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Bond Markets Would Applaud a U.S. Default: Hedge Fund Manager


I keep thinking about Mr. Roarke warmly greeting his guests in his crisp white suit "Welcome to Fantasy Island". Unfortunately, actor Ricardo Montalban has left this world, but perhaps a vintage life size cut-out of the 70's TV star could be placed in the budget negotiating chambers in Washington as a sort of ironic motivational tool. But the funny thing is, contrary to the doom and gloom forecasts and ''what-if'' disaster scenarios that you are all well acquainted with by now, at least one hedge fund manager says it would be a good thing if a deal isn't struck by August 2nd.

"I think the bond vigilantes would definitely applaud some form of default if it implies that everyone gets the message that you can't spend forever," says Harry Lengsfield, Managing Partner at KLS Diversified Asset Management.

Ahead of that, he says there really aren't that many viable alternatives. "You have to understand your objectives and when you need your cash...Be as short as you can on the curves, perhaps move money out of treasuries, if you have the capability maybe even into foreign assets, perhaps to Canada, banks CD's and the like," Lengsfield says.

But he doesn't view gold as is not a suitable short-term alternative. "If you really think it's going to come to pieces in Washington D.C. you could argue that gold is a very good alternative, but north of $1600 there is also a great deal of principal risk," he explains.

And yet, applauding vigilantes aside, Lengsfield still expects a last-minute resolution to avoid default but is still surprised politicians pushed things this far.

"Obviously austerity is tough" he says, adding that any cutback in federal spending is tantamount to tightening or a headwind that would slow GDP by anywhere from 0.5% to 1.5% at a time when the economy is ill-prepared to handle it.

"Austerity is tough but it is a necessity when you have debt levels running at 100% of GDP. While the economy may need stimulus, a fiscal tightening in one form or another is definitely on the horizon," says Lengsfield.

If a default does happen it will go down in history as the most forewarned, telegraphed, train-wreck in history that everybody saw coming but nobody believed would actually happen.

What do you think? Would a brief period of default be an applause worthy event and a turning point, or just a sad milestone of government ineptitude?

Your thoughts and feedback are welcomed below, via email at BreakoutCrew@Yahoo.com or you can reach me on Twitter @MattNesto