It’s a Crisis — a Budget Deal Looks Unlikely by June
Author: Greg Valliere
May 2, 2023
SINCE A DEFAULT is un-thinkable, there’s an increasing likelihood of “kick the can” — an extension that will last into the fall, perhaps coinciding with the end of the fiscal year on Sept. 30.
THAT WON’T SOLVE THE PROBLEM, OF COURSE: It would simply extend the crisis for a few more months, with the Washington dysfunction eating away at market and consumer confidence as uncertainty persists through the summer.
DURING THE PAST WINTER WE PREDICTED A 60-40 CHANCE OF A DEAL, but that forecast is looking shaky. Why? There’s no chance — none — that the House-passed budget deal could win enactment in the Senate, where leading Republicans are reluctant to get involved. In the House, a couple dozen hard-liners have no interest in raising the debt ceiling if the Senate modifies their bill.
WAIT UNTIL MAY 9: President Biden has agreed to talk with leaders of both parties next Tuesday, but even if there’s a tentative agreement on further talks and imposing some spending reductions, it won’t lead to a clean debt ceiling deal. Both sides will pledge to keep working, but an X date for default is perhaps only a month away.
WHAT’S NEEDED FOR A DEAL? That’s easy — a stock market meltdown or signs of a looming recession. Without a catalyst, Congress will continue to dither and posture. Are the markets worried about a default? Apparently not yet, but that could change by Memorial Day.
THE END GAME: Eventually the rough outlines of a deal will come into focus. It will raise the debt ceiling for only a year, it will cut billions, not trillions, in discretionary spending and it will impose caps on outlays for years to come. Both parties will hate the deal.
IN THE MEANTIME, the White House will consider options to raise the debt ceiling via executive orders or other gimmicks. By summer, some discretionary outlays may already face spending cuts, raising the issue of the whether the Big One — Social Security payments — might be on the table.
BY FALL THE MARKETS AND VOTERS will tire of scare tactics and will demand a deal; the threat of Social Security cuts or a humiliating default will lead to an agreement by the second half of the year. But for now there’s no deal in sight; wrapping up talks by early June is a huge stretch.
THUS WE THINK there’s a long road ahead between now and fall, as default fears persist and “kick the can” becomes the strategy. Neither party wants a deal now; they’re focused on their talking points, trying to move the polls.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
©2023 AGF Management Limited. All rights reserved.