The Weekly (5/12)

Friday, May 12th 2023


Debt ceiling chatter continues to echo louder as we approach the potential default date of June 1st. If unfamiliar, think of the debt ceiling as a self-imposed, and easily raised, federal credit card limit that (sort of) curbs government spending. Terms need to be decided on by Congress, and as we all know, they don’t move quickly.

Introduced during WWI in an effort to provide more accountability over government borrowing, the debt ceiling has evolved into a political tool for televised negotiations and brinkmanship. Throughout its history, the ceiling has been raised or suspended (ignored) over 100 times, often accompanied by deals made at the eleventh hour to avert a nasty economic situation.

The debt ceiling was initially set at $11.5 billion in 1917, which shakes out to roughly $250 billion after adjusting for inflation. To put that into perspective, the current U.S. debt limit is over $31 trillion, now surpassing our GDP of about $23 trillion.

A notable debt ceiling dilemma played out in 2013. It resulted in a 16-day government shutdown that was remembered by piles of trash in DC and the resurfacing of the “trillion dollar coin” idea. 

Some claim that a nation with its own sovereign currency, like the U.S., can never run out of money and simply should get rid of the debt ceiling concept altogether. Why? Well, essentially, because the U.S. can technically always print more money. Of course, we’ve seen firsthand that pumping trillions into the economy can quickly lead to sticky inflation, and we shouldn’t take the responsibility of having the global reserve currency lightly. But, they might be right.

Just yesterday, Jamie Dimon exhorted politicians, "Please negotiate a deal” because "the closer you get to it, you will have panic." It’s clear that an extended default would critically impair the economy. Unemployment well into the double digits, surging interest rates, and ripple effects across global markets could be expected.

Do we have a variant perception of the likelihood of an extended default? Certainly not, and anyone who claims they do, we’d advise taking their opinion with a grain of salt. Having said that, history may not repeat itself, but it certainly rhymes. We expect there to be a resolution just when everyone is certain there won’t be one. 

We’ll keep a close eye on the situation while working to control the controllables: investing in what we believe to be great companies, attempting to size our positions well, and holding on tight.

Have a great weekend.

– Your Titan Team

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