Uncle Sam Is Broke
The debt-ceiling countdown is nearing zero... Congress is taking its best shot at 'running out of money'... Enough to make any investor think 'Huh?'... Uncle Sam is broke... In this political standoff, one side will blink...
The government is close to running out of money...
The clock that tells us when the U.S. government runs out of money to pay its own bills is ticking... It's not likely to run out, but it's closer to zero than you might think.
Specifically, we're referring to the ongoing debate – or, more precisely, the game of "political football" – that is the federal debt ceiling... It is essentially the U.S. government's congressionally approved spending limit, which needs to get approved soon. And Congress plays dangerously close to the deadline almost every time it comes around.
The limit currently sits at around $28.4 trillion, which seems high enough to us mortals... But in order for the U.S. economy to avoid financial calamity – given the tangled web of debt the government has woven over the decades – the number needs to go higher.
In June, we noted that Treasury Secretary Janet Yellen said that if this "ceiling" is not raised (like it has been roughly 90 times since 1940) or suspended (like it has been the last two years) by Congress, the U.S. would default on its debt as early as October.
If that sounds really bad to you, you're on the right track...
It's never happened – mainly because the U.S. government can print dollars at will, and there's enough global demand for dollar-denominated government bonds to finance spending... Plus, the Federal Reserve's a buyer, too.
It's hard to "run out of money" in that leading economic position, but Congress is taking its best shot.
I (Corey McLaughlin) am not saying the unthinkable –a U.S. debt default – will happen now. But as I'll explain in today's Digest, the federal government, sloshing through a bureaucratic quagmire, has let this clock tick down lower than most people should feel comfortable.
In the short term, at the very least, what happens (or doesn't happen) next may inject some fear into this bull market and portend a coming credit crisis – even if the government ultimately gets a higher credit limit, as it always has.
Already, since the start of August, the U.S. Treasury Department says it has been taking 'emergency cash-conservation steps'...
This should already be enough to make any investor say "Huh?"
We wrote about this in the August 2 Digest, where we said the "debt ceiling" issue was coming to a head because the last two-year debt-ceiling "suspension" made by the Trump administration expired on July 31.
A resolution should have happened then but, as we noted, Congress decided to go on vacation as usual... and make this issue a negotiating chip amid the debate about an infrastructure bill to which Democrats could peg an increase in the debt ceiling.
So instead, in the weeks since – without a "green light" from Congress to take on more debt – the Treasury Department has basically finagled a way to reduce expenses and not fully fund government employee retirement programs. It's not an insignificant move, nor one that can go on much longer...
We're talking weeks. Sometime in October is the presumption. The Treasury secretary laid out the doomsday scenario in an opinion piece in the Wall Street Journal just yesterday...
In a matter of days, millions of Americans could be strapped for cash. Nearly 50 million seniors could stop receiving Social Security checks for a time. Troops could go unpaid... We would emerge from this crisis a permanently weaker nation.
She went on, describing how fragile this all is with the U.S. apparently not having a large enough cash cushion to last longer than two months (from August until now). Said another way, Uncle Sam is broke...
We can borrow more cheaply than almost any other country, and defaulting would jeopardize this enviable fiscal position. It would also make America a more expensive place to live, as the higher cost of borrowing would fall on consumers.
Mortgage payments, car loans, credit-card bills – everything that is purchased with credit would be costlier after default.
This would make things pricier than the current high rate of inflation already has... It's probably easy to see why this would devastate the economy. But here's the good (and bad) news...
If there is one thing both sides of the aisle will eventually agree on, it's spending money...
But for now, more than anything, the U.S. credit limit has become a big negotiating chip in Washington, D.C. Excuse me if this next part gets a little bit into the weeds. But if nothing else, the details are telling...
Republicans over the last few weeks have made public statements that they won't vote on raising the debt ceiling and that Democrats, with majorities in the House and Senate, can raise it themselves.
That's true, they can... but they just don't want to.
As Stansberry NewsWire editor C. Scott Garliss reported this morning in his regular "Market Headlines" feature, Democratic leaders proposed a new bipartisan option Monday afternoon...
It would suspend the debt ceiling through the 2022 midterm elections by attaching the measure to a short-term funding bill to be voted on this week – because, oh yeah, the annual budget plan for the government expires on September 30...
The bill would have no problem passing the House (a vote was scheduled for today) but runs into trouble in the 50-50 Senate, where it also needs 10 Republican votes to overcome a filibuster and avoid a government shutdown.
This is what we've been expecting.
We wrote months ago that any debate you hear about the debt ceiling was likely political posturing more than actual debate. But the situation shows you just how leveraged our economy is when the U.S. government can be just days away from defaulting on its debt.
It's hard to say exactly what would happen if the worst-case scenario played out, but here are a few ideas...
In the Wall Street Journal yesterday, Yellen wrote...
The U.S. has never defaulted. Not once. Doing so would likely precipitate a historic financial crisis... Default could trigger a spike in interest rates, a steep drop in stock prices, and other financial turmoil.
For starters, just think of what's going on with China Evergrande, which we wrote about yesterday, and substituting the United States government for the real estate developer struggling (or not wanting) to pay its bills.
All but assuredly, U.S. stocks would take a significant hit, if for nothing else than the complete loss of faith of the U.S. government. But just the threat of this scenario might be enough to rattle the markets...
As we wrote in the August 2 Digest...
In 2011, for example, Congress and the White House came to a deal within days of a default... and Mr. Market didn't like it... In the five days leading up to the conclusion of negotiations, the benchmark S&P 500 Index dropped 4%...
And as a result, the credit rating agency Standard & Poor's downgraded the U.S. credit rating from AAA to AA+ for the first time in the country's history...
Probably the most critical and practical matter is that the rest of the world would likely demand higher interest rates on U.S. government assets, which could be the pin that pops a few asset bubbles and bankrupts a bunch of "zombie" companies.
As our colleague and Stansberry's Credit Opportunities editor Mike DiBiase wrote in the Digest back in April...
Here's the bottom line... While we can't know for certain exactly when it will happen, higher interest rates will be the bubble-popping pin for both the stock and bond markets.
Higher interest rates make stocks less valuable. Many investors will sell them in favor of safer, higher-yielding fixed-income securities.
Higher interest rates are also a problem for another reason... They cost companies more to service their debt. And as I've explained in the Digest in the past, servicing debt is already an enormous problem for many companies today.
As it is, many companies are choking on their debt even with interest rates near historic lows...
But if you feel compelled to simply go 'all out' of the market today, hold on...
As we've said, Congress has always given itself a higher credit limit, or at least agreed not to lower it. That doesn't mean it's a guarantee, but we're willing to bet it happens again.
If the debt-ceiling raise isn't passed as part of the Democrats' most recent proposed funding bill, the most likely scenario, as I see it, is that the raise becomes part of an infrastructure bill passed through "budget reconciliation" by the simple Democratic majorities in the House and Senate.
There's really no reason why that shouldn't happen...
But in any case, this should serve as a reminder that in a debt-based system, it doesn't take much to cause a crisis. Trouble is constantly lurking, which is why you want to be prepared by owning a diversified portfolio... and considering overlooked alternatives to protect your assets, should crisis hit.
To that point, in a world where the U.S. defaults on its debt, you want to own "hard assets" that you can see and hold... things that have real value, like gold or silver. The same goes for digital assets like bitcoin or other cryptocurrencies that are "outside the system."
There's a lot of debate today about gold versus bitcoin, but there's no reason you can't own both.
And within the system, even if the government doesn't default, plenty of other companies likely will, as Mike explains, should interest rates go up for any reason. The "zombies" simply won't be able to service their debt... just like what the U.S. government is on the brink of right now.
When rates go higher, a credit crisis will follow...
But a wave of bankruptcies is nothing to fear – if you're prepared for it and aren't the one going bankrupt. We'll finish today with an opportunity that will come from this debt-ridden mess... one that might not be what you think. We're talking about corporate bonds.
As Mike explains, unlike stocks, bonds are the legal obligations of companies... making them safer to own. They must pay their bond investors no matter what's happening in the economy or markets... and before they pay equity holders if the company gets close to bankruptcy.
And when the next credit crisis arrives, many of these corporate bonds will get much, much cheaper – simply by association of other companies that are going bankrupt. As Mike wrote in the July 13 Digest...
As bankruptcies begin to soar, investors will want nothing to do with corporate bonds. You'll be able to buy some of them for pennies on the dollar – even the safe ones.
And the less you pay for these bonds, the more money you'll make.
For example, in the two months between March and May 2020, at the start of the pandemic, eight bonds that Mike and his colleague Bill McGilton recommended in Credit Opportunities produced an average annualized return of 59%. That's a great return for a bond investment.
In other words, while the world was in crisis, their subscribers were making money. But don't just take our word for it. Listen to what one of our paid-up subscribers has to say about his own experience.
This is a story worth hearing. Get all the details here.
A Big Move for Bitcoin Could Be Coming
Bloomberg Intelligence Commodity Strategist Mike McGlone tells our editor-at-large Daniela Cambone that there is a high probability the U.S. follows Canada by creating cryptocurrency exchange-traded funds – with strong pressure building for U.S. regulators to allow them.
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 9/20/21): Asana (ASAN).
In today's mailbag, feedback for our colleague C. Scott Garliss and the Stansberry NewsWire team... As a reminder, you can follow Scott and his team around the clock for news and analyses of what's moving the markets – all for free... Click here for more details.
And, as always, if you have a question or comment, send your notes to feedback@stansberryresearch.com.
"I would like to thank Scott Garliss and the NewsWire team for Monday's Morning Market commentary... I never felt comfortable with investing in Chinese markets because I felt that they were not real. This was one of the better NewsWires of late." – Stansberry Alliance member Jeff S.
All the best,
Corey McLaughlin
Baltimore, Maryland
September 21, 2021