Control Panel: Looming risk of government default

The largest Macroeconomic risks at this time are Federal Reserve actions and the looming federal debt ceiling. Fed Chair Powell has stated that the Fed may not raise the fed funds rate in June since the banking crisis is tightening lending. Treasury Secretary Janet Yellen has said that the government may have to stop paying (default) on June 1 or thereabouts, which less than 2 weeks away.

Politics is banned on METAR. Rather than get into a debate about the situation and its politics, I will simply lay the risk of default on the table and discuss how the market is handling it and how to mitigate our risk as investors.

Investors Seek Protection in Case of Debt-Ceiling Debacle

Many are pulling cash from stock funds and seeking safety in Treasurys that don’t mature for several years

By Eric Wallerstein, The Wall Street Journal, May 21, 2023

Some investors are betting the debt-ceiling stalemate could inject a new dose of volatility into markets…

Traders are betting on a rise in the Cboe Volatility Index, known as Wall Street’s fear gauge because it tracks the price of options often used as insurance against market declines. Investors are pulling cash from stock funds for the seventh-straight month and seeking safety in Treasurys that don’t mature for several years.

During the debt-ceiling crisis of 2011, the S&P 500 fell more than 15% from the start of July through early August, when S&P downgraded the U.S.’s credit rating. BlackRock analysts say this time the economic backdrop is worse. Back then, the Fed was supporting markets with low rates and investors were worried about deflation. Today, lingering inflation and tighter policies from central banks are more of a threat…[end quote]

Investors are avoiding T-Bills that mature in the time frame of the potential crisis. Not me, I bought to get the higher yield since the government will pay off eventually. (Bond yields go up when their prices go down.)

The Treasury yield curve climbed along its entire maturity in the past week. That could be noise or it could be an early indication of the bond market’s uneasiness at the potential of Treasury’s default.

Why You Keep Chasing the Wrong Stock Market

Trying to make up for stock market losses can be costly, impulsive and misguided, and the Dow isn’t necessarily your best metric

Jason Zweig hedcutBy Jason Zweig, The Wall Street Journal, May 19, 2023

This year’s stock market is split in two. One consists of a few big technology companies, and it’s booming. The other is everything else, and it’s been stinking up the joint.

In 2023, the Dow is up only 1.2%, while the broader S&P 500 has gained more than 9%, not including reinvested dividends. That’s the widest year-to-date performance gap between the two indexes on record since 1945…Meanwhile, cheaper value stocks have done even worse than the Dow, falling 2%. … [end quote]

The Control Panel shows this concentration of growth in tech stocks as the NAZ is climbing. I find this concentration in a few stocks concerning. The market has already seen wild swings in tech stock prices in 2022.

The Fear & Greed Index has moved into Greed. USD and natgas are climbing. Copper is falling since China’s economy is slowing.

Financial stress is low. Inflation is still too high but the Fed has taken steps to support banks in light of higher yields.

The METAR for next week is partly sunny. A sudden storm may blow up if the market suddenly becomes concerned about a federal debt default but there is little evidence of that now.



We see the ceiling lifted a bit forked over

We see the markets tank? Or we see the markets soar? The markets are overvalued.

We see a default?

We are in serious trouble.

I think we will default. I think the country has to decide what will happen in the aftermath. Oh the country definitely will be deciding.

I think we have an economic and financial window to repair the damage as Britain had. But it is going to truly cost you.