The Silver Lining of Increasing the Debt Ceiling: What You Need To Know?

Foreign. Welcome to another edition of We're Talking Money. The United States debt ceiling negotiation is all over the news. Many of our listeners have been asking, what happens if the debt ceiling is not raised? Equally important is what happens if it is raised. Let's get into it.

The United States debt ceiling is a major factor in the overall health of our economy. I'm sure you know that. And so far, the United States has never defaulted on its obligations, but as they say, there's a first time for everything. Now, this isn't the first time our country has dealt with the debt ceiling dilemma, and it's almost certainly not going to be the last time. However, with the ongoing regional bank crisis and a looming recession, anxiety levels are rising, and that can lead to a self-induced market sell-off. Not a good thing.

Now, in my opinion, a deal will be reached, but it's not going to happen before we get a good dose of theatrics, political posturing and the 11th hour lawmaker rescue. Happens every time. Why am I asserting that our debt ceiling will be raised? Let's look at history. Since 1960, it's worth noting, the debt ceiling has been raised 78 times. That's right, 78 times. This is precisely why I'm confident it will be raised again. It is simple: our politicians, they just can't help themselves. They all talk a good game, that is, of controlling debt and spending wisely, but actions speak much louder than words.

Take California. Residents pay a top federal income tax of 40 percent. Now, they pay an additional 13 for state income tax. That's a total of 53 percent tax, and that doesn't include sales tax or property tax. Yet California's governor, Gavin Newsom, he just announced a 31 and a half billion dollar deficit for their fiscal year 23-24. Just a year ago, the Golden State had a 100 billion dollar surplus. That's roughly equal to about 310 dollars per person in the U.S. And all of a sudden, a year later, they're at a 31.5 billion dollar deficit. What gives here? Regardless, Newsom justified this unfortunate deficit with the remark of, "This is within expectations." Are you kidding me right now? This is the very kind of mismanagement that brings our country to another debt ceiling increase.

So what are the consequences of hitting the debt ceiling? Well, it could mean that our government shuts down. That could be devastating for our economy and everyone in it. Why is that? Well, just think about it. Consumer spending makes up 70 percent, roughly, of our United States gross domestic product, or GDP. A shutdown will have dramatic effects on all spending. In addition, credit markets could suffer. They would likely suffer. Currency would weaken, interest rates would rise, and, well, I'll stop there. I think you get the point.

So if this is so important, why do we keep hitting the debt ceiling anyway? Why not live within our means? Consumers have to. If consumers do not live within their means, payments could be missed and assets eventually lost. It seems like it should work that way for our government, but it doesn't.

Let's take a look at the financials for the United States in 2022 to make a better point. The United States took in roughly 4.9 trillion, with a T, trillion dollars, and that came mostly from income tax. And that money was not enough to cover what we need to run the country. We spent in 2022 6.3 trillion dollars. Now, the simple math tells you that's a 1.4 trillion dollar deficit in just 12 months. Could you imagine if you constantly ran your household like the US government? Clearly there is no way around this, and it may not be what you want to hear, but clearly our country has a spending problem. Anyone that doesn't see this is ignoring simple math.

Maybe we just raise the debt ceiling for the 79th time and get on with things, right? Not so fast. If we keep kicking the debt can down the road without addressing our out of control spending, the eventual pain, it will be worse. Don't forget California. What I shared with you a few minutes ago is proof that spending beyond your means can have deleterious effects. Don't think that our nation is immune from tax rates that exceed those of California. That is in the cards. Could you live like that if you were paying 50, 60 or more percent in taxes? Of everything that you earn, more than half goes to the government.

The fact is, we need to pass a budget that reduces wasteful spending, unnecessary spending, and stop making unsustainable promises. We have certainly had our fair share of those. Until this happens, any increase in the debt ceiling will be just another temporary fix. Not to mention, interest payments alone are huge. That's right, we have to pay interest on our debt.

What does raising our debt ceiling really accomplish? Everyone has a different answer for this, but I'm here to tell you, raising the debt ceiling equals more printing of money. It's adding to a mountain of debt. Interest payments alone should be all the proof needed for lawmakers to be just a little more responsible. More debt and money printing means a weaker dollar, hence more inflation. More inflation at obviously would mean higher interest rates. Higher interest rates reduce consumer spending, and that further reduces economic output. Sounds like a graveyard spiral.

Now, pardon that French. That's pilot speak for a spiraling aircraft that eventually hits the ground with catastrophic results. Unless action is taken during the spiral, the crash is inevitable. I hope this analogy paints a clear picture. Our country in its financial condition could be in a death spiral, or a graveyard spiral.

Without a doubt, we don't want to default on our debts, and inflation, well, it's got to get pulled into a reasonable range. In other words, it's got to be controlled. The reality, however, is actions in one, meaning the debt ceiling, can affect the other, meaning inflation. Now, I don't expect a continuation of falling prices. In fact, inflation near five percent, which is where it is today, is likely to hold there. We've said for quite a while that inflation around this five percent range will become very sticky. It will be more and more difficult to bring it down to the Fed's target of two percent. The question is, have they reached a level high enough to cool the economy and bring inflation closer to that target of two percent?

More rate hikes means more volatility for the stock market and likely eliminates any chance for that so-called soft landing. Of course, it is possible to see the Fed move to the sidelines and let rates work through the system. After all, it does take some time for the effect of rising rates to really be seen throughout an economy. It can take months, if not a year or more. But given the stickiness of inflation, I do not expect rates to move lower during 2023, with one exception: if unemployment moves at least one percent or more to the upside. Say we get closer to five percent, in that range. And I don't think that's likely at this stage, but if we head in that direction and get close to that five percent number, then I think we could see rates move to the downside.

So far, rate hikes have brought growth in the housing market to a standstill, and manufacturing, we saw recent numbers that are mostly slumping. Not good. The straw holding up the economy is the consumer, and pressure on the consumer, well, it is being applied in a huge way. It's been good to see inflation fall, don't get me wrong. From its peak, it's definitely come down, but at this point I believe that it remains sticky around the current levels of, say, five percent, give or take. Getting inflation down from its peak of around nine, nine point one actually, that was pretty easy. Getting inflation down from five percent, on the other hand, that's going to be more challenging. It's almost perfectly aligned with current annual wage growth. That provides the consumer with just enough to keep on spending.

The debt ceiling is the first of a few hurdles, and it's got to be resolved. It must be dealt with quickly. This means our Fed has to continue dealing with inflation, which is unlikely to move much lower, at least in the near term. In fact, I believe it could move higher, particularly if the printing presses fire up again following what I am sure will be the approval of the 79th raising of the debt ceiling, again, since 1960.

In every difficult situation, there is usually a silver lining. If we go back to 1983, we'll talk about the six cycles. From 1983 through 2019, the S&P 500 averaged a post-cycle six-month return of 11.6 percent. That's equivalent to an annualized return of more than 23 percent. Among the six cycles, stocks declined only once in the six months following a final rate hike, and that was in 1999 through 2000, just ahead of the dot-com bubble, or the dot-com implosion. Boy, what a nightmare that turned out to be.

That is not to say, please don't misunderstand me, we are not saying that we have any expectation of the S&P 500 moving that high in 2023. Absolutely, we do not expect that. On the other hand, as inflation comes down and we get additional confirmation that Jerome Powell, our Federal Reserve chair, has inflicted enough pain, stocks will regain their footing and resolve to the upside.

Now, at this point, the S&P 500 has been making new rally highs, but participation, or breadth, it's been dropping. After 30 years, one thing I've learned: the market's going to do whatever it wants, regardless of my views or yours. But the current setup does make a very persuasive case, one that I simply cannot ignore. Essentially, the market is being carried higher by mega cap tech stocks. Perhaps goes a little higher. In fact, 4300 on the S&P 500 is within our range, but I don't believe we're going to easily get through that overhead resistance.

So where do we go from here? At best, we have a mixed bag of signals. Now, the narrow leadership in 2023 that I spoke of, amid bullish signals such as a 20-day moving average that recently crossed above the 50-day moving average. That's bullish by anyone's description or definition. That's a bullish move. But I still believe that a more likely place for resistance is that 4300 on the S&P 500, and I think that it's highly unlikely, given the headwinds that we've talked about throughout today's show, that we break through that number.

As for downside targets, we have a lot of support around 3 300 on the S&P 500, and somewhat of a range from 3 300 to 3 800. Now, that's based on a number of technicals that we use, Fibonacci analysis or Fibonacci retracements being one of those, the 200-day moving average being another one, and of course our trend line, which starts from the bottoming that occurred back in October of 2022. Failure to reach an agreement around the debt ceiling, however, makes our downside targets a little more than a guess. There are plenty of bullish indicators, but risk at this point outweighs the reward. For that reason, we are underweight equities. We're overweight fixed assets and cash.

So I hope this episode of We're Talking Money has inspired you to consider how the debt ceiling and inflation can affect your financial outcomes. Having a solid financial plan plays a huge role in helping you take control and avoid that graveyard spiral. If you enjoyed today's content, please subscribe to our channel and ring that bell so you never miss an episode of relevant, helpful information. You can find us on Instagram and Facebook, Twitter, and of course YouTube, and always feel free to visit our website, omnistarfinancial.com. I'll see you next time on We're Talking Money.

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