Debt Ceiling: The Great Distraction

— The debt ceiling, a tempest in a teapot, will be addressed.

— The media frenzy surrounding the DC distracts from important progress on other issues.

— Accentuating the positives!

The Tempest In a Teapot

What I’m about to discuss should not be construed as an endorsement of our current national debt position (about $31 trillion versus a trailing 12 month GDP figure of $26.58 trillion … debt = 117% of GDP). What I wish to discuss is the likelihood of a default on that debt if the current debt ceiling is not raised.

The last time we had a taste of government shutdown (a remedy for default–curtailing services) was back in late 2018 when the Congress and the Trump administration couldn’t agree on a bill to fund the federal government for the 2019 fiscal year, or a temporary continuing resolution that would extend the deadline for passing a bill. In order to make good on our debts a partial government shut down began December 22, 2018, lasted 35 days (longest in US government history). The shutdown was in response a potential default without a continuing resolution. In order to continue to pay the interest and principal on our debt we began to cut back or eliminate government services. “Nine executive departments with around 800,000 employees had to shut down partially or in full, affecting about one-fourth of government activities and causing employees to be furloughed or required to work without being paid.” This included the national park system. “The Congressional Budget Office estimated the shutdown cost to the American economy to be at least $11 billion USD, excluding indirect costs that were difficult to quantify.” Monetarily, this was not the end of the world for a $20 trillion plus economy, nonetheless it was painful for those with business in those departments.

” … On January 25 – the 35th day of the longest-ever federal shutdown – something changed: 10 air traffic controllers decided to stay home.” To continue the stalemate with a broken and unsafe air traffic control system would have been too painful. A compromise was reached.

Bottom Line: Our debts will be paid and the so-called ‘crisis will last until the pain becomes too intense for the two sides not to reach an agreement. It then will be about enlightened self interest instead of partisan bickering … i.e.,getting re-elected.

Media hype with zero perspective

“The ticking bomb of a potential default by the U.S. government will be front and center with investors again next week” (SA)

These are just two example of the gallons of media ink that have been spilt on one-sided reporting surrounding the current debt limit extension fear-fest. They both suggest impending doom without pointing to any historical perspective as to how things might really go down. They seem to be designed to scare, to engage but not really inform, and they detract from a  pretty good market story that is shaping up.

Accentuating the positive

• “US Inflation Rate is at 4.93%, compared to 4.98% last month and 8.26% last year. This is higher than the long term average of 3.28%.” These numbers are likely to improve dramatically in May and June because those month last year showed 1% increases in CPI inflation that are not likely to be repeated.

• With inflation easing and the prospect for more good numbers the Fed is probably done with this cycle of increases. The rate on the 10-year US Treasury note (a benchmark in determining mortgage rates) has fallen from a high last October of 4.25% to current rate of 3.39%.

• Real GDP was up 2.6% in the 4th quarter of 2022 and 1.1% in the 1st quarter of 2023 (below   estimates, but still positive).  On the other hand corporate profits were down 2% in the final quarter of 2022 and appear to be down about 2.2 (according to FACTSET) in the first quarter of 2023. This is certainly not a disaster and it is nowhere near the analysts estimates as of March 31 … down 6.7%. This would certainly be expected in light of Fed policy that appears to be biting on inflation and earnings.

• The job market continues strong with record low unemployment (only 3.4% at the last reading) with 243,000 new jobs created in April.

• The banking crisis also seems to be under control or at least in an orderly resolution.

• We have all the positives listed above and we still have investor sentiment (as measured by the American Association of  Individual Investors (AAII) weekly survey) in the tank, where it has been for over a year … bulls only 29.1% versus a long-term average of 37.5%, and bears registering 41.2% versus a long-term average of 31%. 

Despite the continuing barrage of negativity that will be the media daily blue plate special until this debt ceiling situation is resolved, my advice is to stay the course. Don’t let ’em scare you out of your stocks. Things are much better out there than the “nattering nabobs of negativism”(Spiro Agnew) would have you believe.

What’s your take?