Hedge your bets; 48 hours from an American default!

By Ben Turney. 

If you are not watching this story, it’s time to switch on. The deficit ceiling debacle is back in full force. News crossed the wires, about an hour ago, that the Republican leaders in Congress have had to admit defeat in their efforts to provide an alternative plan to the bipartisan agreement, which is taking shape in the Senate.

We are now just over 48 hours from a US Default.

While the odds are still against this actually happening, they have, nevertheless, just lengthened significantly.

The Democrats have a new found hardness about them and it looks like they are determined not to blink first in this latest fractious standoff.

The market has sold off slightly, but clearly still believes a last minute compromise will be reached.

As I wrote last night, I don’t believe anyone can be certain of this.

There is a great deal of antipathy towards Obama’s administration and the federal government, among grass roots Republicans. Yesterday, it was reported that one Republican senator could adopt procedural delaying tactics to stop the Senate plan and take the US through its self-imposed deadline. So far, this threat has failed to materialise, but it illustrates how fraught the situation is.

Even if the bipartisan plan makes its way through the Senate, it still has to get through Congress. There it has to make it past the militant Tea Party representatives and the threat this movement poses to the seats of any number of other elected Republican members.

Do you remember Congress’ shock rejection of Hank Paulson’s first bailout proposal in September 2008?

The Dow fell 777 points the next day, its largest single drop.

I took profits in various positions today, deciding it was a better idea to have more cash available.

This evening I have also opened some puts on the weekly Dow. If this drama continues (which it is hard to see how it won’t), we could be in for an extremely volatile time over the next few days. Spread betting under these circumstances, even with guaranteed stops, is extremely risky. The advantage of the puts is they allow me to ride out this volatility and the ones that are way out of the money are also extremely cheap.

I’m not necessarily expecting this trade to come off. It is a hedge. However, while US politicians are waving loaded shotguns at each others’ feet, this seems like a sensible step to take.