QUESTION: is a debt default by the US government likely? If so, what to do about it?
ANSWER: Probably, yes, so “risk-off.”
For a long time, I thought the Republican leadership in the US congress were crazy, but not so crazy to default on the government debt. However, when I consider how the crazies, and their supporters are now rationalising the January 6 US Capital attack suggesting pardons, et cetera, it isn’t obvious to me that debt default would be off the table. Why? Damaging the Biden administration and winning the MAGA supporters is the aim of Republicans and compared to invading the US Capital and the attempted insurrection, defaulting on debt is trivial.
The less likely alternative to default is massive upheaval by pushing all the way to the edge of default which will leave markets thinking it might just be next time.
The least likely outcome is the Republicans say sorry, and just do what every previous congress has done and increased the debt ceiling.
The solution for investment managers is go “risk-off” at least until we know whether default occurs in the next couple of weeks because even if it doesn’t, there isn’t a likely bounce for the reason outlined above and the general valuation of stocks.
However, even if you go risk off and the US government defaults, you might still have a problem depending where you put your money. What is considered going to cash is often exposure to 4-week US Treasury Bills: see most broker cash accounts; money market funds; “narrow” banks, etc.
DISCLOSURE: TurnerStreet Advisors went risk-off and into cash on 19 May 2023.