Exclusive: Is a debt ceiling stock market disaster looming?

A leading economist and adviser to some of the world’s best-known hedge funds believes there’s a high likelihood of a Government default in the United States during 2023, which would spark a debt ceiling stock market plunge.

The comments were made by Andrew Hunt in a note to clients, obtained by Asia Markets.

Hunt’s analysis comes as concerns grow over the U.S. economy hitting its public debt ceiling, with a political row erupting in Congress over the raising of the debt ceiling.

Republicans, who control the House of Representatives are staunchly against lifting the ceiling, arguing the consequences of not doing so are exaggerated.

While the Democrats say the ceiling must be lifted to ensure vital Government services can continue.

“If the debt ceiling is not raised in the near term, we can expect a further drawdown in the government’s cash balances (TGA) that could add 10% to the Monetary Base and around 2% to Broad Liquidity,” said Hunt.

Debt ceiling stock market
Leading Economist, Andrew Hunt. (Image: https://www.hunteconomics.com)

Political analysts expect the Republicans will leverage the issue, forcing the Democrats to bow to a range of demands in order to raise the ceiling.

But the stand-off could last months.

Hunt says the coming weeks will be critical for the economy.

“If January does not produce its customary surplus, or February produces more than a $300 billion deficit, then the Treasury may not be able to hold out until the mid-April tax season (for a Government impasse on the debt ceiling) and therefore ‘make it’ to the Summer. 

“If the February weekly deficits are wider than anticipated, fears over a government default could surface at that point rather than in the run up to 2023Q3.  We regard this as being a high probability event.”

Who is Andrew Hunt?

Andrew Hunt leads Hunt Economics, an advisory firm he established in 2001. It’s a media-shy firm, with a low public profile, however industry insiders say some of the largest asset managers in the world rely on its economic analysis.

The Hunt Economics website states:

“The company’s (Hunt Economics) analysis is always based on the thorough and intensive use of the publically available economic data both from the real and financial sectors, and the analysis is backed up by regular research visits to the countries concerned.

“The company’s sole aim is to provide this research, whatever its conclusions might ultimately be, to a limited number of clients. AHEL has no external investors or stakeholders and hence is completely focussed on the provision of first class research to its clients.”

Prior to founding Hunt Economics, Andrew Hunt was an economic adviser within the Dresdner Bank Group.

Hunt not the only expert tipping debt ceiling stock market problems

Leading macro hedge fund manager, Crescat Capital, has told clients its preparing for a deepening monetary and economic crisis in the United States, which will likely lead to a sovereign default.

Amongst a series bearish economic data points – including negative consumer sentiment, rising mortgage rates, unemployment, negative real wages growth, plunging savings, and falling corporate earnings – Crescat recently pointed to a breakout in the US 30-year Treasury yield as one of the most concerning right now.

“Tightening monetary conditions and the steep rise in the cost of capital will not only negatively impact consumers, corporate earnings, and overvalued financial assets, but it will also cause pain for highly indebted sovereigns,” said the firm in a letter to investors.

“The chart of the US 30-year yield has broken out from a 41-year macro downtrend. This is truly concerning from a leverage standpoint as the US economy remains in a deep deficit in both its current and fiscal accounts.”

Debt ceiling stock market
Image: Crescat Capital

“In the same way the Bank of Japan had to intervene in its bond market, we believe US policy makers will inevitably be forced to impose yield curve control to avoid a sovereign default.

“The likelihood of success of such policy is highly questionable and risks a monetary crisis given today’s high structurally driven global inflation levels.”

What happens if the U.S. Government defaults?

The United States has successfully navigated through every economic crisis in history without defaulting on Government debt.

Default would occur if Congress blocked measures to raise the debt ceiling as interest rates on U.S. Treasury bills surge and the Government decided to not make interest or maturity payments.

This would lead to chaos in the economy.

Bond yields would rise even further as they would no longer be seen as ‘safe’ assets, making it harder for the Government and U.S. companies to raise capital.

There would be major ramifications for the stock market, as there would be more perceived risk surrounding U.S. corporations.

And perhaps the biggest impact would be on every day Americans. If the Government isn’t repaying its bondholders, it would be unlikely to fully fund its operations.

Government programs and welfare could be cut. Wages for Government workers, including the military, would likely come under pressure.

Investors looking outside the U.S. for 2023 stock market winners

U.S. stocks have lagged Asian stocks and even European stocks in first few weeks of 2023, as economic uncertainties such as the debt ceiling weigh on investor confidence.

A growing number of investors are now turning their attention to stocks outside of the U.S. where valuations are still much cheaper.

“What we’re seeing is lower lows in the U.S. It doesn’t feel like we’re done with this bear market,” said Glenorchy Capital CIO, Chris MacIntosh.

“Earnings season is unlikely to be filled with rainbows and unicorns either. The question is if that’s priced or not?”

In a recent Capitalist Exploits newsletter written by MacIntosh and seen by Asia Markets, the prominent hedge fund manager revealed three stocks outside of the U.S. which he believes could generate +300% percent returns for investors.

They include Australian offshore energy contractor MMA Offshore (ASX: MRM), Singaporean shipping building company, Sembcorp Marine (SGX: S51), and Turkish mobile telephone company, Turkcell (IST: TCELL) (you can subscribe to the Chris MacIntosh newsletter here).

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