Too High to Buy, Too Strong to Sell

What a strange trip it’s been for the markets over the past three weeks. After the S&P futures spiked to an all-time high of 1723.75 on September 19th after the Fed decided to keep the printing presses running by not tapering asset purchases, the index reversed course and proceeded to sell off to 1640.00 on October 9th for a total dump of more than -83 handles, or -4.8%. Since that 1640 low the S&P has come roaring back to 1694 in early trading on October 11th… a +50 point rally in a little more than 1 regular hours trading day.

Obviously the government shutdown and debt ceiling debate caused uncertainty in the markets as our politicians in Washington essentially misled the public that the US would default on its debt if the limit was not raised. The notion we would default on our debt by not raising the debt ceiling is 100% inaccurate and in my view a complete lie to the American people.

To put this into perspective the Debt Ceiling has been raised 16 times since 1993 when it was a mere $4 trillion. It is currently $16.7 trillion and it is going to be raised again. Both parties have used the debt ceiling in the past as a tool to extract concessions from the other. This is not just a Republican or Democrat tactic. The party in control tends to use it to their advantage.

The claim by President Obama that the debt limit has never been used before to extort concessions from a sitting president is 100% FALSE. It is also 100% FALSE to the claim that hitting the debt limit will force a US default on its debts. The government takes in over $250 billion a month and the US debt service is between $30-$45 billion depending on the month. The default sound bite is simply a scare tactic used by whichever party is in control at the time. The government can prioritize payments to debt service although the current administration has rejected that option because it would take away their Armageddon style sound bites. Since much of the debt service payments would go to China that option would not be well received by the American people.

The bottom line is the US would NOT default on its debt if the debt ceiling was not raised; rather Congress would be forced to create a balanced budget where our government spends no more than it generates in revenue. Is this such a bad thing?