Transcript:
Tom Vaughan:
All right, I always like to start off the show with a summary of what’s happening for the week in the stock market, specifically. And this has been a really incredible week, really different. We’ve had this underlying issues that are both positive and negative, that have been going on all year. We have supply supply chain issues, we have really labor shortages with lots of unemployed, but people aren’t willing to come out to work at the rate that needs to happen in order to kind of fill the demand. We have great earnings growth, we have low interest rates, and we have lots of things on the positive side. And even a couple of weeks ago, I did a positive Friday, and all those things are still applicable. But this week is a little different.
One of the issues that’s come up this week, I think supersedes everything else, and that really has to do with the raising of this debt ceiling. And so obviously, what happens is the US government, as well as most other governments, are running at a deficit, and so what that means is we’re spending more than we’re bringing in and revenue. And so we have to keep issuing new bonds in order to function. And it works out pretty well. Our treasuries are very, very much so in demand worldwide. And so we’re able to continue to put out treasuries. Rates are really low, so the US isn’t having to pay huge rates on a lot of these different bonds they’re putting out which is great. And that’s all fantastic.
Except for in 1917, they put into place a thing called the debt ceiling limit. And it’s a function that is designed so that Congress and the President couldn’t overspend. They have to come back to Congress in order to get an approval to raise the debt ceiling. Which makes some sense. Except for the fact that in 1974, we actually put in a formalized budgetary process, where a budget is created, and everybody spends against that budget, and we no longer need the debt ceiling. But, the fortunate part of this is that the debt ceiling has been discovered as a fairly powerful political weapon. And so that’s what’s happening here.
So, on Monday, they pushed through a bill to the Senate, from the house, to raise the debt ceiling. None of the republicans voted for it. And in this particular case, there needs to be at least 60 votes in order to get the debt ceiling increased; didn’t happen. And so the market has been struggling with this all the way. We were told this week also by Janet Yellen, that we have enough money until the 18th of October. After that, we might start defaulting on some of our debt. This would be a really, really bad outcome. And everybody seems to know this, with the unemployment spike that would happen and all of the things that you can’t even imagine that could happen from a default. And yet, we’re still kind of careening towards this date of October 18. The Democrats have a couple of different ways that they could do it. And there’s been a lot of talk about it. They’ve been talking about printing a $1 trillion coin. Janet Yellen said that that wasn’t an option. They’ve talked about basically just ignoring the debt ceiling, either Congress is saying or ordering to ignore the debt ceiling, or the president actually using his authority. Neither of which is deemed as constitutional, so those are not particularly good issues. So the two paths that seem to be there, at least in my opinion, One: is that they’re trying to push through this reconciliation bill. Reconciliation bills only take 50 votes, so theoretically the democrats can do that. But, the bill is super complicated. It’s super controversial, even within the Democratic Party. And so they’re having trouble getting it together. And, of course, they want to possibly put the debt ceiling increase in that bill, and then push it through with a 50 person vote in the Senate. And so, I believe at the moment that the Democrats are using the timeline of the debt ceiling, as pressure to try to get their own party to go forward with this bill and get together and make something out of this. And Tuesday, Biden mentioned that he didn’t want to do the other path, which is changing the filibuster, specifically for the debt ceiling.
So in other words, they could say, “Alright, we’re going to change the filibuster for one issue here,” which is that if we have a debt ceiling issue, only 50 people need to vote, one way or another to make it pass. And that would give the Democrats the ability to then change or eliminate the debt ceiling. But on Tuesday, Biden said he didn’t want to change the filibuster. So that might be political speak, just trying again put pressure on the Democrats, but it’s probably the easiest path to solve this problem, so I’m hoping that that’s still open, especially as we get close to the 18th.
What has happened here for us: we saw a fairly good downturn here throughout September. Roughly 6% of the market has been down across the month, for a variety of issues, but mainly because of this debt ceiling. And so what’s going to happen going forward, at least in my opinion, is we’re going to keep getting closer and closer to the 18th, and the market is going to get more and more nervous now. The market’s up today, but it’s been up quite a few times so far in September and then fallen apart. So there is this group that wants to “buy the dip” and come in and buy these things at this point in time. But if we get to that 10, to the 12th, or the 14th, or 15th, and there’s still no debt ceiling resolution, and we’re still really have no clarity as to what is going to happen, the market is going to continue to come down.
And the reason is, is because if you understand how money managers work, and these are the big money pools, they work predominantly on risk control first, and second would be rate of return. And so if you have a situation where there’s a possibility of a cataclysmic event coming, where they could default on the debt here in the US, you have to pull back some of the risk. That’s just how it works. And so that’s what we’re seeing. We’re seeing these big money managers and such pulling back on risk, mainly by reducing their stock market exposure, which of course, we’re seeing in this drop in the market as a whole. …This is something we’ve done. We got more conservative in our investing. We hedge some of our pieces, and moved into more defensive posture, for the same reason. We’re managing the net worth of 270 households, and we’ve got to be careful with that, and so we’re slowly but surely responding to this. And again, we’ll continue to get more defensive as the market continues to deteriorate, if it does.
There’s always a possibility they solve this debt ceiling tomorrow, or very soon, and things would go up. Now, let me describe what would happen. So, when you’re a money manager, and you take money off the table, and you take money out of the stock market, you are probably competing against some stock market index, which is fully invested. So they come along and they solve the debt ceiling, you’re going to see a big jump, and it’s going to move very quickly, and then all of those money managers who have money on the sidelines now are going to jump back in, because they need to get that comparable against the stock market indexes.
And the same thing would happen for us. We would move our defensive positions back into the normal positions that we normally have. And I think you’re actually gonna see some explosive growth, and see a lot of recovery come right after the debt ceiling is resolved. And so, maybe that gets us back even to an all time high. And sometimes you need these downturns to kind of create the next big up term. You get enough momentum buying coming in at these low points, and hopefully, that can turn things around.
So the real question is, “how fast will they solve the debt ceiling?” My gut feeling is, looking at the way things are going right now, it’s going to be closer to the 18th than it is closer to Monday, as far as that goes. So it really, really interesting timeframe to watch, and it’s just a different situation altogether. It is also important to understand that this can be solved really very quickly and very easily, and so that’s a good thing. This is not a situation where the US can’t pay their debt; that’d be a different story. The story of this Evergrande, a big real estate company in China with $300 billion in debt: They’re having trouble paying their debt. That’s a totally different deal. The US is not having trouble paying their debt, it’s just this political aspect of what’s happening. But our …political system right now is really divided. So that’s going to be the big challenge, is just trying to figure out what happens there.
So, hang in there. I think there’ll be some opportunity. We have some defensive positions now, that are out of the market, that if things come down, we can come back in. And if things take off, we’ll just get back in. I think, for most of us, we’ve made an awful lot of money the last two or three years. And so making sure that we don’t lose a big chunk of that in an actual default, is probably prudent to get a little bit conservative here, as far as that goes.
I do not normally advocate that. I am a huge advocate of staying in, making some small adjustments. So, if you have a 60% stock exposure, kind of staying at 60% stock exposure, because getting in and out is a really a fool’s game. This is a different situation. That catastrophic nature that could happen in a debt default is worth taking that down to maybe 40% exposure, and having that other 20% be in some like ultra short term bonds or something along those lines. So anyway, …it’s a totally different outlook than we normally have as far as that goes, but this is a pretty unusual situation. And I’m not sure that they’re not going to be able to get it all together in time so let’s just be a little bit cautious. Sort of like visiting the Grand Canyon: You get near the edge, that’s not the time to be dancing around and getting reckless. That’s the time to be cautious as far as that goes. And so as we get closer to the edge, I think it’s time it’s just be cautious doesn’t mean we’re gonna fall off the edge. And again, I think there could be some opportunity once they do resolve this.
Anyway, that’s what’s been happening this week. I find this very, very fascinating right now. I look forward to really talking to you about this again next week.