Meanwhile, Still Lurking In The Background: The Debt Ceiling

The last time we checked in on the looming debt ceiling drama was – checks notes – 11 days ago.

Since then, nothing has changed.

Yes, America averted another government shutdown thanks to a last minute, bipartisan spending bill that Trump begrudgingly signed, but his extremely ill-advised decision to declare a national emergency means the atmosphere inside the Beltway is now even more contentious than it was earlier this month.

As noted previously, markets have become somewhat numb to recurring debt ceiling shenanigans. Brinksmanship around the issue is now a fixture of American politics and there’s every reason to believe this time will be no different, where that means it will go down to the wire only to be resolved with an eleventh hour deal that averts a technical US default.

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Debt Ceiling D-Day

That said, anytime Trump is involved there’s a chance something will go wrong. Even if you overlook his penchant for courting disaster and subjugating all other concerns to the dictates of an ego that’s even “larger” than he imagines his “brain” is, Trump is a political neophyte and his learning-by-doing approach to the presidency has a spotty track record (and “spotty” is a generous characterization).

Earlier this week, a sale of $39 billion in six-month bills met with tepid demand, a sign of investor angst about the presumed “x-date” in August. “Front-end investors continue to avoid the 6-month sector due to concerns about the potential drop-dead date for the debt ceiling being pinpointed there once more details are available on tax season”, Jefferies’ Thomas Simons wrote. Here’s a simple visual:

(BofAML)

Well, in the interest of staying out ahead of this (which is the exact opposite of the approach lawmakers generally take to the issue) we thought is was worth highlighting a couple of passages and visuals from a BNP note dated Wednesday.

The bank, like every other desk, expects the usual politically-motived procrastination and kicks things off with the following handy chart which is just a visual history of recent debt ceiling dynamics.

(BNP)

“The debt ceiling remains a powerful lever for negotiating spending priorities. Since 2013 Congress has suspended it on five occasions with progressively less brinksmanship, although it has continued to allow the Treasury to revert to using extraordinary measures for multiple months”, the bank writes, adding the obvious, which is that this time around, “the composition of government is a mirror image of the period of debt ceiling brinksmanship — Democrats now control the House and Republicans the Senate and presidency.”

(BNP)

The good news, from where BNP is sitting anyway, is that it appears Trump and Congressional leaders on both sides of the aisle are keen to avoid the kind of lengthy feud that might rankle markets and further undermine America’s perceived creditworthiness at a time when unnecessary fiscal largesse is ballooning the deficit.

Still, the bank thinks it’s unlikely that Democrats are just going to forgo a chance to wield an extremely effective negotiating tool altogether. “We do not expect House Democrats to completely give away the leverage that comes with the debt ceiling, especially with FY20 budget negotiations on the horizon”, BNP goes on to write, before delivering their prediction as follows:

We expect the negotiations to lift the FY20 caps to be fraught, with House Democrats likely to push for lifts to non-defense discretionary spending, which the president and Senate Republicans will likely oppose (the president’s expected FY20 budget resolution reportedly proposes 5% spending cuts across-the-board). Still, such negotiations and subsequent legislation have historically served as vehicles for debt ceiling suspensions, and we expect them to do the same this time around. We think the Democrats will likely use the debt ceiling to win some priorities on a budget deal, and vote for a suspension along with a continuing resolution or bipartisan budget deal in September.

Obviously, the presence of former fiscal hawk (and current man who wakes up everyday wondering how it came to be that he is now associated with ballooning deficits and the type of fiscal insanity that at one point threatened to manifest itself in the US spending as much as $30 million on a Third World-style military parade) Mick Mulvaney. Here’s a highly amusing excerpt from a recent Axios piece which serves to underscore how little thought has gone into this so far:

Before a recent Cabinet meeting, Mulvaney and Treasury Secretary Steven Mnuchin chatted about the debt ceiling, per a senior White House official. According to that official and another source briefed on the chat, Mnuchin said, “Democrats will give us a clean debt ceiling.”

Mulvaney “sort of giggled,” according the senior official. “Steven, no they won’t,” he added.

Mnuchin said Democrats wanted a clean hike last time; Mulvaney retorted that Democrats weren’t in charge then.

“Now they’re going to end up tying one of their priorities to the debt ceiling increase,” Mulvaney predicted to Mnuchin, according to the official. “You cannot assume that because they wanted something the last time, it’s exactly the same thing they want this time. … There’s not much consistency when it comes to this in politics.”

A source familiar with Mnuchin’s thinking told me, “The secretary is focused on raising the debt ceiling, but hasn’t expressed a strong preference for how it’s done. That’s up to Congress.”

Although we don’t normally say this, we’re going to have to side with Mulvaney on this one, at least in terms of “giggling” at Mnuchin’s apparent childlike naïvety.

As Vox writes on Thursday, nobody is particularly enamored with the idea of pretending this is something which can safely be put off until the last minute, but “even Democrats who don’t want to pick a fight over breaching the debt ceiling probably won’t lose sleep over the prospect of some transient stock market turmoil.”

Right. And that’s particularly true right now, because just like everybody who follows Trump on Twitter, Democrats are acutely aware that the president in part benchmarks his performance by reference to the Dow. Trump has repeatedly demonstrated that a falling stock market is something he can’t (and won’t) stomach. In fact, reports indicate he was in full-on panic mode late last year as US stocks careened lower on the way to posting their worst December since the Great Depression.

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Given that, you’d be forgiven for wondering whether Trump’s opponents might be willing to let stocks slide a bit on debt ceiling jitters in order to make him sweat.

Finally, if you’re wondering whether there’s been any movement at all to speak of on this, the answer is apparently “no.” Here’s another excerpt from the same Vox piece linked above:

The administration itself hasn’t yet come to the table with a formal request to raise the debt ceiling, and OMB is prepping some kind of plan to use the budget sequester to try to force House Democrats into cutting domestic spending. Democrats are reluctant to try to weaponize the debt ceiling but aren’t going to want to give in to Republican demands on spending levels, either.

The overarching message here is that investors shouldn’t ignore this, precisely because everyone on Capitol Hill seemingly is.

Then again, if the US were to default, I suppose Trump could just resort to the same “classic” tactics he used in his dubious business career by blaming the country’s creditors and subsequently suing them.