Let’s play fast forward. Making short term predictions is always perilous, especially for us financial prognosticators, but that doesn’t mean we can’t play around a bit with a very unfun topic. So, let’s fast forward: we are pretending to be reading the Sunday paper on June 3, three weeks from today.
In our fast forward game, on Friday, June 1, the Democrats and Republicans have been unable to come together for a last-minute agreement and have failed to extend the debt ceiling enabling the government to issue additional debt to fund its operations. The worst-case scenario has occurred, and here you sit, sipping your coffee on Sunday morning.
On this Sunday, the cable news channels and Sunday morning news shows are on fire selling Armageddon. You look outside, it’s a beautiful June day, the world doesn’t look to be burning. Time to take a shower and get ready for church. Despite the dramatics on TV, to your delight the water still works, and you notice the lights are still on. It's so pretty outside, maybe today would be a great day for a hike or the beach after church.
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After church you take the family to the Indiana Dunes National Park for a lakeshore hike. The Cowles Bog parking lot has a chain across it, it’s closed. Well, that’s annoying, how much can it cost to operate a dune trail? Seems sort of petty. You keep driving down the road a bit and go to the state park; it’s open, of course, and although you have to pay a couple bucks to get in, at least you get your nice hike.
Later in the day the news shifts to panicking about the Asian financial markets, which are expected to open sharply down. Markets in Japan and Australia are sharply down but not crashing, and China is flat. None of it seems overly dramatic, but nonetheless, the media hysteria continues to build.
Monday morning arrives, and unfortunately if you are me in this game, you plug into markets as soon as you wake up. Indeed, the markets are disrupted. But now that the debt ceiling catastrophe is a reality, true post disaster analysis is starting to emerge. The true concerns are in the money markets, or short-term debt markets. This market, which is largely comprised of extremely short-term government notes, is seized up, as investors await some guidance from the government. The seized money markets are causing the stock and bond markets to experience extreme levels of volatility in pre-market trading.
Before financial markets open, the Secretary of the Treasury goes on TV. As it turns out, the federal government does have a priority list it uses to direct federal revenue and resources. After all, the federal government is projected to rake in a record $4.8 trillion in receipts this year (source: CBO), which is real money. Unfortunately, it wants to spend an astounding $6.2 trillion, which is a staggering 39% more than it spent as recently as 2019 (source: CATO Institute).
With roughly $400 billion flowing into its coffers during an average month, the government does have options. The Treasury Secretary announces that interest on federal debt in the form of U.S. Treasury notes and U.S. Treasury bonds will have primary claim on revenues. Since the government is projected to owe $640 billion in interest in 2023, but will take in $4.8 trillion, there is more than enough revenue to service this debt. The Secretary also details the government operations it intends to use to pay off bonds as they mature by issuing new bonds. She explains this issuance of new bonds does not violate the current debt limits as older bonds are simply being replaced with new bonds.
Financial markets settle down a bit as the money markets begin functioning again. The stock market will still be down on the open, and the interest rates are up quite a bit in the bond market, but for now at least, the markets are functioning.
Later in the day, the President comes on TV. He announces non-essential federal employees are to be furloughed, with delayed pay, national parks are to be closed and he hints that July Social Security payments may be late, and Medicare payments are going to be delayed.
You remember the math. With the all-time record $4.8 trillion in taxes coming in, you wonder why they have to close the parks and with all 2023 Social Security payments equaling $800 billion, it seems like the government should have enough coming in to keep these payments flowing. The President reminds us he will only accept a "clean" debt ceiling increase, and you wonder why the President looks a little smug when he’s “warning” people to prepare for the Social Security delay. Once again, petty, and a bit rude.
After the President speaks, the Fed announces an emergency cut to interest rates to help markets endure the stress of the debt limit. Stocks end up closing flat for the day. It’s a beautiful Monday in June.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.