Two Fish Tales and a Debt Ceiling

Two Fish Tales and a Debt Ceiling
July 31, 2011
David Kotok

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The annual fishing gathering in Maine is fast approaching.  Our group comprises forty-six economists, financial professionals, portfolio managers, and investors from around the world.  At Leen’s Lodge, there will not be one bed or dining room seat left vacant.  This is our largest and widest assembly to date.  We look forward to some discussions, some fishing for small-mouthed bass, and some camaraderie.

Current world events are giving us plenty of food for thought.  That, coupled with the great cuisine of Leen’s Lodge, means the average weight gain will be about three pounds over the course of the weekend.

We are pleased to announce that Bloomberg Television will be covering the event on Friday, August 5^th, when Michael McKee will be present with his cameraman.  Other media will also cover the event, including Dow Jones News Service, Barron’s, and National Public Radio.

This commentary is being drafted from the site of the other fish tale, the Star Valley Trout Ranch in Afton, Wyoming.  We are here for two days prior to the Global Interdependence Center Rocky Mountain Summit in Jackson Hole, Wyoming.  Some speakers arrived early and were able to gather for terrific trout fishing and engaging discussion.

All conversations at non-public GIC events are held under the Chatham House Rule.  Round-table discussions are limited, and media are asked not to quote or participate.  Chatham House Rule also requires that no one is to be quoted without their permission.  Takeaways from the group are permitted to be discussed, and I will limit this commentary to several specific items that were on the agenda in these private conversations.

The debt-ceiling debate, the behavior of our politicians in Washington, and the effect of money on the outcomes of American politics led every discussion during our gathering.  How could we have such a mess?  How could we allow our government to do things in this fashion?  What can we do to fix it?

Conclusions were reached that this is the system in place, and there is not much we can do to fix it.  Half the country has either grown complacent with the government or highly resistant to it, leaving the other half with the responsibility to energize itself and counter the polarizing forces of the left and right as they work to eliminate the functioning, common-sense, centrist middle.

Other technical issues in the debt-ceiling debate that have not received much attention were also discussed.  One of the theoretical issues is what would happen if the Obama Administration chooses to use the 14^th Amendment provision to issue debt, given a Congressional failure to extend the debt ceiling.  How would the debt trade in the marketplace?  Would there be a risk premium attached?  Without a doubt there would be immediate court tests and challenges that would end with a Supreme Court decision.

A second concern is how the Federal Reserve would deal with this debt.  Would it be Treasury debt that they could buy?  Would they use it to substitute if they employed it to implement changes in policy or maintain the existing size of their balance sheet?  If the Treasury is not issuing new debt, what would happen in the marketplace if the Fed entered to buy 14^th Amendment debt rather than seasoned debt?

There are so many open-ended questions regarding the debt ceiling.  None of the outcomes is good.  There is an obvious cost attached to every one of them.

In our Jackson Hole dialogue that took place with two Fed Presidents, Jim Bullard of St. Louis and Dennis Lockhart of Atlanta.  Lockhart summed up the sentiment with regard to the open questions by saying, “The best thing is for Congress to extend the debt ceiling.”  In response, Jim Bullard was equally succinct and direct in stating, “I agree.”

We’re editing this commentary from the Green River, where we are out fishing on a Saturday afternoon.  A few friendly trout have been helpful.  The rest of them came after the fly so fast that I missed hook sets right and left.  My friend Kip Wadsworth sat quietly looking at this old guy, and then proceeded to demonstrate his Utah prowess with a fly rod.  Luckily, he did not tease me too harshly.

Our kind guide, Chris Stump, was also unwilling to laugh at me, but he did give me some pointers, which I intend to adopt.  Here is a picture taken on the Green River in Wyoming: http://www.cumber.com/content/commentary/fish.jpg. Chris is holding the fish. If you would like a guide on your visit to Jackson Hole, email me for his contact information; he comes highly recommended.  (Photo credit: Kip Wadsworth)

We are off this week to Maine for the annual event.  We will discuss the debt ceiling, the economy, the markets, interest rates, and all the other things that are on the agenda.  Leen’s Lodge is a wonderful place for such conversation.  Our associates and guests who are coming this year will certainly contribute to the dialogue.  We hope the small-mouthed bass will add to the fun, too.

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David R. Kotok, Chairman and Chief Investment Officer