JP Morgan says it processes between $6 and $7 billion of Social Security payments, food stamps, and veterans benefits every month.
CEO Jamie Dimon says his bank will keep processing those transactions, even if government reimbursement is not forthcoming…
“We were going to fund it, despite the fact that we weren’t being paid by the government, because those people have to eat,” Dimon said.
Yes, JP Morgan can afford to float those payments — for a while. And it’s nice that the bank plans to make an effort to help Americans if the unthinkable happens and the U.S government starts running out of money.
But the fact is banks around the world have already started game-planning U.S. default.
Jamie Dimon also said: “… it would ripple across the global economy in ways you couldn’t possibly understand.”
Co-CEO of Deutsche Bank Anshu Jain said, “Once you miss payment on U.S. Treasury debt… there are legal ramifications, which we believe are probably incurable.”
PIMCO CEO Mohamed El-Erian stated: “You will freeze the system.”
Joel Prakken, an economist at forecasting firm Macroeconomic Advisers, explained, “Hitting the debt ceiling even briefly could cause the next recession.”
Yep, Congress is coming right down to wire on an incredibly important issue. And there is no reason for it — except stubbornness.
So my question is: Why aren’t stock prices a lot lower?
It’s a reasonable question, considering the potential damage of default.
Parts of the U.S. government have been shut down for two weeks. And Congress still hasn’t figured out how to resolve the debt ceiling problem, let alone pass an actual budget. In fact, Congress hasn’t passed a budget in almost five years!
But then, if they did pass a budget, they wouldn’t be able to hold the American economy hostage every time one of their short-term debt ceilings approaches.
Of course, the U.S. government is designed to be dysfunctional. It’s supposed to be hard to get new laws passed.
The idea that a vocal minority like the Tea Party can force the majority to negotiate is exactly what Jefferson and his crew intended.
I can’t say our Founding Fathers would approve of threatening default to force negotiations, but it’s not the first time we’ve been here…
A Dumb Market?
As I wrote last week, as the 2011 debt ceiling fight went down to the wire, stocks got killed:
Trouble began the week of July 25, 2011. The S&P 500 was around 1,345 at the time. Over the span of 12 trading days, the S&P 500 had plunged 226 points, to 1,119. That is a massive 16.8% decline — in just 12 days.
There were two days where the S&P 500 was down over 50 points and the Dow Industrials were down 500 points.
Today we are at the limit.
The U.S. officially starts the default countdown tomorrow, October 17.
And yet, stocks haven’t sold off much at all…
After the 2011 debt ceiling issue was resolved, the S&P 500 stocks launched 27% in six months.
So perhaps the relative strength during this go-round is because investors don’t want to miss a similar ramp job…
Or it could be that Wall Street no longer takes Congress seriously.
Most likely it’s a combination of the two — and frankly, that has me a little worried.
A Done Deal?
Right now, it seems like investors are all leaning the same way. They are tuning out the debt ceiling fight on the assumption that a deal will get done.
But what if it doesn’t?
That could lead to a stampede out of stocks. And it’s not like we haven’t been warned.
The U.S. hits its debt limit tomorrow, October 17.
At that point, it is no longer legal for the Treasury to sell bonds.
That doesn’t mean we immediately stop paying the Chinese the interest we owe them for the Treasury bonds they own… but that day could eventually come.
Or there would have to be other painful cuts, because we have more obligations going out than tax receipts coming in.
At some point, the decision would have to be made on whether to mail Social Security checks or pay China…
At this rate, the Congressional Budget Office says doctors treating poor people won’t get paid after October 30 as the government tries to save money.
By November 1, military paychecks will stop going out on time.
Yes, we want spending cuts. Yes, we want America to live within its means.
But this isn’t the way to do it.
Until next time,
Until next time,
Briton Ryle
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
