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Debt Ceiling and AI

| May 22, 2023

The market is at the top of its trading range and from many indicators seems to be stalling out. Why is that? Tough to say, and truthfully there are probably many reasons.

It could be as simple as the market is just waiting to see how reckless our elected representatives can be as they play near the edge of a fiscal cliff, and how close to that edge they want to take the economy. We seem to have this issue every year or two, because both political parties seem to suffer from the same affliction…overspending.

Now, if you believe the now discredited Stephanie Kelton (Modern Monetary Theory), the government can print money infinitely and therefore support chronic overspending. Well, until you get inflation. Has anyone seen inflation lately?

So, there is a limit to spending and there is also a limit to borrowing. The government (we the people) must pay interest on that borrowing. When it gets high enough and the interest rate gets into a normal range, the amount of the government budget allocated to debt service squeezes out other spending.

Now, you might just say tax the rich. Of course, what we all mean by that is tax the other guy who is richer than I am! Nobody I know says they’re “rich” (at least when it comes to the issue of taxes), and I know some “rich” people. Of course, my definition is just like yours, a “rich” person to me is someone who has more money than I do. It’s all relative. The person with $100M is rich to me, but he sees the person worth $500M as rich.

In my jaded Gen X view of the world, be careful what you wish for. Taxing the other person because they have more than you only means that you are next in line for taxation. Getting our spending in line with our revenues is the key. Now, most in government would say that’s old fashioned, right Stephanie Kelton?

So, in light of the debt ceiling “crisis” (which isn’t really a crisis, since it will get fixed at some point), I decided to get into the AI world and see how smart AI can be. Here’s the question I asked.

And here’s the answer. Not a bad answer overall.

Let’s put some color on this discussion. Here is a chart of the US government debt. It’s a doozie.

If you remember the last time we had a real debt ceiling “crisis” was 2011. Hard to believe that was 12 years ago. Here’s what the stock market and 10-year treasury yields did during that time.

If you also remember, Standard & Poor’s downgraded US debt to AA+ from AAA. This was a rating the US had not seen in a long time. Mind you, it’s where the US is still rated currently. Perhaps the most noteworthy item is the Y-axis of the top chart (S&P 500 index). With that index now hovering around 4,200, it is more than 3x the level we see here. Investing for the long-term! Here’s that from another view…

This graph shows what happened the following four years after the “crisis” was resolved. The market proceeded to double from the lows. Will that happen this time? I doubt it, but could there be a relief rally? Sure.

In fact, here’s a chart from our good friends at Alpine Macro, showing how corporate earnings revisions have just started to turn up.

If we combine a debt ceiling resolution, the FED pausing their rate hikes, and earnings revisions starting to go up, we could be setting ourselves up for a nice run in the markets.

I know nobody feels like that. I sure don’t. As I’ve said before, some of the hardest decisions have turned out to be the best decisions. I don’t know the future any more than anyone else does, but we started to discuss “green shoots” several months ago. Could this be our green shoots taking root and being a positive catalyst for the markets? Surely goes against most sentiment at this point. Here’s the latest AAII survey.

Sorry, it’s a bit small, but you get the gist. Most investors are either bearish or neutral. That leaves a lot of dry powder to fuel a rally. Just a thought. We will see how it plays out.

For now, have a good week. If something doesn’t make sense or you want clarification, let’s talk.