The Debt Ceiling Stakes Are High Kind Of

The debt ceiling needs to be raised again or the US will default on its obligations and the financial world will literally collapse. This game of chicken plays out around once a year which is how often Congress needs to come back to the trough for whatever they are spending money on. I am not going to judge the merits of that spending. Don't need another minefield in my life thank you.

 

I believe there is a very near 0 chance that we will not increase the debt ceiling. Joe can bluster all he wants, but if he doesn't raise the ceiling it will mark him as the worst president in US history to allow it to happen. Politically it is suicide which doesn't give him that much room to maneuver no matter how much he shakes his hand at Congress, no one will remember Congress. They will remember Jo Biden as the guy who collapsed the world economy.

 

I don't mean that lightly either. Over 60% of nation states reserve capital is in US dollars. So if those T-bills are no longer good, 60% of the sovereign balance sheets in the world now have a big problem. Now Wall Street has bought their hedges in case of this unlikely event. They will always have a plan B, but what about your regular old tax-paying American?

 

A natural question comes up in these sorts of scenarios which is how do you play the transition. What assets do you want to own if we default?

 

Well you guessed it, real estate is always great because it has intrinsic value no matter what the currency is doing. It's a lot harder to make a house than another virtual dollar so real estate will protect wealth very well along with hard assets like gold and commodities.

 

In the worst case people will say bullets because it would cause a lot of social disruption. If you look at the countries that have had this happen, it didn't go so well. (The United States has done it twice!) Think Argentina (couple of times), Greece, South Africa, Venezuela, and many more. Most of them have done it multiple times. Now many of these countries come back out of it, but there is a period of massive instability that every sitting office will want to avoid on their watch.

 

It's not all doom and gloom. It's not likely to happen anyway so we'll just keep on adding zeros for now. The Consumer Price Index (a qazi-metric for determining inflation based on asking a specific set of government types) is down this month! April was at 4.9%, down from 9.1% the previous year. The interesting turning point here is that the Fed Funds rate (5.25%) is now higher than the CPI which should mean even further shrinkage of inflation. I'm looking at you, George Costanza!

 

Lord Powell must be feeling quite pleased with himself. Let's hope this keeps up and he can declare 2.5% inflation victory by the end of the year.

 

Mortgage rates are hovering in the 6.6% range as of this writing. It's not the cheap money of yesteryear, but it's not bad. People will get used to the new normal.

 

Austin is still sitting pretty in relative terms to the rest of the real estate market. Texas still has some of the highest growth and Austin has the highest in Texas. That being said, rents in Austin have fallen 14% which is the highest in the nation, but this is after a large run-up (20%+) so it's not that much of a surprise.

 

Prices are back to their cyclical nature but lower than they were last year, again which is no surprise because of the inflated cheap money craze that gripped all markets. We are coming back to a long-term trend line. There may be a little more downside in the future like you see in 2019, but without more financial trickery we should come back to that predictable cycle we see from 2013 to 2019, as long as they keep raising the debt ceiling. That pill may have to be swallowed at some point, but it too shall pass.

 

As always, question everything, and don't take suggestions as absolutes. These are written from a perspective of our experience and offer our insight however limited. We're not perfect and get things wrong, but not on purpose.