The Debt Ceiling and Shark Attacks
It strikes me that shark attacks and the U.S. Debt Ceiling have a lot in common.
In case you’ve ever been floating around in the ocean and wondered what the chances of you being attacked by a shark are; they are 1 in 5 million, according to an article on www.silive.com, “What are the chances of being attacked by a shark in the U.S., July 6, 2021?” Author's Note: It was recently brought to my attention by the World Animal Foundation that as of the 2022, the most recent data available, the odds of a shark attack are now 1 in 4,332,817. Source: https://worldanimalfoundation.org/advocate/shark-attack-statistics/
No doubt you’re aware that the latest conflict in Washington D. C. is over raising the debt ceiling. If you aren’t aware, no one can blame you. After all, conflict in our nation’s capital isn’t exactly uncommon.
For those who are unaware, by law, the U.S. Government is limited to borrowing $31.4 trillion. Think of that as the credit limit on your credit card. They bumped up against that limit in January, meaning they maxed out their credit card.
Our government is projected to spend more money (about $6 trillion) this year than it “earns” in revenue (about $4.5 trillion). This equates to a deficit of $1.5 trillion. They borrow that money by issuing Treasury bills, bonds, and notes.
It’s important to note that NO ONE in Washington is proposing something as drastic as trying to balance the budget. Apparently, governments, civilized or not, regard balanced budgets as relics of the ice age.
The Democrats want to apply for a credit increase, and the Republicans want to secure some spending cuts before agreeing to raise it.
As of now, while Congress and the President are in talks, a deal hasn’t been reached. Treasury Secretary Janet Yellen is warning that the U.S. will default by June 1st if the debt ceiling isn’t raised.
If you have read up on this subject, you may have noticed that NO ONE in the mainstream expects that a default will happen. But, just about EVERYONE expects that it will be the eleventh hour before an agreement is made.
This is one of those events that the chance of something bad happening is very low. But if it happens, it’s going to be really bad. Kind of like getting attacked by a shark.
At this point, the investment markets are mostly unperturbed.
The stock market isn't panicking, judging by the SPDR S&P 500 Trust ETF.
Source: eSignal
The Treasury bond market is doing fine, judging by iShares 7-10 year Treasury ETF.
Source: eSignal
The only market that is concerned is gold, judging by the SPDR Gold Trust ETF. (Prices are up, meaning that gold investors are nervous.)
Source: eSignal
I got curious and looked back to 2011, which was the last time raising the debt ceiling was a serious issue. In January of that year, Treasury Secretary Timothy Geithner said the Treasury would run out of money between March 31st and May 16th. It took until August 1st to reach an agreement.
Check out what happened to the stock market between January and August. The SPDR S&P 500 ETF went UP 9% through May, and then went down 22% through October.
Source: eSignal
You would think Treasury bonds would go down too, but they didn’t. The iShares 7-10 year Treasury ETF was down slightly through February, then went up 17% through September.
Source: eSignal
Gold took the blue ribbon. The Gold SPDR increased 30% between January and August, reaching new all-time highs.
Source: eSignal
Will history repeat this time? Of course, no one knows.
Eliminating the risk of an unfriendly meeting with a shark is pretty simple…just stay out of the water.
Unfortunately, trying to eliminate the risk of a default is a lot harder because it’s almost impossible to stay out of the water, i.e. investment markets. Stocks, bonds, and money markets could all plunge if that happens. Gold would probably go through the roof. But please know that gold is currently at highs and looks a little toppy.
My approach to navigating this debt crisis is this. Stay in the investment markets, but reduce risk, diversify broadly, including non-dollar denominated assets, and purchase some portfolio insurance.