Debt Ceiling + less fiscal deficit + increased inflation + crisis in China = A roaring bear¡

On Thursday afternoon, the President of the United States, Joe Biden approved a law so that the Federal Government can continue to function for 2 more months, thus avoiding the partial closure of the Government that I mentioned could happen. However, everything seems to indicate that the "fight" would be won by the Republicans since they are talking about an infrastructure package closer to USD1 trillion (versus Biden's original plan of USD2 trillion), as I wrote in the article of "Letter from Mr. Market" of July 24th. However, the interest of the Democrats is no longer apparently to defend Biden's original plan but to spend at all costs with the proposal a few months ago of the "Education, Anti-Poverty and Climate Change" plan for USD3.5 trillion. Republicans have signaled for weeks that they will not approve that level of spending and neither will the more conservative section of Democrats. Regardless of when and the final amount, the most likely scenario is that US fiscal spending is much lower than Mr. Market has in his estimates (the expectations of many analysts and investment banks were / are more optimistic), which it is already having an impact on consumption, investment and expectations.


With a lower fiscal deficit, the government's need for issuance will be less and that explains a large part of the fact that the beginning of the tapering is in the FOMC in early November (rather than the achievement of its surpassed inflation goals or those of employment), as Powell implied a few days ago.


Regarding the debt ceiling, Yellen pointed out this week that the "x" date for the US Treasury to run out of funds would be October 18 (1 to 2 weeks after the estimate that I indicated in this medium).





The Democrats theoretically have the votes to approve suspending the "debt ceiling" without the votes of the opposition party, in a legislative process called "reconciliation" in which they only need a majority of 1 vote out of 50 in the Senate. However, if it is used, the estimates say that they would not reach the "x date" indicated by Yellen, so the risk of default of the Government of the "risk-free" rates, although still low, grows with the passing of the days (the deadline for the market is Friday of next week).


For now, as the October 18th date given by Yellen approaches, the risk perceived by the market of a debt default will increase and also the risk of a drop in the risk classification of any of the main agencies as Fitch Ratings warned on Friday, October 1st. Republican leader Mitch McConnell today sent a harsh letter to Biden reminding him that the current position of the Republicans was known and was warned months ago by them, and that they will not compromise not to increase the debt ceiling as long as they follow very high proposals. spending, which are having an impact on inflation. Biden for his part today did not calm down much and mentioned in the morning: "In the days ahead, even before the default date, people may see the value of their retirement accounts shrink. They may see interest rates go up, which will ultimately raise their mortgage payments and car payments". Such a comment in a context where markets are already nervous can have unintended consequences such as mutual fund and deposits withdrawals (which does not calm, but rather exacerbates the crisis).


Regarding inflation, at least in the short term, the indicators that I manage would be showing inflation that would remain high in the coming months (where, for example, the worst drought in Brazil in 1 century does not help; however, this expectation of high inflation could change radically and quickly with a financial crisis or sudden recession), but the growth figures I have show that the 3Q and 4Q numbers would be lower than what the market expects. Therefore, we are getting closer and closer to a stage in the largest economy on the planet of stagflation, that is, low growth and high price increases, as the renowned economist Nouriel Roubini has pointed out for some months.




FEPIC leading indicator of US economic growth vs GDP growth