Back in January, I wrote a detailed post about the upcoming debt ceiling fight, complete with several suggestions regarding ways to protect yourself should things indeed get out of hand (Link at the bottom). I believe we're at that point right now. I'd like to lay out the situation for everyone in a concise way that avoids the need to get into a crazy, heated, and partisan screaming match. The facts are that no matter who you voted for, or what you believe, you're at risk here. I've done a ton of research on this so that I could best know how to protect myself and my family. So let's check partisan nonsense at the door and look at where we're at.
Earlier this month, Treasury Secretary Janet Yellen wrote a letter to Congress advising them that the US Treasury risks running out of money on June 1st. Even after this announcement, as well as several third party reports that came to similar conclusions, people are still operating under the belief that June 1 isn't a real deadline and that we could actually go another month past this date. Today Yellen forcefully dispelled this belief. 👇
https://www.investing.com/news/economy/yellen-says-june-1-is-hard-deadline-for-raising-debt-ceiling-3087233
She called June 1 a "hard deadline" and referenced slower than anticipated tax revenues due to several states receiving a filing deadline extension due to natural disasters. This extension pushed back revenues that normally would have already been due and changed the calculation in regards to the so-called X-Date. Put simply, the X-Date is the date where the US government runs out of money to pay it's bills and cannot issue more debt due to the debt ceiling.
So, it is of course possible that Yellen is being forceful regarding June 1 in an attempt to spark a deal, but as I mentioned before, several independent reports have come to a similar date. If you want a more detailed breakdown, including what payments the US has due on which dates, I suggest reading this article 👇
https://news.yahoo.com/u-run-cash-answer-complicated-173308070.html
Operating on the assumption that Yellen isn't lying, and June 1 is the absolute line in the sand, that means time is dangerously low. Congress is scheduled to recess for Memorial Day weekend May 26-29 which leaves only 4 scheduled days in session for the House of Representatives before June 1.
An argument I frequently hear, and something the market seems to be in agreement with for now, is "they do this every time and they always end up raising the limit." I'm not going to get in too deep as to why I believe this time is different.. but conceptually the argument is what's called the "prisoners dilemma" in game theory. This basically says that two individuals (in this case two parties) acting in their own individual best interest will reach an outcome that's worse for both parties than if they had just worked together.
https://www.investopedia.com/terms/p/prisoners-dilemma.asp
The important point here is that there is real risk. In 2011 during a similar standoff over the debt ceiling, things came down to the last second, just as now, and it resulted in the US credit rating being downgraded. The Governmental Accountability Office, GAO, estimated that delays in raising the debt limit in 2011 led to an increase in Treasury’s borrowing costs of about $1.3 billion in fiscal year 2011.
https://www.gao.gov/products/gao-12-701
I strongly encourage you to read this article about the 2011 debt ceiling crisis
https://www.investopedia.com/terms/1/2011-debt-ceiling-crisis.asp
And this article about which asset classes did the best and which suffered the most. The overall result of the 2011 crisis sparked a 20% peak to trough decline in the S&P 500.
https://www.marketwatch.com/amp/story/heres-where-investors-may-turn-to-hide-as-u-s-debt-ceiling-deadline-looms-based-on-2011-market-reaction-49ce81a9
If you look at the timeline for how the 2011 crisis played out, the downgrade of our credit rating occurred just as we were about to hit the X-Date. The resulting market turmoil pushed Congress to raise the limit almost immediately afterwards and just a day before the nation actually defaulted. So, based on that as a guide, we're entering into that period now. With 4 session scheduled for the House of Representatives before June 1, we are at HIGH risk for a credit downgrade. If you think about it, we probably deserve it at this point. If you loaned someone money and they then engaged in a very public debate as to whether they ever intended to pay you back, you'd be hesitant going forward to loan them any more money.
A credit downgrade would increase the amount of interest lenders would expect to receive in return for buying Treasuries. The inverse relationship between bond yields and bond prices means as bonds pay more interest that means the price of those bonds goes down. This is why $TMV is worth watching, as it gains $3 for every $1 $TLT , a fund holding 20+ year dated Treasuries, declines.
So what paths are realistically left for a deal to happen before the X-Date?
Negotiations were abruptly ended on Friday, causing a rally in the market to reverse into losses, but indications are that staffers have resumed negotiations, and Biden ended his G7 visit early to return to Washington Monday to continue negotiations. Honestly, all indications are that they are not very close to any deal. So, here are what I believe to be the most realistic paths remaining.
1) The extremely limited time remaining due to the Memorial Day recess means it's entirely possible they decide to pass a short term pause to allow negotiations to continue.
2) Biden could take the risky step of invoking the 14th amendment, which would immediately be challenged in the courts, and likely lead to a similar degree of turmoil as a default would.
"Explainer-Could Biden use the 14th Amendment to raise the debt ceiling?"
https://www.investing.com/news/stock-market-news/explainercould-biden-use-the-14th-amendment-to-raise-the-us-debt-ceiling-3087240
3) A union of Federal Government employees representing 75k workers filed a lawsuit calling the ceiling unconstitutional and claiming irreparable harm should the ceiling be reached as they would stop getting paid.
https://thehill.com/regulation/court-battles/3993782-government-employees-union-sues-yellen-biden-over-unconstitutional-debt-limit-law/
4) A credit downgrade, or other market turmoil forces a deal.
That's it. Those are the options. I realize talk of a discharge petition had been floated but the rules regarding how much time must pass between each step of that process means that as of today, they couldn't possibly complete that before June 12. There's also the trillion dollar coin idea which has been outright rejected and doesn't seem to even be considered.
So that's where we are, and here's my post on steps you can take to protect yourself. Even if you believe there's only a slim chance anything bad happens, it's worth taking steps to minimize the impact to you and your family as much as possible. You buckle your kids up every time because the potential for harm exists. Well, the potential here is just as real.
Hopefully this summary helps you understand the situation, and more importantly know how to navigate it. For more information join my free Discord community.
https://discord.gg/GaUxA4dvZs
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