Don’t Worry About The Debt Ceiling

Don’t Worry About The Debt Ceiling

Don’t worry about the debt ceiling. More spending is coming. The risk of Treasury defaulting in June is 0.00000000000000000001% (I jest), but that is neither here nor there. Both the Dems and the GOP want to spend on pork, it is just a question of which flavor. Therefore, the debt ceiling will be lifted, another $trillion-plus omnibus bill will be passed, Treasury will issue mountains of debt – most of which will be subsidized by the Fed (China and Japan are too smart to load up on U.S. Treasuries).

The Fed will further dilute the Dollar to support fiscal spending programs that subsidize: Healthcare, Pharma, Insurance and individuals. The U.S. will continue to run fiscal deficits, it will continue to import more than it exports and asset values (including stocks) will reinflate – unless the Fed maintains its Fed Funds Rate at current levels. Should Powell and the Fed do so, banks will continue to tighten and the U.S. economy will further slow.

At some point Powell will cave. Despite all of the tough rhetoric, only recently did the Fed Funds Rate (5.00-5.25%) approach Core CPI (5.5%). Typically in an inflationary period, the Fed would take its Fed Funds Rate north of Core CPI if it was serious about fighting price inflation.

Do I believe that Powell will take rates back to zero percent this year or next? No. Could I imagine Powell lowering rates to 4% this year post-Labor Day and to 2-3% next year as the economy slows and as the 2024 Election quickly approaches? You bet. Powell hasn’t exactly been an example of courage and he will face enormous political pressure as the General Election fast approaches.

Net, net, Core CPI won’t get back down to 2% this year or next, the economy will remain soft, 2024 Revenue and EPS will remain flat with 2023 (two muted growth years in a row – at least) and equity valuations will remain elevated. This is what Stagflation looks like. Stagflation will be the status quo until the Fiscal side gets spending under control and starts to run surpluses and the Monetary side gets the hell out of the markets so that they may be considered “private” markets again. Until we purge the markets (and the economy), of the “Fed put”, the markets will remain a messy stew of mixed signals and irrational valuations. For that to occur, fiscal spending must come under control and return to black.

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