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Main Street is largely ignoring the debt ceiling threat

Updated: 2013-10-11T01:43:49Z

By MARK DAVIS

The Kansas City Star

Main Street has done little to prepare for a debt ceiling crisis.

Businesses and investors said their plans had changed little despite the threat that Uncle Sam may run out of borrowing room Oct. 17.

For a while Thursday, the urgency appeared to have passed as Congress and the White House worked on a deal to extend the cap on how much the federal government can borrow.

Late in the day, President Barack Obama had not accepted an offer from Republicans to extend the nation’s borrowing authority for six weeks because it would not end the partial government shutdown.

Outside Washington, the impasse has led to a few small steps to brace against trouble. Many are concluding that Washington simply wouldn’t go too far in its political madness.

Then there’s the reality that a default on the federal debt would be so calamitous that there simply would be nowhere to hide.

“I don’t know what you’d do,” said Gary Cloud a fixed-income manager at Financial Counselors Inc. in Kansas City. “Do you go to gold? That’s down $20, so that’s not working. You’re certainly not going to buy stocks.”

Financial markets, which had turned jittery, welcomed the reports earlier Thursday that a deal was possible. The Dow Jones industrial average jumped 323.09, or 2.2 percent, to 15,126.07.

But all the angst could resurface Friday if it appears the impasse will continue.

The irony is, the closer Washington comes to defaulting, the more that money would flee risk in the stock market and head for the one investment most in question amid a federal default, namely U.S. Treasury securities.

It happened that way in August 2011 when Congress last came close to a debt ceiling debacle. So much money poured into Treasuries that the interest rate Uncle Sam paid to borrow plunged even as questions rose about a possible Treasury default.

Why? Investors know that should Uncle Sam decide not to pay, he still will be able to pay. Even if he paid late.

Small steps

Americans have gotten used to worrying about Washington.

Starting with the August 2011 debt ceiling impasse, Washington has given businesses and investors an 11th-hour cure for the fiscal cliff, the sequestration-ordered cuts in federal spending, a summer of rising interest rates as the Federal Reserve readied to “taper” its stimulus and a market surprise when it didn’t taper, the partial federal shutdown that’s still happening and another debt ceiling impasse.

“There’s a frustration with the entire process,” said Bill Hancock, president of Mayer Hoffman McCann PC, a certified public accounting firm based in Leawood.

Bankers hear the same story. Washington is a source of worry.

“In my opinion, the debt ceiling is the big issue, and we have a lot of customers asking about that,” said Mark Jorgenson, Kansas City president for U.S. Bank.

Some businesses had taken out a bit of insurance ahead of the debt ceiling dealings Thursday.

Jorgenson said they increased their lines of credit at U.S. Bank. This opened a window to borrowings, though the businesses hadn’t reached for any of the cash.

“They’re building a treasure chest in the event they need it,” Jorgenson said, “if the government is a bad actor.”

This month’s debt ceiling drama at least came amid a more stable economic recovery than the one two years ago.

Then, Europe was a mess, with its banking system weakened by holdings of somewhat doubtful European government bonds. It has strengthened. And the U.S. economic recovery has broadened, even if it remains modest.

So looming crisis or not, it was mostly on with business at area businesses, said Jim Ketter, partner at the accounting firm Miller Haviland Ketter, which serves small local companies. Few have any direct business with Washington, and the debt crisis alert hadn’t altered their plans.

“We’ve got several clients who are having their best year ever,” Ketter said.

What? Me worry?

Wall Street certainly noticed Washington’s deadlock.

The Dow Jones industrial average had tumbled 6 percent from record highs a month ago before rebounding Thursday.

It got much worse in 2011, when the Dow shed 15 percent between late July and early October. Even then, the Dow regained all its lost ground by February.

Investment advisers said trying to play a Washington-induced bend in the stock market would amount to a sucker’s bet. Washington is even harder to predict than corporate earnings, which are generally the key to stocks’ long-term value.

“When you try to invest on Washington, it’s a losing bet,” said economist and adviser Diane Dercher at Wealth Management Advisors Inc. in Leawood.

Still, a few professionals decided to hedge their bets.

Fidelity Investments said its money market funds no longer own any U.S. Treasury securities that come due in late October, the period a default would presumably disturb.

Fidelity’s funds still hold a lot of other U.S. Treasuries, but fund managers won’t have to worry about delayed collections from Uncle Sam.

A Reuters report said some other fund families similarly sought to avoid Treasuries that might not pay off on schedule because of the impasse.

Otherwise, Treasuries remain the safest investment out there as far as money managers are concerned.

Dave MacEwen, chief investment officer for fixed income at American Century Investments, said there was no reason to avoid any Treasuries.

Even if Washington doesn’t pay on time, it will pay, he said. And it will pay interest during the delay, making investors whole.

And that means, he said, that the market for new Treasury borrowings and resales of existing Treasury securities would remain strong even in the face of a short-term default.

“I can’t create a case where Treasuries trade at distressed levels,” he said.

Standard & Poor’s Corp., which cut the United States’ AAA credit rating to AA after the 2011 debt ceiling impasse, said it would consider a short-term default to be a political event.

“This sort of political brinkmanship is the dominant reason the rating is no longer AAA,” said a Sept. 30 report from the credit rating agency.

Missing any debt payments would trigger a “selective default” rating for Uncle Sam until the missed payments were made up, S&P said. Then the agency would rate Uncle Sam anew.

In other governments’ defaults, S&P said it came out with new ratings in the range of CCC+ to B. But that was because those governments lacked the means to make timely payments, S&P said, not because of political gridlock.

U.S. Treasuries didn’t escape unscathed from the government’s proximity to its debt ceiling.

For example, rates on Treasuries that come due Oct. 17 jumped to 0.456 percent early Thursday, according to Bloomberg News. Rates on Treasuries due Nov. 21, presumably after any default would have been resolved, were only 0.05 percent.

Consider the extra interest just another bit of insurance ahead of what still may be a debt ceiling deadline next week.

To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.com.

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