ARTICLES

The US Debt Ceiling

America is like a rich person who has fallen on hard times. She has a penchant for expensive overseas products which she can no longer afford, she has an aversion to hard work, and she is living off her credit rating.

Especially since World War II, the US government’s debt has been climbing steadily. This steady rise has occurred under both Republican and Democrat administrations. Perhaps the best way to get a feel for this is to go to the web site: https://www.usdebtclock.org/

This site maintains a real-time picture of the national debt and breaks it down into its various components. It is truly horrifying. The total debt is now $31,8 trillion – and rising rapidly.

In an effort to limit the borrowing, the US Congress established legislation in 1917 to place a ceiling on the debt. Since then, it has been necessary for congress to raise or modify that debt limit more than one hundred times – in other words, roughly once a year. In recent decades and especially since the Trump presidency, politics in America has become excessively partisan making it increasingly difficult to achieve a bi-partisan agreement on raising the ceiling.

However, experience shows that eventually, and often with some hair-raising brinkmanship, the ceiling is always raised. This is because, when push comes to shove, it is not in the interests of either party to be the cause of America defaulting on its debt repayments.

Right now, America’s national debt is more than 20% of its gross domestic product. This is one of the highest debt levels of any country in the world. In 2011 Standard and Poors down-graded US debt from their highest rating because of this.

In recent years, America has had to increase debt substantially to pay for COVID-19 and the war in Ukraine among other problems. Prior to that the government had to spend heavily to counter the impact of the 2008 sub-prime crisis.

In this regard it is important to realise that these extremely high debt levels are sustainable partly because of the US dollar’s role as the international currency of choice in most trade and central bank reserves worldwide. There is always a strong demand for dollars and, in our opinion, the recent reporting on efforts to replace the dollar as the currency of choice for international trade are almost certain to fail.

Janet Yellen has said that the current debt ceiling is only sufficient to allow the US government to meet its obligations until 5^th June 2023. We expect therefore that an agreement will be reached within the next two weeks at the most.

In the meantime, and until the debt crisis is resolved, it has the tendency to unnerve international markets. The S&P500 has alternately been depressed by the prospect of a debt default and then boosted by the prospect of a bipartisan agreement.

This can be seen in the progress of the S&P500 index, which has been testing resistance at just above 4170 and on Friday last week closed at a new cycle high of 4205 on the strength of new hope that a deal is imminent. Consider the chart:

As you can see, the S&P is repeatedly testing the 4170 resistance level which indicates extraordinary bullishness.

The negotiations around the debt ceiling will inevitably be a temporary disruption to the market that will almost certainly be resolved within the next few days.

The far more important consideration is the amazing residual bullishness which is evident in this market. This bullishness has characterized the current bear trend from the beginning - and continues, despite that fact that most analysts are now predicting that the US economy will fall into recession probably before the end of this year and certainly during 2024. The persistent yield curve inversion is the strongest evidence of an impending recession. And there is growing evidence that the cumulative impact of the Federal Reserve Bank’s 10 interest rate hikes totalling 5% is having an impact – seen in the tame 1,1% growth in GDP in the first quarter.

The bulls appear to be taking the position that, if there is a recession, it will be relatively short-lived and that the Fed will be reducing interest rates again soon. This idea is bolstered by the fact that 2024 is an election year and the incumbent Democrats will certainly not want to be fighting it in the teeth of a recession.

Our view is that core inflation in America (which excludes food and energy) will continue to prove very sticky and the Fed will find it almost impossible to reduce rates until it gets down to the target level of 2%. So, we are expecting the recession to be both longer and deeper than is currently being discounted into the S&P500 index.

This, in turn, implies that the current bullishness on Wall Street is misplaced. Note that the JSE Overall index made an all-time record high on 27^th January 2023 and has been trending down since then.

Post Script

As anticipated, on Sunday, the Democrats and Republicans reached an agreement on raising the debt ceiling. Both sides gave some ground, and both got some wins. The important point is that the debt ceiling is lifted for 2 years and so should not become an issue again until after the 2024 elections. Altogether, Wall Street investors, both bulls and bears, appear to have placed far too much emphasis on the importance of this event – which has happened more than 100 times in the past and has always been resolved. 

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

PDSNET ARTICLES

The US Jobs Market

International investors who trade on Wall Street are generally negative about any good news from the economy because it tends to make the monetary policy committee (MPC) more hawkish and less likely to reduce interest rates. The opposite is also true. But there comes a point where bad news is so bad that investors begin to fear that the US economy is heading

Jackson Hole

Once a year in late August central bankers and academics congregate in Jackson Hole to discuss the state of the economy and consider the way forward. Traditionally, the Chair of the Federal Reserve Bank (“the Fed”) addresses the meeting and gives direction to its thinking on monetary policy in the US. This year, the comments of Jerome Powell resulted in the

Choppies

Choppies is a supermarket chain which operates in Botswana, Namibia and Zambia. It is listed both on the Johannesburg Stock Exchange (JSE) and on the Botswana Stock Exchange (BSE). Notably, the company has resisted the temptation to re-enter the highly competitive and cut-throat retail market in South Africa, having exited that market in 2020 due to sustained losses. Despite

Gold Resistance

All investments throughout the world can be ranked on a scale from high risk to low risk. As a general rule, in the world of investment, risk and return rise together. In other words, as the risks in an investment increase, so does the return necessary to attract investors.

At the one end of the scale there are very low risk investments

Sibanye takes off

We have been writing about Neal Froneman and Sibanye for years now. Beginning in 2013, Froneman assembled the Sibanye group over a period of 7 years, buying up mining operations both in South Africa and America at bargain prices. Initially he bought precious metals producers, but more recently he has been diversifying into base metals like zinc and lithium which

The 16 Year Bull Trend

Since the Second World War, the stock markets of the world, including the JSE, have always tended to follow the New York Stock Exchange (NYSE) - and the NYSE is best measured by the S&P500 index (S&P) of its 500 largest companies.

For this reason, we believe it is important for private investors to constantly

CA Sales Revisited

Retailing in Africa is difficult with many of our leading retailers having attempted to open stores in countries to the North of us without notable success. These countries are often unstable and volatile politically. Getting adequate stock to branches has proved problematic and expensive.

It is not surprising therefore that a company has been

Bluetel

Bluetel (BLU) is a company involved in pinless top-ups, prepaid electricity, ticketing and universal vouchers. As such it is a company with substantial repeat business from existing customers. This type of business model is attractive to investors because it implies minimal working capital and strong cash flows.

Bluetel’s purchase

The Debtors' Book

A BIT OF HISTORY

Many years ago, in 1982 when I started this business (which became “PDSnet”), I ran advertisements in both the Rand Daily Mail (RDM) and in the Star – which were the two most widely read newspapers in Johannesburg at the time. At that time, we were a very small business and had no credit rating at all. Despite this the RDM immediately

WeBuyCars - Results

The financial results of companies show how profitable they are and give a good indication of their share’s risk and potential return. WeBuyCars (WBC) is a recent listing which came to the JSE on the 11^th of April 2024. Unlike other listed motor vehicle companies, it is a company which specialises in the purchase and sale