Debt ceiling riles short-term investors; long-termers at peace
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If you are a long-term investor, one who does not make knee-jerk portfolio decisions based on short-term events, or if you find it ludicrous to think that the U.S. government will default on its debt, you may want to skip this article. However, if you get a kick out of events that could roil the short-term financial markets and appreciate political theater, you might find the following interesting and worth your time.

You are starting to hear the rumblings of the latest "threat" to the financial markets, the looming need to raise the national debt ceiling by Congress by late September. If this is not done, the government will run out of money and shut down. This may also lead to the government defaulting on its debt. Whether this is done or not, it will not stop the president from tweeting, his recent tweets seeming to have added more concern for investors. 

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Recent yield increases in treasuries due to mature close to the debt ceiling deadline seem to indicate that markets are a little jittery about the potential for another government shutdown. Yield increases in treasuries indicate a rise in risk. In this case, the risk is not receiving payment on the treasuries when due. This occurs when investors demand more yield for taking that risk. 

 

A shutdown could also mean people not receiving social security or other government payments and not being able to spend, causing damage to the economy. This could hurt corporate profits. In the extreme, the U.S. could default on its debt obligations. Some money markets depending on those maturing Treasury payments close to a shutdown seem to have decided to sell those holdings early.

Yield increases like this indicate some investors feel more of a risk that payments on treasuries might be missed this time. You would think investors would have gotten used to squabbles that have caused government shutdowns in the past, but some, like Gretchen Morgenson a Friday article in the New York Times, believe this time could be different. Ms. Morgenson feels the difference this time is the unpredictability of President Trump.

The president has declared funding for the wall between Mexico and the U.S. an essential part of a bill that will raise the ceiling. Conservative Republicans see this as an opportunity to cut spending. The Democrats, sensing another opportunity to wound Republicans and the president, have made it clear they will not cooperate in raising the debt ceiling or on any spending cuts.

They feel any government shutdown will hurt the GOP more than them. Treasury Secretary Steven MnuchinSteven Terner MnuchinOvernight Finance: GOP criticism of tax bill grows, but few no votes | Highlights from day two of markup | House votes to overturn joint-employer rule | Senate panel approves North Korean banking sanctions Fitch Ratings: GOP tax plan will hike deficits, be 'revenue negative' Live coverage: Day two of the Ways and Means GOP tax bill markup MORE has publicly stated the debt ceiling rise will be passed without any spending attachments — what he referred to as a "clean" bill. Mnuchin and the GOP leadership are hoping to attract democratic votes and negate conservatives with a clean bill. 

There seems to be growing uncertainty whether a bill will be passed in time to keep the government functioning and meeting obligations. Markets do not like uncertainty. In the stock market, uncertainty means more volatility, possible daily wide swings in market values and the specter of losses.

The long-term investor, while maybe not liking short-term swings in the market, is more secure in the knowledge that these events are blips in the life cycles of the markets. The stock markets could be affected by the noise that will be heard over the next month or so before a bill passes. However, where the stock markets' values wind up will be dependent on the third-quarter earnings reports in October and in future quarters.

A bigger risk that has not been discussed yet could be a downgrade of United States debt by credit agencies. The last time there was a serious fight over the debt ceiling, Standard & Poor's (S&P) downgraded the credit rating of the U.S. from AAA status to AA+. This occurred for the first time in Aug. 5, 2011, four days after Congress passed a bill to raise the debt ceiling.

While S&P eventually backed down (a government investigation helped persuade them), if this occurred again, but with more credit agencies, and they don't back down, government cost for debt could rise, causing damage to the economy. A ratings downgrade might also drive a selloff of all treasuries in portfolios. 

I predict Congress will raise the debt ceiling. I am not saying when, but I would like to think there are mature minds in Washington that will do this before a shutdown occurs. There is too much at stake. I also predict there will be more tweets by the president on the ceiling, the wall and politicians of both parties.

I sense (but cannot predict as surely) that the bill that passes will be a "clean" bill. Finally, I predict articles like this will be written the next time the debt ceiling issue is looming again!

Al Zdenek is the president, CEO and founder (1982) of Traust Sollus Wealth Management, a boutique wealth management firm serving high net worth individuals and families. His book, “Master Your Cash Flow,” shows readers how to determine the wealth they need and then find additional cash flow.


The views expressed by contributors are their own and not the views of The Hill.