Debt Ceiling Deadline Looms!

THE ROOF IS CAVING IN: Debt Ceiling Deadline Looms!

It’s not every day that a JPMorgan analyst will recommend adding gold and cash to your portfolio. That’s happening now, and it’s another sign that Wall Street’s experts are preparing for the U.S. government to again fail to work together in the best interest of the populace.

JPMorgan Chief Global Markets Strategist Marko Kolanovic cited the usual suspects: “elevated risk of recession, stretched valuations, high rates and tightening liquidity.” Those factors have been in play for quite a while, and we could certainly add sticky inflation and stricter lending conditions into the mix.

Kolanovic sees the elephant in the room that everyone else sees. Congress and Joe Biden have a very limited amount of time to either raise the federal debt ceiling or risk a U.S. debt default, which would be a historic first and would have far-reaching ramifications.

Career politicians couldn’t care less about most of those ramifications, but there’s an election coming up next year, and they don’t want to throw the nation into a depression now. Time is running out quickly because the Bipartisan Policy Center estimates that the U.S. government could run out of cash as soon as June 2 (the so-called “X-date”) if Congress and the president don’t agree to raise the federal borrowing limit.

We’re not just talking about a government shutdown here, though that would be part of the maelstrom of events if there’s no agreement. You may recall the time during Obama’s presidency when the government shut down briefly: all federal services ceased, and it cost the taxpayers millions of dollars per day until the shutdown ended.

Despite Kolanovic’s misgivings, an equities market decline would be the least of America’s problems if there’s a federal debt default. The ensuing meltdown would precipitate global de-dollarization, ruin the U.S.’ credit rating, and result in deep cuts to social programs.

In other words, the consequences wouldn’t be limited to the U.S. losing its triple-A credit rating from S&P for the first time in history, which is what happened when lawmakers narrowly averted a debt default in 2011. This time around, the stability of America’s economic and political system hangs in the balance.

Even Treasury Secretary Janet Yellen, who never ruffled any feathers when she was the nation’s Federal Reserve Chair, is sounding the alarm bells now. Yellen warned not long ago that it’s “highly likely” that the Treasury “will no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1.”

So, you’ve got both the Bipartisan Policy Center and the Treasury Secretary pinpointing early June as the dreaded X-date. Meanwhile, Biden and House Speaker Kevin McCarthy call their meetings “productive,” but no material progress is ever reported from these meetings.

Remarkably, the stock market has remained fairly calm during this tense time, chopping the indices around but mostly just pushing them sideways.

Since the markets are highly efficient and forward-looking, they’re in “wait and see” mode but also assuming that Congress and the president will hammer out some sort of agreement by early June. Of course, making assumptions in the markets can be a costly mistake.

Where does this leave investors? UBS predicts that if the Treasury misses its bond payments, the stock market could decline 30%. That seems like a lowball estimate because a historically unprecedented debt default would undoubtedly shock the nation’s financial system to its core.

As a result, we circle back to Kolanovic’s idea about keeping some gold and cash in your reserves. With the U.S. government reaching its statutory debt limit of $31.381 trillion back in January, holding gold is a good idea regardless of how this debt ceiling drama resolves. As for cash, it’s not a terrible idea to have some dry powder ready; when the you-know-what hits the fan, there ought to be some terrific bargains amid the wreckage.