The high stakes standoff in politics will continue at least another 2 months with Congress suspending the Debt Ceiling conversation to December. As a backdrop, the government owes roughly 29 trillion U.S. dollars, around 1.7 trillion more than last year. What we find interesting to note is that the largest owner of U.S. Treasury securities is not any foreign country, but the Social Security Trust Fund ($2.9 trillion), followed by the nation of Japan ($1.28 trillion), the nation of China and the U.S. Military Retirement Fund ($1 trillion each) and the Office of Personnel Management & Retirement ($955 billion). Mutual funds and private investors are holding about $3.8 trillion collectively.
With politicians kicking this can down the road, the consequences in December would real, but we really need to question whether career politicians would view these items as good for their re-election campaigns:
· Suspension of Social Security checks
· National Parks & the economists who collect government statistics shutdown
· Government employees furloughed
· Money Market Fund’s forced sale of Treasuries
When we look at past shutdowns, they are all temporary blips, soon forgotten. The debt fiascos of 2011, 2013 and 2018 were all resolved, and everybody was made whole; there is not going to be a permanent wholesale default on government obligations this time around either. And most meaningfully, none of the past exercises in brinksmanship impacted long-term equity returns. If you recall, the S&P 500 rose during the 2018 shutdown.
One factor making things easier in this situation, but making Jerome Powell’s job a nightmare, is that interest rates are so low that the government isn’t paying much for the privilege of borrowing investors’ dollars.
So the biggest danger is short-term: that the alarming media coverage might spook timers and traders, who could go on a short-term selling rampage before realizing that the government taking a week or two off didn’t really depress actual underlying value of U.S. companies. And, as said before, an actual shutdown is unlikely in the first place.
Stay tuned for the video to come from Founder Sam G Huszczo’s recent lecture for Lawrence Tech’s Harold Hotelling Memorial Lecture Series: https://link.sghwm.com/LTU01