When you’re on a commercial flight, and the plane is approaching turbulence, the captain comes on the intercom to let you know to buckle up and expect ‘rough air. There should be similar warnings about ‘rough air’ in the markets, and this is a good time to offer one.
Depending on how it plays out, this market turbulence may create one of the biggest opportunities of the year. We’ll explain in a bit.
We are anticipating volatility as consequence of the debt ceiling debate—or, rather, the refusal of Congressional leaders to agree to either cut expenses or raise the limit on the amount of bonds the government is allowed to sell to finance its operations. The legal limit on the amount of Treasury debt that the government can issue is periodically raised—and it is always because Congress has already authorized a budget that will exceed the debt limit.
As are most things in Washington, this is a political issue.
How likely is a default? The U.S. government hit its maximum debt ($31.38 trillion) on January 19, and has since been relying on accounting tricks since then. We are now on a near-approach to what insiders call the ‘x-date,’ the unspecified time when those measures will be insufficient, and the government will have to start deciding who to pay and who not to pay out of its diminishing resources.
It’s worth pointing out that a previous debt-ceiling debacle caused credit agencies to lower America’s credit rating.
If the government does run out of its ability to pay, there most likely be some short-term panic among investors who would see sharp declines in the value of their stock holdings. This hype will not affect the actual value of shares of stock (or the value of public companies) in any way. However, in the short-term, especially with screaming headlines of potential default and dire economic consequences, confidence (or lack thereof) will trump rationality every time.
Sooner, rather than later, both sides of the aisle will come to an agreement that the U.S. should pay its obligations, and normalcy will be restored.
If we experience a massive correction associated with the debt ceiling negotiations, consider it a tremendous opportunity to get cash sitting on the sidelines into the markets.
In the meantime, fasten your seat belts, hold on to your wallets and watch the political theatre of Washington, D.C. unfold.
