> 0:19:02.080 And I've always wondered whether like a US debt default, 0:19:02.680 --> 0:19:05.800 like would it almost be more like the Y two 0:19:05.880 --> 0:19:09.840 K problems. See this is a crossover episode between the 0:19:10.040 --> 0:19:13.720 Y companies have terrible software and the U. S Treasury. No, 0:19:13.920 --> 0:19:16.480 this is exactly what I've wondered whether rather whether we're 0:19:16.480 --> 0:19:19.080 thinking about it the risks is sort of the wrong dimension, 0:19:19.200 --> 0:19:22.080 whether it's actually kind of like creates all just sort 0:19:22.119 --> 0:19:25.600 of technical things like here's the one instrument that no 0:19:25.640 --> 0:19:29.680 one ever thinks about missing a payment on, etcetera. Right, 0:19:29.720 --> 0:19:32.280 it's like, uh, you know, I don't I don't know 0:19:32.320 --> 0:19:34.920 what the analogy would be, but I'm glad you brought 0:19:34.920 --> 0:19:36.520 this up because it seems like this could be the 0:19:36.520 --> 0:19:39.320 one thing. It's like, did they even like code the 0:19:39.400 --> 0:19:42.600 possibility that some of these instruments wouldn't get paid and 0:19:42.640 --> 0:19:45.040 what kind of like I mean it's kind of specultive, right, Like, 0:19:45.040 --> 0:19:48.360 it's hard to answer, but I'm glad you brought this up. Yeah, 0:19:48.400 --> 0:19:50.560 I mean I think the team over Hindsight Capital would say, well, 0:19:50.560 --> 0:19:54.080 I sure hope they'd this because you know, you've known 0:19:54.119 --> 0:19:56.320 it's a possibility. Yeah, when are we gonna get this? 0:19:57.520 --> 0:20:02.400 Every single trade their way ahead of things. Um, but yeah, 0:20:02.440 --> 0:20:04.440 I mean we've known this is at least the hypothetical 0:20:04.480 --> 0:20:07.760 possibility since at least, so you would hope right that 0:20:07.760 --> 0:20:10.399 that there have been some efforts to make sure that 0:20:10.400 --> 0:20:13.359 settlement systems can handle this sort of thing. But just 0:20:13.400 --> 0:20:16.200 because you would hope that doesn't and you can actually 0:20:16.200 --> 0:20:18.760 say like, oh, yeah, that's that's how it works. I 0:20:18.800 --> 0:20:21.199 know at some level there would be able to be 0:20:21.240 --> 0:20:24.560 settlement of treasury securities and defaulted. I mean, you can 0:20:24.600 --> 0:20:26.320 do stuff over the phone, you can do stuff with 0:20:26.359 --> 0:20:31.080 manual settlement procedures, but there's just no way that the 0:20:31.119 --> 0:20:33.479