Extension Tension – The Next 90 Days

Congress wisely chose to not deploy the “nuclear option” of defaulting on our nation’s debt obligations by agreeing to a short term funding bill, as well as lifting the debt ceiling – albeit temporarily. Specifically, government spending levels have been funded through January 15, and the debt ceiling has been suspended until February 7. Congress also set target dates for budget negotiations, with the first on December 13, less than 60 days from now.

In the meantime, there is no limit on new debt the government can issue between now and February 7. Current U.S. total public debt outstanding is $16.738 trillion as of Sept. 30, 2013. If history is any indication of future results, we can expect that our country will be an additional $1 trillion in debt by the time the February 7 expiration of the suspended debt ceiling arrives.
The chart below shows a simple trend line of our nation’s public debt extended Jan. 31, 2014. For comparison purposes, the circled area on the chart reflects the six-month period in 2011 when we last encountered a dysfunctional debt ceiling debate, resulting in the U.S. losing its Standard and Poor’s AAA credit rating for the first time in history. The trajectory of the debt over this time in 2011 mirrors the trend line. As addressed in early commentaries, this trend is not sustainable. The cooling-off period we are now in provides an opportunity to make some progress in addressing this issue, but our expectations should be contained.

chart 1

Where to from here? We are in earnings season, when corporations are disclosing their earnings for the third quarter of 2013. More importantly, they are providing forward guidance. Taking advantage of the government shutdown and the kick-the-can-down-the-road resolution, corporate CEOs may lower the bar on what should be expected of them, setting up Q4 earnings results to exceed expectations after the first of the year. This environment would also suggest the Federal Reserve will not start tapering until well into 2014, providing a continued tailwind for the stock market. Household net worth is at record levels, and Christmas is coming. Let’s not let the Grinch steal Christmas.

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