Red Flag Warning
Two identifiable dynamics may signal significant market shifts imminently:
1. The US debt ceiling will be debated soon and signs point towards a messy outcome.
2. Recent economic data have been weak, confirming our thesis that US economic growth is slowing and will not be reversed until a recession is acknowledged.
Excessive debt has a way of catching up with people and institutions, and the first true test for the US government may be at hand. Congress was expected to raise the debt ceiling by October or else Treasury could not fund all the government’s programs and current obligations. Yet talk of Trump tax reform in 2016 may have given taxpayers incentive to defer their liabilities. As a result, Treasury received about 3 percent less in revenues than expected, accelerating the timetable to debate and raise the debt ceiling.Progress on raising the ceiling will unlikely be made in August, as Congress is in recess.
Meanwhile, the political atmosphere in the Republican Party has splintered further under President Trump. The conservative wing, which tried to block raising the ceiling in the past, has signaled it will again dig in its heels to force the government to begin balancing its budget. Though it caved in the past, the conservative caucus’ resolve should not be doubted this time, judging by its will and ability to so far block health care reform that does not absolutely repeal the Affordable Care Act.
Treasury Secretary Mnuchin has stated that the Department has options if Congress does not raise the ceiling, but has not been forthcoming with specifics. If a cash flow shortfall develops in the fourth quarter, principal and interest payments on Treasury debt would be prioritized so that the government would avoid default.
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