Plancorp’s CEO, Chris Kerckhoff, joins the show for a live recording at the Wealth Management EDGE Conference.
Listen now and learn:
- Why the debt ceiling was originally created
- The three most likely scenarios in today’s debt ceiling standoff
- How to think about investing
Listen Now
Show Notes
Recording live from Hollywood, Florida at the Wealth Management EDGE conference, I speak with Plancorp CEO Chris Kerckhoff about the three most likely outcomes from the debt ceiling debate in our nation’s capital.
Chris and I attended the conference to celebrate our firm, Plancorp, being awarded the RIA EDGE 100. The RIA Edge highlights advisory firms that are growing while providing outstanding service to their clients.
Here are my notes from our conversation.
What is the Debt Ceiling?
The debt ceiling was instituted in 1917 to provide more flexibility to finance the United States’ involvement in World War I. Prior to the debt ceiling, Congress directly authorized each individual debt issued.
Can you imagine if today’s Congress had to approve every single Treasury bond issuance?
Treasury securities are offered multiple times a week, so naturally, it would be a nightmare to keep our government funded.
The Second Liberty Bond Act of 1917 removed the need for the individual approval of each bond issued, but it also introduced limits to the total amount of money the United States government could borrow to meet its existing legal obligations.
The debt ceiling is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations.
Those obligations include paying interest on the national debt, Social Security and Medicare benefits, military salaries, tax refunds, and other payments for the continuation of public goods and services.
The debt ceiling is different than the budget, which Congress passes every year.
The budget includes spending on these items I’ve just mentioned as well as many others.
Congress also taxes people to pay for all that spending. In years where the government spends more than it takes in from taxes and other revenue, it increases the federal deficit, so the government needs to borrow money to continue paying out what Congress has already OK’d.
The debt ceiling does not have anything to do with authorizing new spending commitments – that’s the budget. The debt limit simply allows the government to finance legal obligations that Congresses and presidents of both parties have made in the past.
3 Potential Outcomes for the Debt Ceiling Today
There are an infinite number of potential outcomes, but we talked through what we felt are the most likely outcomes in a worst-case, middle-case, and best-case scenario.
These possible outcomes don’t impact the way we are managing portfolios because we build portfolios based on our clients’ financial plans. Our financial plans incorporate historical levels of market volatility along with losses occurring with a similar magnitude and frequency as they have in the past. As a result, we don’t actually need to predict how things will play out.
But the exercise is useful in setting expectations and creating a long-term investing context to the debt ceiling headlines in the media today.
- Worst-case scenario: Congress fails to act until market turmoil forces their hand to reach an agreement. When we think of “probable worst-case outcomes,” we would expect to experience significant market turbulence followed by markets rallying once an agreement is eventually reached.
It’s sad to frame it this way, but ultimately the worst-case scenario is much like a game of chicken that gets out of hand. - Best-case scenario: Congress reaches an agreement at least a day before the Treasury’s estimated deadline of June 1. Chris adds that although it’s unlikely to happen until after the 2024 election cycle, a best-case scenario might also include an agreement on guidelines for spending going forward that reduces some of the growth of government spending.
- Middle-Case (and what we view as most likely) scenario: Congress gets a deal done a week or two after the Treasury’s estimated June 1 deadline. Market volatility would be heightened in this scenario as well, particularly in the bond market, but not nearly as severe as what we would expect in a worst-case scenario.
What Do the Debt Ceiling Talks Mean for Your Portfolio?
If the debt ceiling headlines make you nervous, reviewing your financial plan is a better course of action than looking to change your portfolio.
We can’t control or impact the way the debt ceiling situation gets resolved. But we can control the inputs of a financial plan. We can also control the investments we choose to align with the assumptions and objectives of a financial plan.
As Chris points out, we often talk about known and unknowable factors in the planning process. For the three scenarios we developed in our conversation, it wouldn’t be enough to correctly identify which one will occur because we still can’t know how markets would react.
But here’s what we do know.
First, the cost of trying to avoid any potential volatility is high. If you have to liquidate taxable assets, then you must realize gains and trigger a tax bill that’s equivalent to a permanent bear market loss.
Second, there is a huge opportunity cost with timing when you get back into the market. In both Chris’ and my experience, people who go to cash struggle to get back into the market (if they ever do). The opportunity cost of sitting on the sidelines can be enormous.
If you don’t need money from your portfolio in the next few years (and hopefully decades), then the best thing to do in times like this is to stick to your plan.
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Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.
Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.
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