Normally, I don’t get too excited about the Debt Ceiling. Back in September 2021, we published Debt Ceiling Insanity.

The conclusion in that report was Why Bother? It is just an act to get more pet projects funded on both sides of the aisle.

“The debt ceiling resembles less of a ceiling and more of a periodic trigger allowing both sides to scare the public with talk of shutdowns, while lining up a list of pork barrel spending for their districts, as they avert the ‘crisis’ of their own making, without even thinking for a moment to address the issue of rising debt.”

There is a good chart in that piece, that I’m almost horrified to update, given the trajectory of debt since September 2021.

But why am I not so dismissive this time around? Do I really think that a government shutdown (for a few days or even weeks) will cause calamity? Not really. Do I think that we will realize that some things not considered “essential services” will turn out to be “essential?” Possibly, but not a major concern. Will checks not going out in time be problematic? Yes, if it lasts more than a few weeks (where at least one bi-weekly paycheck is missed, or worse, a monthly paycheck). Do I expect this income to be “lost,” and employees will not be made whole? Not really. Does the fact that we have holidays in the middle of the next two weeks further reduce the impact of a shutdown? I think it could.

So why am I paying attention this time?

A Sign of Struggles to Come?

What should concern markets is whether or not this is a signal of how difficult it will be for the new administration to accomplish its goals.

The market has priced in a lot. From tax cuts, to reduced regulation, to (I still don’t understand why), a Bitcoin Strategic Reserve. Initially markets were happy with the Trump victory. That “excitement” grew as it looked like confirmations, at first being questioned, were likely to get done. It seemed that various methods would be used to get their way (such as funding primaries against those who didn’t stay in line, etc.). All of this, along with President-elect Trump’s ringing of the bell on the NYSE, and tweeting “you are welcome” when Bitcoin crossed $100k, seemed to provide a backdrop that helped U.S. stocks hit record highs.

• The first problem that the market faced this week was a Fed which was no longer committed solely to unemployment and cuts. See A Tough Powell Who Didn’t Take the Bait. If markets hadn’t been so aggressively positioned, seemingly happy to be complacent and let the Santa rally run its course, the reaction might not have been as bad. But the market was over its proverbial skis, got hit hard, and failed to bounce yesterday (except the Dow, which is increasingly irrelevant to anyone).
• The problem the market is facing right now isn’t about the potential shutdown, but what we are learning from the process that might derail helpful market policy next year.
  • A “Continuing Resolution” of over 1,500 pages was distributed on Wednesday. There was very little chance that this was going to be fully digested, and it was much longer than the 20 or so pages used in the CR earlier this year to kick us to December.
  • Quickly, especially on Twitter, there was a lot of information about “things” that had been attached to the CR (my personal favorite was quite a large raise for Congress).
  • The recent election seemed to make it clear that the country (or enough of it to get a sweep of the House, Senate, and the Presidency) was getting tired of big government (or at least a lack of transparency). The D.O.G.E. is the one thing that virtually everyone we communicate with, domestically and internationally, seems curious and at least somewhat optimistic about. Yet, this CR seemed to embody much of what America seemed to have spoken out against.
  • Relatively quickly (certainly by D.C. standards) a much smaller CR (just over 100 pages) was adopted. While still containing some items that had been questioned or criticized, it was much smaller, and the argument that other big spending should be voted on in separate bills (which seems logical to me) got traction, at least in social media.
  • That CR was defeated last night.
• The combination of Trump and Musk, so far, failed. It brought attention to the issue, but hasn’t “solved it” yet. Likely we get something in between, and it will be a partial victory, but it highlights the fact that even once all the new representatives are sworn in, things might not be as easy as previously thought (even some Republicans voted against the new measure).
• We use the term “combination” loosely as this seemed much more driven by Musk than Trump. I still think that this relationship is likely to end in tears, and it is far from clear whether or not Trump likes that Musk took such a leading role.

Bottom Line

At this moment it is all about the timing of the deal and what the deal looks like.

If we get a resolution, but it is based on the original CR, look for more chaos.

If we don’t get a resolution, don’t panic, it will all come down to how quickly we get a resolution and what that resolution looks like.

The closer to the 100-page doc, the better for markets, as it would seem to imply that the new administration, even with some setbacks, will get its way.

If it is more like the original full CR or just a simple extension into the first months of the new administration, markets might take comfort that “next year will be different,” but there will be some questions about what can get done (in addition to the questions about what they want to get done).

So, this time, I’m watching this more closely, but only to see what it might mean for the new year and policies!

Until it is clear that chaos (or just roadblocks) are off the table (and right now that is far from clear), then it is too early to buy this dip (especially with a less than helpful Fed that may have pivoted too early).

While 10s neared the top of our 4.4% to 4.6% range, I’d be reluctant to buy as the desire to spend our money in D.C. is high, entrenched, and will be difficult to change, even if people really want change on the debt trajectory!

Have a great weekend as we head into nice middle of the week holidays!

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