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Don’t Be Fooled By “Debt Ceiling” Tailwinds

by | May 3, 2023

To keep my sanity, I’ve turned back to my Kindergarten roots. 

I’m designing my own coloring book that has the Federal Reserve as a theme using AI image generator Midjourney. 

For example, here’s Fed Chair Jerome Powell literally asleep at a wheel. I’m sure my daughter would find the perfect colors for the car, the tire, and Powell’s tie.

I’ve also got a few images of Janet Yellen that I’ve developed… 

Here is the Treasury Secretary burning down a regional bank…

Federal Reserve May Meeting

I know what you’re thinking…. I’m being a little too hostile to our financial leaders. But with our current regional banking crisis and the ongoing debt ceiling drama, I can’t help but wonder how and why they still have jobs.

Today, in the Federal Reserve May meeting, the Fed raised interest rates by 25 basis points – despite the fact that it has broken emerging market economies, the United Kingdom’s financial stability, the cryptocurrency markets, and now our regional banks. 

Consider this… the Fed is still raising through all of these concerns because inflation is considered the bigger threat. 

But that’s not even the biggest challenge facing us today.

The Federal Reserve May Meeting: Yellen, The Debt Ceiling, and False Stimulus

Last week, Treasury Secretary Janet Yellen warned that the U.S. government might run out of funding by June 1. 

That’s a problem, right? It seems that all that stagnating economic growth hasn’t fueled a big jump in tax revenues. 

For the last few months, the government has engaged in Extraordinary Measures to address the debt limit set around $31.6 trillion… 

Extraordinary Measures sound important – tactical – almost grownup in the approach. 

In reality, they’re just stuffing a bunch of IOUs into government pension programs and prioritizing payments to other places. 

It’s possible that June 1 isn’t the date. It might be sooner. 

This is why there’s so much urgency around getting a deal in place. 

The Republican majority in the House has passed a debt ceiling agreement that includes spending cuts to a wide variety of programs that saw a big increase in spending in the last few years. 

Democrats don’t like to cut spending. They never do. 

So, everyone is focused on gold and silver and three-month bond prices, instead of focusing where they should. 

That’s the Treasury General Account (TGA).

The TGA has been the tool that the Treasury Department has used to keep funding programs. 

In fact, back in January, Bloomberg warned that the Treasury Department’s debt ceiling efforts would hurt the Federal Reserve’s tightening prospects.

Federal Reserve May Meeting

This proved correct. The Treasury Department has been operating a government checking account with the Fed… 

Bank of America (and me) predicted at the time that the Treasury’s cash positions would help neutralize the Fed’s efforts at tightening. 

And it’s hard to look at the S&P 500 right now and not see a situation where QT isn’t making the expected dent. 

So, what happens if we reach a debt ceiling agreement?

The TGA – which has been acting like a backdoor stimulus – goes away. And we know that liquidity (particularly from central banks) has been a core driver of performance in these markets. 

I’m very cautious about predictions that suggest a debt ceiling solution would lead to a sustainable rally. 

In my view, the opposite holds true. The government will again start to print new bonds – which could draw money out of the equity markets. 

We could see further increases in rates (yes, that’s a thing), and the Fed isn’t done slashing its balance sheet. 

We’ll continue to monitor this debt ceiling crisis… 

And we’ll follow momentum based on the shifts in the wind.

To your wealth,

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Garrett Baldwin

*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk. 

Market Momentum is Red

Momentum remains very red, and we continue to see range-bound trading between short-term overbought and oversold conditions. Markets are selling off, and finding a bid in low volume hours. Following the Fed’s decision today, the market will now turn its attention to the Friday jobs report and Apple earnings after the bell Thursday. 

WRITTEN BY<br>Garrett Baldwin

Garrett Baldwin

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