How to invest for a debt ceiling crisis

Investment Analysis Clubs Macro Economic Trends and Risks
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How to Invest as a Debt Ceiling Crisis Looms

The risk of a federal debt ceiling breach later this year has increased. Steel yourself for trouble, our columnist writes. But remember: This, too, shall pass.
Jeff Sommer

By Jeff Sommer, The New York Times, 1/19/2023

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Even in a crisis, I buy and hold diversified investments in the global stock and bond markets, preferably through low-cost index funds. That’s a well-tested approach for long-term investing. It makes sense as long as you are able to withstand market turbulence and hang on for decades. [That’s a great strategy for someone who is working and won’t need to touch their investments for decades. – W]…

Bizarrely, since World War II, after every previous debt ceiling crisis — and, indeed, whenever markets have panicked — investors around the globe have typically flocked to the U.S. Treasury market as a safe place to park their money…

At a minimum, as an investor, you will want to be prepared, with ample cash holdings. You may want to move some money to the safest places, like government-insured bank accounts. Because a debt ceiling crisis could set off severe market declines for a while, it would be wise to soberly assess your ability to bear losses. If you know you can’t handle them, reduce the risks you are taking well before you start reading about imminent market disruptions…[end quote]

“Imminent” appears to mean the day before “The X date,” as it is being called — the absolute, no-kidding, deadline for the lifting of the current $31.4 trillion debt limit — which is expected to arrive sometime in the second half of 2023. Given the market’s flightiness it’s likely that some participants would literally hang on until the last second.

The Federal Reserve already discussed (internally) ways to handle a U.S. Treasury default. The Fed could buy defaulted bonds but that’s a step further than even Quantitative Easing and Fed chair Jerome Powell has called that “loathsome.” I love that word – loathsome – because it leaves no doubt that the Fed would only do it in the event of a complete market collapse.

I don’t have decades to wait for a popped market bubble to recover or a crashed mutual fund to retrieve its NAV. I don’t expect to live that long. I want my money to hold its value for when I need it within the next, say, 1 to 10 years.

Cash in bank accounts is safe. It’s insured by the FDIC. Some FDIC-insured banks are actually offering decent interest.

Wendy

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The last few debt ceiling standoffs were essentially non-events, right?

When was the last one that had a meaningful and lasting impact on investing? And what was the investment lesson?

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The debt crisis in 2011 had a meaningful impact; the S&P eventually dropped 15%, with some sectors like health care and defense dropping 25%. Individual; components dropped even more than that.

If you had cash to deploy, you could have made meaningful gains in a just a month or two and exited with a nice profit.

Treasuries dropped, the price of gold dropped, and commodities dropped. They had all rebounded within a few months, but it’s also true that the “crisis” was resolved in fairly short order. That might not happen this time, given the hyper-partisan split now in Congress, much worse than in 2011.

By contrast the 2013 imbroglio had no meaningful impact even in the short term, but I suspectthat’s because memories of what happened in 2011 (both political parties’ approvals dropped, as did the Presidents’) was fresh in their minds. It’s now been over a decade, memories are short, lots of new people, including firebrands are now in power, so it might not resolve the same way.

I’m holding on stalwarts, moving to cash where it is easy or where there are not meaningful profits to be taxed, letting my short CD’s expire, and doing other things while I watch and wait. I’m not running, but I am walking away, situation dependent.

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How to invest? If you think it is going to be more than a non-event for stocks (sometimes it has been and sometimes it hasn’t) then buy a bit of protection for your portfolio, say some SPY puts that expire in two months.

DB2

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This is not fair to almost everyone involved. This is not a partisan battle at all. I mean that.

The agenda involved here is just destruction. There is not an argument between right and left. There is not some sort of compromise for an outcome to which you could then say is partisan.

There is business as usual as the economy looks extremely promising going beyond 2023. There is forcing a massive failure for the entire country. That is not in anyway a partisan battle.

It is like talking to someone suicidal and working out a compromise. That is not how anything works at all. Or a mass murderer and figuring out how to give him ammo. There is no partisanship involved.

Unless you can tell one thing…how does the position of destroying the entire US economy help one single American citizen? If there is one shred of good in this for any American citizen then I will admit it is fully partisan.

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In order to reduce the federal deficit, cut off all federal funding to each state supporting not funding the federal govt deficit. You know, the federal budget deficit passed by Congress…

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Jerry we cut for 40 years from 1981 to 2020 that is how we got in this mess.

The much better way to cut debt is to optimize GDP growth so that tax revenues pay down the debt.

There are those who can not stand the idea of fiscal policy optimizing the US economy.

I hate their idea of corrupt cronyism. Again corrupt cronyism is not a partisan divide either. It is all sorts of things in the ethics books but not a discussion of policy positions SPECIFICALLY for improving the US economy.

Now that should be an easy discussion what have the crooks decided would be good for the US economy? Setting aside the threat of melting down the entire economy, what would be good for the US economy according those those who would destroy us?

I do not want their names or their bills in congress.

I want the economic theory they espouse? What theories on economics would help this economy?

You know things where we can all easily grasp it and say, “that is a really good idea for our country”! Name one of those things and I will say this is a partisan battle, but it MUST be good for our country. Not just for one industry to rape our treasury. Unless you can tell us why that industry getting a tax break or less regulation would help the US economy. Lets have that discussion away from the politicos and bills in congress. Lets know why cutting taxes or reducing regs or whatever is good for the US economy?

But I am going to insist that higher taxes on the wealthy, optimizing the US economy and paying down the US debt over time because the economy is growing much faster is far better for all of us and the US economy.

I am going to ask why failed ideas are being pushed.

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The only way this works is for GDP to grow faster than government spending. And that for the most part hasn’t happened for 100 years.

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Realistically, it harms every citizen. But those choosing to shut down the govt are–by definition–clueless about the US economy and business. Sound familiar? It should. Applying a micro-economic policy (live within your budget) to a macro-economic problem (always cutting taxes and never raising them) tends to lead to a disaster. Always has and always will.

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Just reposting I see the left hand axis differently. There is a plateau from 1980 to today of about 35% of GDP. The crises are another matter.

If the US GDP had been growing more rapidly from 1980 till now then Government spending a as a percentage of GDP would have fallen. The fiscal and monetary policies did not work.

We can see much faster growth in the 1953 to 1967 period with around 27% of GDP as the spending level. The policies optimized the US economy in modern times. But the New Deal structural problems began to show in the US economy.

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Today? FY 2022 is the rightmost data. Probably about 45%.

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The spending went from 2009 beyond 2012 in that crisis.

The peaks not withstanding we are in the 35% area.

The issue is having an industrial policy which has an upfront cost in order to find out if we can get back to the 27% area. As it was during much of the last time we had an industrial policy.

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To get back to 27%, we would have to spend 4 TRILLION dollars less each year to govern ourselves!

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Economics does not work that way. Meaning the reason we have any debt is to create capital and industrial output. If you cut debt you cut capital and industrial output. Capital and industrial output are dependent on the US government for help.

BTW from 2016 to 2020 the debt ceiling was lifted three times and no one who had a say cared at all. There were no objections to raising the debt ceiling.

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This was quickly and poorly stated. If you cut spending you cut capital and industrial output over the longer term. I am saying the industrial plan means higher revenues to take care of the spending levels.