By Tom Konrad, Ph.D., CFA

The risks of playing politics

The American news media often tries too hard to be “balanced” when talking about politics.

Depending on which news sources you rely on, you may be hearing that “congress” is having trouble passing bills to fund the government and raise the debt ceiling. More partisan sources will be blaming it on the Democrats or the Republicans, depending on their political bent.

I generally consider myself an independent who cares deeply about the environment and competent government. Since the rise of Donald Trump, the Republicans have shifted from being the party of big business (often anti-environment) to the party of big fossil fuels and corruption. Where I used to be mostly aligned with Democrats because of their pro-environmental stance, the recent shift from conservative political positions to the disinformation fueled corruption and pursuit of power for its own sake of Trump and those who follow his lead, I (now) have no choice but to take the opposing position. And because I feel that much of the mainstream media is focused on trying to be “balanced” at the expense of telling it like it is, I’m going to tell it like I believe it is:

Because Republican leaders (especially Mitch McConnell in the Senate) are more interested in scoring political points than making sure that America avoids financial disaster by raising the debt ceiling, the market is starting to look wobbly. Using the filibuster, Senate Republicans are even blocking a simple up or down vote on raising the debt ceiling- one which would need no Republican votes to pass- and are instead trying to force the Democrats to raise the debt ceiling through reconciliation. Even if the Democrats manage to avoid the filibuster by raising the debt ceiling through reconciliation, the delay is already doing damage to investor confidence and the economy.

Not raising the debt ceiling would be like me refusing to make the minimum payment on a credit card balance that I had run up because I suddenly decided I didn’t like credit card debt. It’s fine not to like credit card debt but the way to avoid credit card debt is to pay it off or avoid spending the money in the first place- not by refusing to pay the bill when it comes due. Even if I can pay and eventually do, my credit score and ability to get loans would be damaged for years.

McConnell and other Republicans in the Senate have decided that they want to be able to score political points by blaming Democrats for raising the debt ceiling, rather than voting to do the responsible thing for the country. They certainly did not have any problem adding to the credit card bill by passing giant tax cuts when they controlled the government, while Senate Democrats did the responsible thing by supporting Republican efforts to raise the debt ceiling the last time it came up for a vote. But Republicans would rather score political points than vote to pay the debt that they ran up – or even allow the Democrats to have that vote on the Senate floor.

Stock market consequences

We can see the harm caused so far in the 5% declines of my 10 Clean Energy Stocks model portfolio and its benchmarks in September:

A real bear market will look much worse.

The political standoff over the debt ceiling could easily be the event that ends the current bull market. With the Federal Reserve reducing its stimulus to the economy, and the Delta variant rampant in more rural parts of the country due to low vaccination rates, I find it surprising that the market remains as strong as it does.

The Democrats will almost certainly eventually raise the debt ceiling, but only after considerable economic damage has been done. This is a certainty, since that damage has already started, and barring a reversal by McConnell, it is likely to continue for weeks if not months.

I’ve been cautioning my readers to be prepared for a market downturn for almost a year now, so if we enter a bear market, my readers and I will probably be fine. Those of us who are prepared may even scoop up some stock market bargains at discounted prices.

This potential opportunity to shop a stock market sale and the Republicans scoring a few political points is simply not worth creating a crisis that simply did not need to happen.

If the Democrats are forced to raise the debt limit by reconciliation, I hope they take the process one step further and remove the debt ceiling altogether. These periodic artificial debt ceiling crises are bad for the economy, and one more barrier to the ineffectual congress actually getting something useful done for a change.

DISCLOSURE: Long all stocks in the 10 Clean Energy Stocks for 2021 portfolio.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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