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



## Toro (Jul 27, 2011)

> The issue now is that there are "different" defaults. The first kind of default, which isn't a real default, just a technical one, is that certain bills do not get paid. I think this has become a likely scenario now, growing 5% to 10% more likely every 72 hours that we draw close to the Aug. 2 deadline. Let's call it 50-50 for now. The consequence? A 2% to 4% decline in the S&P 500 across the board
> 
> There is a second form of default, though, that isn't innocent and will lead to a bigger decline to the market, one that I shudder to think about. Let's call it the nuclear option. That's the one where the nation doesn't pay its bills. That's right, we don't pay interest or principal on the bonds. If we don't pay for one day, I don't think it can be contained by just 4%. We don't pay for three days, and I think the S&P can go down as much as 10%.
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http://www.thestreet.com/p/_jcblog/rmoney/jimcramerblog/11200260.html


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## waltky (Jul 27, 2011)

Senate's plan gets the nod...

*Analysts: Senate plan saves $2.2 trillion*
_27 July`11  WASHINGTON (AP)  Six days away from a potentially calamitous government default, House Republicans on Wednesday appeared to be slowly coalescing around a plan by House Speaker John Boehner to avert the debt crisis  a plan Boehner was still retooling to increase its complement of spending cuts. But Senate Democrats insisted the short-term solution Republicans were crafting would leave the economy on shaky footing._


> Each side claimed the moral high ground as a new day of jockeying over to how to end the debt crisis began. And budget analysts suggested both sides had been over-promising how much in spending cuts their rival plans would deliver.  Boehner, R-Ohio, set out to rework his plan after nonpartisan analysts from the Congressional Budget Office said it would cut spending less than advertised  about $850 billion over 10 years rather than the $1.2 trillion initially promised. GOP leaders planned a House vote Thursday on the reworked plan.
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> "We're moving in his direction in a big way today," Rep. Mike Rogers, R-Mich., said of Boehner's plan. Rogers and others cited changes being made in the bill to make sure spending cuts exceed added borrowing authority, and the fact that the House will soon vote on a balanced budget plan.  Senate Republican Leader Mitch McConnell said only Boehner's plan would resolve the crisis "in a way that will allow us to avoid default without raising taxes and to cut spending budget gimmicks."
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## william the wie (Jul 27, 2011)

The senate bill is so crappy it is not expected to pass the senate. By the way what's the big deal? everybody with half a brain is hedged already.


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## Trajan (Jul 27, 2011)

Toro said:


> > The issue now is that there are "different" defaults. The first kind of default, which isn't a real default, just a technical one, is that certain bills do not get paid. I think this has become a likely scenario now, growing 5% to 10% more likely every 72 hours that we draw close to the Aug. 2 deadline. Let's call it 50-50 for now. The consequence? A 2% to 4% decline in the S&P 500 across the board
> >
> > There is a second form of default, though, that isn't innocent and will lead to a bigger decline to the market, one that I shudder to think about. Let's call it the nuclear option. That's the one where the nation doesn't pay its bills. That's right, we don't pay interest or principal on the bonds. If we don't pay for one day, I don't think it can be contained by just 4%. We don't pay for three days, and I think the S&P can go down as much as 10%.
> >
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I have not taken him seriously for a while now. 


and as we have seen, Bernbank is out buying toner right now, QE3 is in the wings.


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## Mad Scientist (Jul 27, 2011)

T.E.A Partiers are far from being anarchists, in fact we're the exact opposite, we want laws ENFORCED! And isn't this Cramer guy the one that was on Jon Stewart oppologizing for something?


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## Zander (Jul 27, 2011)

Fear mongering Sells!!


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## Baruch Menachem (Jul 27, 2011)

I guess he is the expert


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## DavidS (Jul 27, 2011)

Toro said:


> > The issue now is that there are "different" defaults. The first kind of default, which isn't a real default, just a technical one, is that certain bills do not get paid. I think this has become a likely scenario now, growing 5% to 10% more likely every 72 hours that we draw close to the Aug. 2 deadline. Let's call it 50-50 for now. The consequence? A 2% to 4% decline in the S&P 500 across the board
> >
> > There is a second form of default, though, that isn't innocent and will lead to a bigger decline to the market, one that I shudder to think about. Let's call it the nuclear option. That's the one where the nation doesn't pay its bills. That's right, we don't pay interest or principal on the bonds. If we don't pay for one day, I don't think it can be contained by just 4%. We don't pay for three days, and I think the S&P can go down as much as 10%.
> >
> ...



If Boehner's bill does not pass the House tomorrow, this country is in deep shit.

10-20% is a conservative estimate.


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## uscitizen (Jul 27, 2011)

A 10% "crash" would just be an adjustment back towards reality.


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## uscitizen (Jul 27, 2011)

Mad Scientist said:


> T.E.A Partiers are far from being anarchists, in fact we're the exact opposite, we want laws ENFORCED! And isn't this Cramer guy the one that was on Jon Stewart oppologizing for something?



Yeah right!  They only want the laws they like to be enforced.  Just like most other folks.

They want all the EPA laws enforced?


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## DavidS (Jul 27, 2011)

uscitizen said:


> Mad Scientist said:
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> > T.E.A Partiers are far from being anarchists, in fact we're the exact opposite, we want laws ENFORCED! And isn't this Cramer guy the one that was on Jon Stewart oppologizing for something?
> ...



TEA stands for taxed enough already. Stop posting bullshit. All of the TEA Parties are protests against high taxes. You're all a bunch of fucking morons. Taxes are the lowest they've been since Reagan - in fact lower because the rich pay less taxes than the middle class!


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## shintao (Jul 27, 2011)

Toro said:


> > The issue now is that there are "different" defaults. The first kind of default, which isn't a real default, just a technical one, is that certain bills do not get paid. I think this has become a likely scenario now, growing 5% to 10% more likely every 72 hours that we draw close to the Aug. 2 deadline. Let's call it 50-50 for now. The consequence? A 2% to 4% decline in the S&P 500 across the board
> >
> > There is a second form of default, though, that isn't innocent and will lead to a bigger decline to the market, one that I shudder to think about. Let's call it the nuclear option. That's the one where the nation doesn't pay its bills. That's right, we don't pay interest or principal on the bonds. If we don't pay for one day, I don't think it can be contained by just 4%. We don't pay for three days, and I think the S&P can go down as much as 10%.
> >
> ...



No one said you are not taking a huge risk to gamble in the stock market. There won't be a bail out the next time.


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## CrusaderFrank (Jul 28, 2011)

As fucked up as we are, where else can people put their money?


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## editec (Jul 28, 2011)

I think his analysis is pretty good.

The treat of the USA reneging entirely on its debts is rather small.

No doubt Congress will pass "reform" (read _a screwing)_ in Social Security that will make its obligation to pay SS back in a timely fashion somewhat less egregious.

Any default however, is going to drive up the cost of borrowing money for ALL of us.

That is undoubtably going to negatively effect the stock market as well as the economy as a whole.


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## Zander (Jul 28, 2011)

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.....


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## editec (Jul 28, 2011)

Zander said:


> 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.....


 
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?*_


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## Sarah G (Jul 28, 2011)

Toro said:


> > The issue now is that there are "different" defaults. The first kind of default, which isn't a real default, just a technical one, is that certain bills do not get paid. I think this has become a likely scenario now, growing 5% to 10% more likely every 72 hours that we draw close to the Aug. 2 deadline. Let's call it 50-50 for now. The consequence? A 2% to 4% decline in the S&P 500 across the board
> >
> > There is a second form of default, though, that isn't innocent and will lead to a bigger decline to the market, one that I shudder to think about. Let's call it the nuclear option. That's the one where the nation doesn't pay its bills. That's right, we don't pay interest or principal on the bonds. If we don't pay for one day, I don't think it can be contained by just 4%. We don't pay for three days, and I think the S&P can go down as much as 10%.
> >
> ...



I like his guarded concern but what percentage of the time is Cramer right?  I used to watch his program and I saw his debate with Jon Stewart.  I'm skeptical about his opinions.


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## Zander (Jul 28, 2011)

editec said:


> Zander said:
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> > 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.
> ...


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!


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## Ravi (Jul 28, 2011)

Zander said:


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


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## Toro (Jul 28, 2011)

CrusaderFrank said:


> As fucked up as we are, where else can people put their money?



That's a very good question Frank. What happens when the riskless asset becomes risky?  We've been contemplating that question for the past few weeks now. However, the answer is not "US stocks."


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## Zander (Jul 28, 2011)

Ravi said:


> Zander said:
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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.....


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## Toro (Jul 28, 2011)

Zander said:


> 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.


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## Toro (Jul 28, 2011)

Zander said:


> Ravi said:
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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.


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## iamwhatiseem (Jul 28, 2011)

Toro said:


> Zander said:
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> > 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.
> ...



 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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## william the wie (Jul 28, 2011)

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.


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## Trajan (Jul 28, 2011)

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.


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## Zander (Jul 28, 2011)

Toro said:


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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.


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## Zander (Jul 28, 2011)

iamwhatiseem said:


> Toro said:
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P/E Ratios are very high- I agree with you. Stocks are overvalued. 






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)


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## Toro (Jul 28, 2011)

Zander said:


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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.


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## Zander (Jul 28, 2011)

Toro said:


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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!


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## hortysir (Jul 28, 2011)

I guess if Jerry, George and Elaine trusted him I can too


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## uscitizen (Jul 28, 2011)

Did Cramer see the meltdown coming a few yerars before it hit?


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## william the wie (Jul 28, 2011)

uscitizen said:


> Did Cramer see the meltdown coming a few yerars before it hit?


No, he did not.


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## Zander (Jul 28, 2011)

william the wie said:


> uscitizen said:
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He was knee deep in the froth, calling for ever higher highs, new paradigms, Dow 30,000!!!!


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## Trajan (Jul 28, 2011)

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


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## uscitizen (Jul 28, 2011)

william the wie said:


> uscitizen said:
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> > Did Cramer see the meltdown coming a few yerars before it hit?
> ...



Then believe me not him, I predicted it years before it hit.
The end result was inevitable, it was only a matter of time and not too much time at that.
Too many problems to be just a typical adjustment type of recession.


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## uscitizen (Jul 28, 2011)

And Moodys????   Heck they were part of the problem.
We should have no reason at all to listen to them.


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## Toro (Jul 29, 2011)

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.


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## Paulie (Jul 29, 2011)

Zander said:


> 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.


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## Paulie (Jul 29, 2011)

Toro said:


> 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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## iamwhatiseem (Jul 29, 2011)

Paulie said:


> Toro said:
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Initially we would see a knee-jerk reaction by Wall-Street...which would be followed by a very quick recovery. The smart guys are selling off right now HOPING that the debt ceiling isn't raised...and then start buying when the fall happens - and make out like bandits a week or so later.
 I never made so much money in investments than I did in 2008 - 10. I sold off within days of the crash (I admit some luck here) - and I reinvested back in just after the crash - and withdrew again in early 2010. If you sell now, and the government fails to get a deal this weekend and the market falls 1200 points...that could be a very good thing if you sold out prior to that. WIth the bubble-building attitude of Wall Street - I have faith they will drive up stocks rather quickly after the fall.


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## Toro (Jul 29, 2011)

Paulie said:


> Toro said:
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> > 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.
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The decline isn't because of guys stating negative perceptions. It's because there ARE negative perceptions. And minor ones at that. 

I do agree that nobody has much idea what will happen. But that's a negative because the market doesn't like uncertainty. Most in the market do not believe the US will default.


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## iamwhatiseem (Jul 29, 2011)

Toro said:


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That is because most in the market have an I.Q. above 85.
If their is no agreement, and the gov't actually defaults on SS for example - then this President would have committed the single most insidious act in the history of this nation. Anyone who can add knows that a default would be by choice, not necessity. 

Having said this...if the gov't once again kicks the can down the road - then a default is not merely likely - it is certain. In fact, the first defaults will be in the next few years. Only way to avoid that is reduce the spending deficit one way or another by  $7.5 trillion. There is not one official in Washington who has the guts to do this. Therefore - in the not so distant future - America will default...just not now.


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## Zander (Jul 29, 2011)

Paulie said:


> Toro said:
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> > 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.
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Think about the issue logically.   If we do not raise the debt ceiling - VIOLA!! We create an Instant balanced budget.  

Then we return to the same funding levels that we had in 2002- that year the feds spend $2.2 trillion - the same amount we are collecting now.  Everybody takes a haircut in their budget, and some departments and programs are eliminated entirely. Our GDP takes a hit for one year, then it starts to rise again. The mood in the country changes, people start "hoping for change"  from the failure of Obama's fecklessness..... 

Worried about what the people will say or riots in the streets? No big deal! Remember Obama talking about "shared sacrifice" last year?  He can just reload that speech into the teleprompter.


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## Paulie (Jul 29, 2011)

Toro said:


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I believe very strongly that the media has a lot to do with the way the market moves.  Remember back in late 2008 and early 2009 leading up to the March bottom?  The market was moving almost solely on daily news.  Bank stocks were up and down each day as the media kept changing their mind on what the government was going to do about mark to market, citi and boa nationalization, etc.  It was a media clusterfuck.


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## Toro (Jul 29, 2011)

Paulie said:


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I look at it a bit differently. The media does not operate in a vacuum. They report what is reflective of the market. They may exacerbate the mood but I don't think they create it. The best examples are that the media tends to be excessive when the market is excessive, often reflecting turning points. Thus, media sentiment - like the market in general - is often a good contrarian indicator at highs and lows.


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## Meister (Jul 29, 2011)

Isn't the market reacting to the possibility with it correcting over the last week?
I'm not so sure it's waiting for the news to pull the trigger.


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## Gallagher (Aug 27, 2011)

There was never any real risk od default as the interest and principal payments were always going to be honored. The gov takes in trillions and the least they could or should do is pay the bondholders. It was never an issue and the politicians, especially Obama, played on that irrational fear.


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