I want to address the debt ceiling charade debate that’s currently going on.
If Congress doesn’t get their act together and we default on our debt, it would be absolute chaos.
Over the past month or so I’ve often been asked, if we do default, what will happen? How can we position our investments to protect against this risk?
It’s a tough question to answer because every asset class would be affected.
Stocks would decline.
Bonds would decline.
Money Market accounts could “break the buck”, in other words, decline.
However, don’t lose sight of the fact that members in Congress have investments in the stock and bond market just like you and me. As Cullen Roche recently put it:
“Nothing gets Congressional attention like members of Congress losing their own money.”
It would be so chaotic that Congress would be forced to immediately intervene, and if they didn’t, the interest rate market would be such a mess that the Federal Reserve would have to step in and stabilize.
“In either case, markets almost certainly bounce back quickly to where they were before and then we all look around at each other and say, wow, that was stupid, let’s never do that again.”
At the end of the day, defaulting on our debt likely isn’t constitutionally possible anyway.
The President can invoke the 14th Amendment which has a clause stating that the “validity of the public debt of the United States… shall not be questioned”.
By most interpretations, that goes to say it would be illegal to default on our debt.
Even if one doesn’t agree with that interpretation, there are still other ways to solve the issue without Congressional approval (issuing premium bonds, coin seigniorage, and selling Treasury assets).
What hasn’t changed here is there is always a crisis.
Per the usual, my goal is to provide long-term perspective.
As we consider the debt ceiling crisis, it may be helpful to remind everyone that you, as a stockholder, own some of the best businesses in the world.
Are we to believe that people will change their spending habits over the next couple of decades based on the outcome of this debt ceiling debate?
Will less people go to Disneyland?
Buy fewer cars?
Fill their gas tank less often?
Go longer without upgrading their iPhone?
My opinion is there’s not much that can derail people’s desire to spend over the long term.
If that’s the case, then it seems likely that the earnings of great companies will continue to grow. And since stock prices generally follow earnings, it seems likely that prices will rise over the long term as well.
In the long run, consumer spending and smart management teams are what will drive corporate earnings, not our representatives in Washington.
Yet, every single time the government goes through this debt ceiling charade, the media wants you to think that it’s the end of the world as we know it.
With as much confidence as I can express, I don’t believe this time will be the end of the world either.
And that’s my opinion regardless of how this particular debt crisis pans out.
As they say, “Never let a good crisis go to waste.”
So, they’ll go on telling you exactly what this means for the market despite nobody having any earthly idea.
The Bottom Line
The real risk to us as smart, long-term investors, is not the debt ceiling itself, it’s making a decision to alter your portfolio out of worry, fear, or uncertainty.
That fear is, and always has been, a recipe for disaster.
Knowing this to be true and that earnings are historically likely to rise in the decades ahead, it’s easy to see that as frustrating as Washington is, it’s mostly a distraction from what will ultimately matter over the long term.
My advice is to follow this debt ceiling “debate” as closely as you want, or don’t follow it all, as long as you keep your resolve to stay the course.
Have a great holiday weekend!