The debt ceiling impasse is, and will continue to, impact markets until a resolution is reached. The question is does it matter? As is often the case, the answer is yes and no.
In the long term, yes, it matters. Our level of debt and continuing budget deficits present some problems that will need to be addressed at some point. The U.S. is well on its way down the road to ruin, but that doesn’t mean it isn’t fixable. The constant and growing use of debt at every level, from individuals, to corporations, to the government, in a way that outpaces our economic growth eventually has some ugly long-term consequences. There is no obvious solution today, but that doesn’t mean we should not get started on one. However, that is a story for another day (as well as a key reason for owning gold).
In the near term, it doesn’t matter. While there are numerous dire predictions making the rounds, this is not about the ability to pay our debts; this is 100% about politics. We have been here numerous times before. At worst, the debt ceiling impasse threatens to slightly delay timely payments of some U.S. obligations. This is reflected with a kink at the front of the yield curve, but the lack of any reaction in longer term rates clearly assumes that the U.S.A. will continue to pay its bills. We agree, but this isn’t going away until the very last minute, and maybe a few minutes later.
As for that kink, the chart below shows current Treasury rates (orange) and the same rates one month ago. The kink at the front end is obvious, even when the recent increase in Fed funds is taken into account. This kink is a function of the debt ceiling not being addressed and markets are demanding a premium to take on the risk that the one-month Treasury may not be paid precisely on time.
How some analysts are addressing this has been a bit convoluted. We recall one interview this week where the analyst said that this debt ceiling issue is a transitory problem. The U.S.A. will continue to pay its bills, although there is a risk of a ‘technical’ default due to a slightly late payment. It is important to focus on the long term and this volatile interlude will soon pass.
No argument from us, but then the same analyst confused the issue with recommended portfolio changes to address the bout of turmoil that may come! That’s where we got lost. Not only were the comments incongruous with the initial statements, it completely ignores the long-term goals in favor of short-term trading! That makes no sense to us or Warren Buffett.
Last weekend, at the Berkshire Hathaway Annual Meeting, Mr. Buffett said he had just rolled some maturing treasuries (about $30 billion, if I recall correctly) into the kink in the yield curve because it gave a little more return. In his mind, if the market is going to be that irrational, he is happy to take advantage… Warren being Warren.
No one wants to see the U.S. truly default on its obligations, not Republicans, not Democrats. What we are seeing is a political sideshow. McCarthy made promises to the far right in order to be elected Speaker and he can’t give in easily. Likewise, the Biden Administration has made promises to the far left, and they can’t cave easily either. So, this will come down to the wire, but eventually, they find a place where both sides can settle and proclaim victory. Then this will go away, until we hit the new ceiling, when we will do this all over again.
While the debt ceiling issue gets plenty of air time, it has little influence on our portfolios. We tactically adjust portfolios, but only to address longer term trends, not day-to-day shifts.
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