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Thinking the Unthinkable: Investors Start Hedging Against U.S. Debt Default

Aaron Task
Editor in Chief
Daily Ticker

The breakdown of the debt-ceiling talks has caused a major rethink of what had been conventional wisdom on Wall Street: That politicians would never be so crazy as to miss the Aug. 2 deadline and trigger U.S. debt default or loss of America's triple-A rating.

Or so the thinking went. But after having largely dismissed the debt-ceiling talks as political theater, investors, traders and C-level executives across the globe are now starting to hedge for what was once unthinkable.

According to various reports, banks and money market funds are starting to hoard cash while businesses are become even more wary about spending money. "While companies generally expect Washington to resolve the debt-ceiling impasse at the last moment, they are lining up extra sources of financing, and carefully husbanding cash just in case a deal falls through," The WSJ reports.

Given the experience of 2008, when Lehman Brothers' bankruptcy triggered a near shutdown of the short-term credit markets, such steps seem prudent amid great uncertainty over how the U.S. debt ceiling debate will shake out. Similarly, investors are wisely taking some precautionary steps ahead of potential market upheaval as Aug. 2 approaches.

While the stock market is slowly waking up to the threat -- stocks were down midday Wednesday but well off earlier lows -- the Swiss franc and gold are trading at record levels vs. the dollar. Meanwhile, the price of U.S. credit default swaps are on the rise.

Renewed concern about Europe's debt crisis is a factor as well and, ironically, European investors seem more spooked about the U.S. debt debate than their American counterparts. But attitudes are starting to shift here as well, which only seems prudent. (See: Worried About the Debt Ceiling? "You Can't Be Conservative Enough," WisdomTree CEO Says)

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com