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Bond dealers and fund managers don’t buy John Boehner’s route to fixing the debt crisis: they doubt that that spending cuts by themselves will remedy the budget problem; tax hikes, though unwanted, are pretty much mandatory.According to Reuters,
17 out of 29 fund managers and economists representing major Wall Street bond dealing firms said the Republicans’ favoured option of spending cuts alone would not a work.
Nine of the respondents said a deal could still be credible without dealing with the popular but huge entitlement programs.
(Bond vigilante chieftan, Bill Gross, says he’s “seen no willingness to tackle the difficult problem of entitlements from any political party.”)
Interestingly, while primary dealers want spending cuts to be the main tool used to deal with the deficit, money managers prefer a mix of cuts and tax increases.
Either way, investors don’t really care about Boehner’s speech on the debt ceiling — they want action; they don’t care about words.
Bill Gross, who’s ostensibly the leader of the so-called bond vigilante gang, doesn’t care what it takes — he just wants the budget to be tackled. “Actual default is unimaginable,” he says. But he admitted to Megan McArdle at the Atlantic, “obviously we need to raise taxes on the rich by quite a bit.”
The thing is, investors aren’t going to sit around and wait for congress: In Gross’ opinion, he has a “fiduciary duty to his investors that he can’t violate just because his country doesn’t want to make hard choices about taxes and spending.”
And he’s not averse to staging a revolution: “Sale of Treasury bonds is the easiest way of staging a mini-revolution and saying ‘Hell no, we won’t go,'” he told the Atlantic.
(On that note, in 1993, Clinton adviser James Carville apparently said: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.”)
On the plus side for Boehner, and the Dems, is that the market isn’t worried yet. Apparently congress has a month or two before the markets really start to get rattled.
Still, one asset manager, Mitch Stapley, of Fifth Third AM, had a warning:
I think the opportunity for the markets to stage a riot is going to be elevated because this is not going to get done before the very last second and it’s not going to be done in a way that’s very satisfying to markets.