The Definition of Insanity

Something both sides of Congress agree on... News in the debt-ceiling 'debate'... It's still the same old story... The definition of insanity... More inflation fuel... What the markets might do...

Here is one major thing the two big parties in D.C. can agree on...

More debt is the only way for the bloated U.S. government to survive...

Today, House Republicans proposed this idea: Raise the government's "debt limit" by $1.5 trillion or extend its ever-rising borrowing cap so the Treasury Department can pay its bills until March 31 of next year.

I (Corey McLaughlin) won't get into more details of this new proposal because they remain scant as I write. Nevertheless, the takeaway will be the same no matter what you hear about the debt ceiling "debate" today, next week, or over the next several months...

As we wrote in the March 16 Digest while discussing this topic...

It doesn't matter who is in control of Congress or what is happening in the world. Congress has raised the debt limit more than 100 times since its creation. That includes roughly 90 times since 1940 and about 20 since 2001. That covers the spectrum of those who've been in political power.

Never say never, but it's a good bet that "more debt" will happen again. The first significant Republican idea already ups the limit by a casual $1.5 trillion (even with $4.5 trillion in suggested spending cuts in the Republican proposal). Democrats will fight these ideas, and the sides will eventually reach some kind of resolution to raise the existing limit.

Plan accordingly...

Oh, the irony...

To plan accordingly here means to acknowledge that continuing to raise the debt limit won't help ease inflation pressure. That's not because of how high the debt limit is in and of itself, but because of what it allows – which is more government spending.

And government spending, as we know, is inflation fuel. That's why every time we've heard someone in Congress ask Federal Reserve Chair Jerome Powell if he could get help in the central bank's inflation fight with less fiscal spending, he demurs.

It's true, but he doesn't want to get political (in public at least). That's why Powell also has said it's Congress' job to handle the debt rules but that a U.S. debt default should not be considered. As we wrote in January...

Technically, the debt ceiling is the congressionally approved limit on the amount of debt the Treasury Department can rack up. It's not "spending," per se, but more like a credit limit for the U.S. government for spending that Congress has already approved...

But this limit – a vehicle that originally began to help fund World War I – is set by the same body that approves the federal budget and appropriates funds.

It's like the chicken-or-the-egg dilemma. Which came first? It doesn't really matter... The end result of the arrangement is the same: more chickens and eggs. More spending and debt.

In December 2021, Congress raised the federal government's overall borrowing limit by $2.5 trillion. The federal budget deficit for the 2022 fiscal year was more than $1.3 trillion, and the 2023 deficit is projected to be about $1.2 trillion... for a total of $2.5 trillion.

The starting Republican proposal from new House Speaker Kevin McCarthy is to raise the limit by $1.5 trillion, right around the annual federal deficit, and to cut spending by triple that.

Maybe the numbers will change some amid negotiations. The debate will include a repeal of certain items in last year's Inflation Reduction Act, ironically. Other points could include repealing increased IRS funding and reclaiming money allocated to fighting COVID-19 that was never spent.

But beyond all the details, there's a broad point...

Expect more government spending until... forever...

This may just be the starting point for negotiations about the debt ceiling, for various political gains. That's how this tends to go... It'll probably end up forcing the Democrats in the Senate to pass their own bill. I can't imagine they'll be friendly enough to sign off on this proposal, even if they mostly agree with it.

But today's development shows one thing: Any solution to this problem – the U.S. government lacking money to pay for all its spending – will most likely include Congress giving the U.S. Treasury the green light to borrow more money for at least another year.

And it will be borrowing at higher interest rates than the country has had in the past 15 years...

We're only starting to see inflation-related consequences unfold today from the trillions of dollars in new stimulus pumped into the economy beginning at the start of the pandemic. Even so, it's the same old, same old.

It's the definition of insanity... doing the same thing again and again and expecting a different outcome. Or maybe the folks in D.C. aren't expecting a different outcome... but just can't make enough time or don't have the inclination to arrive at some real, helpful solutions.

What to watch for in the markets...

Should debate ruffle the feathers of the mainstream media enough, that might throw some panic into the markets in the weeks ahead. If so, as we've written before, asset classes like bonds and gold may catch a few tailwinds.

As Rob Spivey of our corporate affiliate Altimetry has shared, in the most serious debt-default worry crisis that led to a partial government shutdown in 2013, every major Treasury yield was flat or down. When the U.S. nearly defaulted, people bought Treasurys because "they wanted to be holding the most liquidly traded asset in case there was a crisis."

Of course, should the U.S. actually default, Treasurys would plummet. And "chaos hedges" like gold could soar as the U.S. dollar weakens. That could send prices of commodities higher as well and benefit emerging markets.

But absent that major event, chalk it all up as more inflation fuel. Don't expect anything different. So long as we have a fiat-currency system, dollar devaluation will always be there... and so will all of the visible and mostly hidden influences that come with it.

There's an ongoing tug of war between the inflation-fighting Fed and free-wheeling Congress spending more money. We can't change the circumstances, but we can do our best to navigate them.

Own high-quality stocks that can keep selling products or services no matter what happens next. (Doc Eifrig has a few ideas about that.) Stay away from the garbage businesses that are least likely to survive a higher inflation and interest-rate world.

Know your goals, consider how much risk you're willing to take, and keep cash on hand (including in lucrative short-term Treasurys) for buying opportunities that will inevitably arise.

New 52-week highs (as of 4/18/23): ABB (ABB), AutoZone (AZO), Copart (CPRT), DraftKings (DKNG), inTEST (INTT), Lockheed Martin (LMT), McDonald's (MCD), Madison Square Garden Sports (MSGS), NVR (NVR), O'Reilly Automotive (ORLY), Flutter Entertainment (PDYPY), PulteGroup (PHM), Raytheon Technologies (RTX), and Zimmer Biomet (ZBH).

In today's mailbag, feedback on yesterday's Digest, which included our take on Mr. Market's recent behavior... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I think, given the free/cheap money pouring into the markets since the Global Financial Crisis, that Mr. Market is waiting for the Fed to cut rates so he can get 'excited' again, i.e. get the markets to rally. I agree with Dan Ferris' thesis in the meantime that the markets will just be in an up-and-down cycle until that happens, but no actual crash. I predict the S&P 500 to go no higher than its February 2nd high, but no lower than its October 2022 low.

"I'm just thinking out loud, of course; I'm a petroleum engineer by trade." – Paid-up subscriber Jose T.

Corey McLaughlin comment: Jose, thanks for the note. Opinions are always welcome!

All the best,

Corey McLaughlin
Baltimore, Maryland
April 19, 2023