{"id":10280,"date":"2023-05-18T04:19:13","date_gmt":"2023-05-18T08:19:13","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/quick-thoughts-on-the-debt-ceiling\/"},"modified":"2023-05-18T04:19:14","modified_gmt":"2023-05-18T08:19:14","slug":"quick-thoughts-on-the-debt-ceiling","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=10280","title":{"rendered":"Quick Thoughts On The Debt Ceiling"},"content":{"rendered":"
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Manole Capital Management<\/strong><\/h2>\n

Debt Ceiling<\/strong><\/h2>\n

May 2023<\/strong><\/h2>\n

Debt Ceiling:<\/strong><\/h3>\n

As we are writing this newsletter, the market is \u201cstressed out\u201d about the pending debt ceiling dispute. Technically, the US government hit its allowed debt ceiling on January 18th, 2023, but Treasury Secretary Janet Yellen has been taking extraordinary measures to avoid the issue.<\/span><\/p>\n

Why the moving target date? Well, the Treasury has eclipsed its $31 trillion debt cap, but one needs to factor in how much cash came in from tax revenues. The non-partisan CBO (Congressional Budget Office) has stated that \u201ctax receipts through April have been less than anticipated\u201d and \u201cthat there is a significantly greater risk that the Treasury will run out of funds in early June.\u201d The not exactly drop-dead date is now June 1st.<\/p>\n

Much has been written about what would potentially happen if the debt ceiling isn\u2019t raised and whether or not it would trigger a global financial crisis. Here\u2019s hoping we don\u2019t get there, but let\u2019s dive a little deeper into the details.<\/span><\/p>\n

Since the debt ceiling was enacted by Congress in 1917, the US government has been close to a breach 78 times and it was resolved and extended 78 times. That\u2019s a pretty good percentage, right? This Washington DC predicament has historically been little more than a technicality, but it occasionally becomes an issue – like it did in 2011. Back then, the US government was close to reaching its borrowing limit of $14.3 trillion (now +120% higher) and the stress ultimately caused a credit rating downgrade. Why would this time be different?<\/p>\n

We found a quote from October of 1984, from then Senator Joe Biden, that seemed apropos for today\u2019s debt ceiling concern. Senator Biden said, \u201cI cannot agree to vote for a full increase in the debt ceiling without any assurance that steps will be taken early next year to reduce the alarming increase in the deficits and the debt.\u201d During that 1984 debt limit debate, Senator Biden joined forces with Senator Tsongas (Democrat from Massachusetts) and asked for a smaller debt limit increase than the White House was asking for, as well as a vote to freeze all federal spending.<\/p>\n

Sound familiar? Sounds exactly like a quote we\u2019d expect from House Speaker Kevin McCarthy. This statutory debt ceiling issue is yet another bitter partisan battle that causes more Americans to distrust politicians and Washington DC.<\/p>\n

There are really only four choices and a couple of them would be unpleasant. The first is a clean increase<\/strong><\/em> in the debt limit, with no conditions. During the Trump administration, this occurred three times and dozens of times during previous presidencies. While one can hope for this option, it seems to be fading each and every day. The second option is a negotiated debt ceiling raise<\/strong><\/em>, that solves this current impasse and gives politicians an opportunity to reach a more substantial deal later this year. House Republicans claim that this is their preferred outcome and passed their own bill last month. That bill calls for limits on federal spending, adds $1.5 trillion to the debt ceiling and essentially is a short-term punt on the concern.<\/p>\n

The third option is executive action<\/strong><\/em> that would bypass the debt limit. This would be unprecedented and might have President Biden declaring the debt limit unconstitutional, arguing it violates the 14th Amendment\u2019s clause that says, \u201cthe validity of the public debt of the US\u2026shall not be questioned.\u201d Another bizarre scenario has the Treasury minting a $1 trillion platinum coin to deposit at the Federal Reserve and infuse the government with enough money to pay its bills. We don\u2019t believe this will ultimately get settled with a legal fight or the creation of a $1 trillion trick coin.<\/p>\n

The last option, which is even worse than the third, is a government default<\/strong><\/em>. Moody\u2019s Analytics chief economist is Mark Zandi, and he described a government default as \u201cfinancial Armageddon.\u201d Treasury Secretary Yellen emphasized that the US failing to raise the debt ceiling would be \u201can economic and financial catastrophe.\u201d What happens to the US dollar? What becomes of the world\u2019s RFA (risk free asset) if US debt isn\u2019t the safest of safe investments?<\/p>\n

Conclusion:<\/strong><\/h3>\n

This debt ceiling issue is coming at an awful time for the market. Investors are still trying to figure out how this business cycle will evolve, following persistent inflation and a once-in-a-generation global pandemic. Adding uncertainty about the US government\u2019s ability to pay its bills isn\u2019t what the market wants to deal with right now. We anticipate (and hope) that policymakers will reach a solution that \u201ckicks the can\u201d down the proverbial road.<\/p>\n

We’re a fundamental research shop, exclusively focused on the emerging FINTECH industry. As DC figures out its latest manufactured issue, we’ll be updating our proprietary models and reading Q’s and transcripts. We did notice that CME’s interest rate complex just hit its all-time high in open interest (leading indicator of future volumes) for the 5th straight day.<\/p>\n

DISCLAIMER:<\/strong><\/p>\n

Firm<\/strong>: Manole Capital Management LLC is a registered investment adviser. The firm is defined to include all accounts managed by Manole Capital Management LLC. In general:<\/strong> This disclaimer applies to this document and the verbal or written comments of any person representing it. The information presented is available for client or potential client use only. This summary, which has been furnished on a confidential basis to the recipient, does not constitute an offer of any securities or investment advisory services, which may be made only by means of a private placement memorandum or similar materials which contain a description of material terms and risks. This summary is intended exclusively for the use of the person it has been delivered to by Warren Fisher and it is not to be reproduced or redistributed to any other person without the prior consent of Warren Fisher. Past Performance:<\/strong> Past performance generally is not, and should not be construed as, an indication of future results. The information provided should not be relied upon as the basis for making any investment decisions or for selecting The Firm. Past portfolio characteristics are not necessarily indicative of future portfolio characteristics and can be changed. Past strategy allocations are not necessarily indicative of future allocations. Strategy allocations are based on the capital used for the strategy mentioned. This document may contain forward-looking statements and projections that are based on current beliefs and assumptions and on information currently available. Risk of Loss:<\/strong> An investment involves a high degree of risk, including the possibility of a total loss thereof. Any investment or strategy managed by The Firm is speculative in nature and there can be no assurance that the investment objective(s) will be achieved. Investors must be prepared to bear the risk of a total loss of their investment. Distribution:<\/strong> Manole Capital expressly prohibits any reproduction, in hard copy, electronic or any other form, or any re-distribution of this presentation to any third party without the prior written consent of Manole. This presentation is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to local law or regulation. Additional information:<\/strong> Prospective investors are urged to carefully read the applicable memorandums in its entirety. All information is believed to be reasonable, but involve risks, uncertainties and assumptions and prospective investors may not put undue reliance on any of these statements. Information provided herein is presented as of the date in the header (unless otherwise noted) and is derived from sources Warren Fisher considers reliable, but it cannot guarantee its complete accuracy. Any information may be changed or updated without notice to the recipient. Tax, legal or accounting advice:<\/strong> This presentation is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. Any statements of the US federal tax consequences contained in this presentation were not intended to be used and cannot be used to avoid penalties under the US Internal Revenue Code or to promote, market or recommend to another party any tax related matters addressed herein.<\/p>\n<\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Manole Capital Management Debt Ceiling May 2023 Debt Ceiling: As we are writing this newsletter, the market is \u201cstressed out\u201d about the pending debt ceiling dispute. Technically, the US government hit its allowed debt ceiling on January 18th, 2023, but Treasury Secretary Janet Yellen has been taking extraordinary measures to avoid the issue. 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